What Form 1099-LS (2018) Is For
Form 1099-LS (2018) is an IRS tax form used to report a reportable life insurance sale or transfer of a life insurance contract. It allows the Internal Revenue Service to track taxable income generated when a policyholder sells a life insurance policy to an unrelated acquirer. The form must include the policy number, the seller’s investment, the settlement amount, and payment recipient information.
This reporting requirement ensures transparency in life settlement transactions and compliance with federal tax law. If you receive IRS penalties for filing errors or missed deadlines on Form 1099-LS, you may be eligible for IRS penalty abatement for information return errors.
When You’d Use Form 1099-LS (2018)
Form 1099-LS (2018) is used when a life settlement or viatical settlement provider acquires a life insurance policy from an individual with no substantial family or business relationship.
- Reportable Policy Sale: This form is required when an acquirer purchases a life insurance contract from a policyholder who has no family, business, or financial relationship with the insured individual.
- Life Settlement Transaction: The form must be filed when investors or companies acquire life insurance policies for profit, creating a reportable transaction for tax purposes.
- Amended or Late Filing: The form must be used to correct previously filed information or to report a sale when the original filing deadline was missed.
- Foreign Person Transactions: The form is required when either the acquirer or the payment recipient is a foreign person involved in a reportable policy sale to ensure proper international tax reporting.
Key Rules or Details for 2018
Form 1099-LS (2018) introduced specific reporting standards for acquirers of life insurance contracts under the Tax Cuts and Jobs Act of 2017. These rules were created to improve oversight of reportable policy sales and ensure that all life settlement transactions are adequately documented.
- Who Must File: Any acquirer of a life insurance contract must file Form 1099-LS and include the acquirer’s information and taxpayer identification number on the form.
- Reportable Policy Sales: A reportable policy sale includes any direct or indirect acquisition of a life insurance contract or an interest in one, such as a partnership or trust that owns a policy.
- Information Required: Each form must include the payment recipient’s name, address, TIN, the issuer’s name, the policy number, the amount paid, and the date of sale.
- Filing Deadlines: The payment recipient and insurer copies must be distributed by January 31. The IRS filing deadlines vary depending on whether the filer submits their return by paper or electronically (e-file).
- TIN Truncation Rule: Only the last four digits of the payment recipient’s Social Security number may be displayed on Copy B, while the full TIN must be provided to the IRS.
If you owe taxes after a life insurance settlement, you may be able to use IRS payment plans for outstanding tax liabilities to manage your payments over time.
Step-by-Step (High Level)
Filing Form 1099-LS (2018) requires accuracy and attention to detail to comply with IRS regulations. The steps below outline the proper procedure for completing and filing the form.
- Gather Required Details: Collect the payment recipient’s full name, address, taxpayer identification number, and the issuer’s information before beginning the filing process.
- Obtain an EIN: Acquire an Employer Identification Number if one is not already available, as it is required for filing IRS tax forms.
- Complete the Form: Fill in the settlement amount, policy number, issuer, and sale date, ensuring that all fields are accurately completed.
- Prepare Copies: Create three versions of the form: Copy A for the IRS, Copy B for the payment recipient, and Copy C for the life insurance carrier.
- File Form 1099-LS: Submit Copy A with Form 1096 to the IRS by mail or electronically through the FIRE (Filing Information Returns Electronically) system.
- Distribute Copies: Provide Copy B and Copy C to the appropriate recipients by the next business day following the filing deadline to maintain compliance.
It’s essential to resolve unfiled individual returns before reporting income from a life insurance sale to maintain compliance with IRS requirements.
Common Mistakes and How to Avoid Them
Filing Form 1099-LS (2018) requires accuracy, and even minor errors can result in penalties or delays. The following are common mistakes and how to prevent them.
- Using a Downloaded Copy: Avoid printing Copy A from the IRS website, as it is not scannable. Always use the official red-ink version or submit the form electronically through the FIRE system.
- Incorrect or Missing TINs: Prevent IRS notices by verifying all taxpayer identification numbers through Form W-9 or the IRS TIN Matching program before filing.
- Omitting Issuer Copy: Do not forget to provide Copy C to the life insurance carrier; this copy is necessary for the insurer to meet its reporting responsibilities under IRS rules.
- Misclassifying Acquisitions: Review each transaction carefully to confirm whether it qualifies as a reportable policy sale, including indirect acquisitions through trusts or partnerships.
- Missing Deadlines: Set calendar reminders to file and distribute forms by their due dates because late submissions automatically trigger financial penalties.
- Incomplete Form 1096: Always verify that the totals on Form 1096 match the attached Forms 1099-LS to prevent IRS processing delays or rejection.
If you need professional assistance or want to authorize a third party to handle filings and IRS communication, consider setting up a Power of Attorney for IRS representation.
What Happens After You File Form 1099-LS (2018)
After Form 1099-LS (2018) is filed, the Internal Revenue Service reviews the information and compares it to the payment recipient’s income tax return. The life insurance company receives Copy C and later files Form 1099-SB to report the seller’s investment in the policy. Any life settlement proceeds exceeding the seller’s cost basis, or total premiums paid, are considered taxable income.
Depending on the situation, these proceeds may be taxed as ordinary income or as capital gains. Maintaining complete records for at least four years ensures compliance if the IRS requests documentation. Understanding the IRS collection process can help you address any notices or actions that may arise after filing a reportable life insurance sale.
FAQs
What are the tax implications of filing Form 1099-LS (2018)?
Filing Form 1099-LS (2018) helps the IRS determine how a life insurance sale affects taxable income. The life settlement proceeds may result in ordinary income or a long-term capital gain, depending on the policy’s cash surrender value and total premiums paid.
Does every life insurance sale require this form?
No, the form applies only to reportable policy sales such as life settlements or viatical settlement transactions where the acquirer has no personal or business relationship with the insured.
How is the tax treatment of life insurance settlements determined?
The tax treatment depends on the seller’s investment in the policy, the surrender amount, and any other consideration received. The remaining proceeds (after deducting total premiums) may be taxed as capital gains or ordinary income.
Can I reference IRS educational resources for assistance with filing?
Yes, the IRS website and official YouTube channel offer videos and step-by-step guidance on accurately filing Form 1099-LS (2018) and related tax forms.
