IRS Form 1099-LS (2024): Reportable Life Insurance Sale

What IRS Form 1099-LS (2024) Is For

IRS Form 1099-LS (2024) is used to report a reportable life insurance sale that occurs when a life insurance contract or life insurance policy is sold or transferred to another party without a substantial relationship to the insured individual. This tax form allows the Internal Revenue Service to monitor reportable policy sales and determine whether the seller has any taxable income. 

For questions about IRS Form 1099-LS, penalty relief, or compliance support, start your case review with our team today.

When You’d Use IRS Form 1099-LS (2024)

This form is required in specific cases where ownership of a life insurance policy is transferred to another party in exchange for payment or other consideration.

• Life settlement transaction: This occurs when a policyholder sells a life insurance policy to a third party for a cash payment, resulting in a reportable policy sale under the Internal Revenue Code.
  
  
• Viatical settlement: This occurs when an insured person who is terminally ill sells their life insurance contract to receive funds before death, making the transaction reportable to the IRS.
  
  
• Business-related transfer: This is required when a business or key person life insurance policy is transferred to another entity, such as a partner or investor, that does not share a substantial relationship with the insured.
  
  
• Indirect acquisition or other consideration: This applies when an individual or entity gains an interest in a life insurance contract through indirect ownership, secondary acquisition, or another form of consideration that qualifies as a reportable transaction.

Key Rules or Details for the 2024 Tax Year

• Who must file: The acquirer must file Form 1099-LS with the IRS whenever they purchase an interest in a life insurance contract from someone with whom they have no substantial family, business, or financial relationship.
  
  
• Filing deadlines: The acquirer must file Form 1099-LS and furnish all required copies to the seller and the life insurance carrier by January 31 of the calendar year following the life insurance sale.
  
  
• Information requirements: The form must include the payment recipient’s name, address, taxpayer identification number, policy number, acquirer’s information, and the total amount paid to the payment recipient.
  
  
• E-file requirements: For tax year 2024, acquirers who file ten or more information returns must use the IRS e-file system or the official online fillable copies available on the IRS website.
  
  
• Corrections and rescissions: If an error or rescission occurs, the acquirer must file a corrected form within fifteen business days after discovering the issue or being notified of the cancellation. 

Ensure you resolve unfiled individual returns to accurately report all life insurance sale proceeds on your current tax return.

Step-by-Step (High Level)

The following process outlines the correct way to complete and file IRS Form 1099-LS for both acquirers and payment recipients.

For Buyers (Acquirers):

1. Identify reportable transactions: Determine whether the purchase of the life insurance policy qualifies as a reportable policy sale or indirect acquisition under IRS rules.
   
   
2. Gather required details: Collect accurate information, including the payment recipient’s taxpayer identification number, the policy number, the life insurance carrier’s name, and the settlement amount paid.
   
   
3. Complete and file Form 1099-LS: Fill out the form accurately and submit it to the IRS by January 31 using the approved e-file platform or the downloadable PDF format.
   
   
4. Distribute copies: Provide Copy B of the form to the payment recipient and Copy C to the life insurance carrier if the acquisition was direct.
   
   
5. Maintain records: Keep all documentation, payment records, and copies of submitted forms for a minimum of three years in case of IRS verification.

For Sellers (Payment Recipients):

1. Review the form: Examine the accuracy of all entries, including amounts, policy details, and taxpayer identification numbers, before reporting the information on your return.
   
   
2. Assess tax implications: Use the accompanying Form 1099-SB to compare your cost basis, premiums paid, and the settlement amount to calculate taxable income, ordinary income, or capital gain.
   
   
3. Report on income tax return: Include all applicable income on your federal income tax return, using Schedule D or Schedule 1 of Form 1040, depending on the classification of your gain.

If you want a tax professional to manage your IRS correspondence or handle filings, consider establishing a Power of Attorney for IRS communications.

Common Mistakes and How to Avoid Them

Avoiding these frequent filing errors can help ensure compliance and prevent unnecessary penalties under IRS reporting rules.

• Incorrect or missing taxpayer identification number: Always verify the accuracy of the Social Security number or employer identification number before filing, as errors may result in rejected forms or backup withholding requirements.
  
  
• Not filing due to assumed relationships: File Form 1099-LS whenever the transaction involves an unrelated party, even if you believe a substantial personal or business relationship exists, unless specifically exempt under the IRS regulations section.
  
  
• Failure to report intermediary payments: Issue separate forms to brokers or other intermediaries who receive six hundred dollars or more in payment to ensure that all reportable policy sale payments are adequately documented.
  
  
• Missing Copy C for direct acquisitions: Send Copy C of Form 1099-LS to the life insurance carrier whenever the payment recipient is the seller in a direct acquisition.
  
  
• Incorrect settlement amount reporting: Report only the amount paid to each payment recipient rather than the total life settlement amount shared among multiple recipients.
  
  
• Ignoring rescinded transactions: File corrected forms within fifteen calendar days of any rescission or transaction cancellation to maintain accurate reporting records.

If you receive IRS penalties for missing or inaccurate Form 1099-LS filings, you may be eligible for IRS penalty abatement for filing errors.

What Happens After You File Form 1099-LS

Once the acquirer submits Form 1099-LS to the Internal Revenue Service and furnishes all copies, their primary obligation is complete except for maintaining proper documentation and filing corrections if necessary. The seller then uses both Form 1099-LS and Form 1099-SB to determine whether tax is owed by comparing the cost basis and settlement amount. 

Understanding the IRS collection process can help you quickly resolve any compliance notices related to life settlement transactions.

FAQs

Does receiving IRS Form 1099-LS mean I owe taxes?

Not necessarily. Whether you owe taxes depends on your cost basis compared to the settlement amount and premiums paid. If the amount received does not exceed your cost basis, you may not owe any tax on the life insurance sale.

What’s the difference between Form 1099-LS and Form 1099-SB?

Form 1099-LS reports the amount paid in a reportable life insurance sale, while Form 1099-SB from the insurance carrier shows the policy’s cost basis and the seller’s investment. Both forms are needed to determine taxable income accurately.

How do I correct an error on Form 1099-LS?

Contact the acquirer or buyer immediately to request a corrected copy. The acquirer must file the corrected form within fifteen business days and provide you with an updated version to ensure accurate reporting.

Are viatical settlements treated differently?

Yes, under Internal Revenue Code Section 101(g), viatical settlements made due to terminal illness may qualify for partial or complete tax exclusion; however, the transaction must still be reported using IRS Form 1099-LS.