What IRS Form 1099-LS (2023) Is For
Form 1099-LS is used to report a reportable life insurance sale when a life insurance contract is sold to a person or company that has no substantial family, business, or financial relationship with the insured individual. The Internal Revenue Service (IRS) requires this tax form to track life settlement transactions and determine potential taxable income. It also notifies the life insurance carrier that future death benefits may have tax implications related to the policy transfer under the Tax Cuts and Jobs Act.
When You’d Use IRS Form 1099-LS (2023)
You’ll use IRS Form 1099-LS (2023) when a life insurance policy is sold or transferred in a way that meets the definition of a reportable policy sale.
Examples include:
- Life settlement transaction: This occurs when an investor or settlement company purchases a life insurance policy from an individual, typically for an amount exceeding the policy’s cash surrender value.
- Viatical settlement: This involves selling a life insurance policy before death, often due to severe illness, and the proceeds may be taxable depending on the buyer’s status.
- Indirect acquisition: This occurs when someone acquires an interest in a life insurance policy through a trust, partnership, or other entity, rather than making a direct purchase.
- Multiple payment recipients: This situation arises when more than one person, such as brokers or agents, receives payment from the policy sale and each requires separate reporting.
- Foreign person involvement: This applies when a foreign entity or person acquires a U.S. life insurance policy, and the transaction must be disclosed under IRS regulations.
If you incur IRS penalties for late or incorrect filing, you may qualify for IRS penalty abatement for filing errors to help reduce or eliminate those fines.
Key Rules or Details for the 2023 Tax Year
For the 2023 tax year, the IRS established specific filing rules for Form 1099-LS to ensure accurate reporting of life settlement transactions.
Important rules include:
- Filing due dates: Paper filings were due by February 28, 2024, and electronic filings were due by April 1, 2024; late submissions can result in escalating penalties.
- Who files: The buyer or acquirer must file the form, providing their own details, the policy number, and the taxpayer identification number of each payment recipient.
- De minimis exception: Payments under $600 to intermediaries or brokers are exempt from reporting requirements.
- Electronic Filing Requirement: Any filer with 250 or more information returns must file electronically; this threshold decreases to 10 forms for tax years 2024 and later.
- Rescinded sales: If a sale is canceled or reversed, a corrected form must be submitted within 15 business days of notice.
- Reporting accuracy: Filers must report the actual settlement amount paid, not the policy’s face value, premiums paid, or cash surrender value.
Understanding the IRS collection process can help you quickly address any follow-up or compliance notices after a life settlement transaction.
Step-by-Step (High Level)
Filing IRS Form 1099-LS (2023) involves several structured steps to ensure compliance with the IRS and accurate reporting.
Steps include:
- Determine if the sale qualifies: Review whether the transaction meets the IRS definition of a reportable life insurance sale and confirm no exemptions apply.
- Collect payment recipient information: Obtain each recipient’s name, address, and taxpayer identification number before completing the transaction.
- Complete Form 1099-LS accurately: Report the sale date, policy number, life insurance carrier details, and total amount paid to every recipient.
- File Form 1099-LS with the IRS: Submit electronically using the IRS e-file system or by mail with Form 1096 if eligible for paper filing.
- Distribute copies: Send Copy B to each payment recipient and Copy C to the life insurance company for their records.
- Retain documentation: Keep all agreements, seller’s investment details, and supporting paperwork for at least three years after filing.
If you’d like professional support with IRS communications, consider setting up a Power of Attorney for IRS communications to streamline your filings and correspondence.
Common Mistakes and How to Avoid Them
Avoiding filing errors ensures IRS Form 1099-LS (2023) is processed correctly and prevents potential penalties.
Frequent mistakes include:
- Misidentifying a reportable sale: Confirm that the life insurance sale qualifies as a reportable life insurance sale; transfers between family members or within a business are typically not reportable.
- Incorrect amounts reported: Always report the actual life settlement proceeds paid rather than the face value, premiums paid, or surrender amount of the life insurance policy.
- Omitting intermediary payments: Include all brokers or agents who received $600 or more in fees from the life settlement transaction.
- Missing taxpayer identification numbers: Verify every payment recipient’s TIN or Social Security number to avoid rejection during IRS processing.
- Forgetting issuer copies: Always send Copy C to the life insurance carrier; this helps ensure the policy’s future death benefit is taxed appropriately.
- Failing to correct rescinded sales: If the policy sale is canceled, file a corrected form within 15 calendar days after notice of rescission to maintain compliance.
Make sure to resolve unfiled individual returns to accurately report all life insurance sale proceeds on your tax return.
What Happens After You File
Once Form 1099-LS is filed, the Internal Revenue Service processes the information and matches it with income tax returns submitted by payment recipients. The life insurance carrier updates its records to reflect the ownership transfer and ensures future death benefits are correctly taxed. The seller must report any resulting taxable income on their income tax return, which may include ordinary income or capital gains, depending on the cost basis and premiums paid.
Maintaining all supporting documentation, including investment records and policy correspondence, helps protect against audit-related issues or disputes. For expert help with IRS Form 1099-LS, compliance, or life settlement reporting, start your case review with our team today.
FAQs
Do I need to file IRS Form 1099-LS (2023) for a family transfer?
No, transfers between family members or individuals with a substantial business or financial relationship are not considered reportable life insurance sales under IRS regulations.
Who is responsible for filing Form 1099-LS?
The acquirer or buyer of the life insurance policy must file Form 1099-LS. The seller only receives a copy to include in their own income tax return when reporting any taxable income or capital gains.
How does Form 1099-LS relate to Form 1099-SB?
Form 1099-LS reports the sale or transfer of a life insurance contract, while Form 1099-SB details the seller’s investment and cost basis. Both forms work together to determine the taxable portion of the transaction.
Can I truncate Social Security numbers on recipient copies?
Yes, when providing copies to payment recipients, you may show only the last four digits of the Social Security number. However, full taxpayer identification numbers must appear on the version filed with the IRS.
What happens if I file late or incorrectly?
Late or inaccurate filings can result in IRS penalties that increase over time. Correct the error as soon as possible to reduce fines and remain compliant with the latest versions of IRS forms.
