What Form 1099-LS (2019) Is For
Form 1099-LS (2019) is an official Internal Revenue Service (IRS) tax form used to report a reportable life insurance sale or any transfer of interest in a life insurance contract. It applies when ownership of an existing life insurance policy is sold to a buyer who has no substantial family or business relationship with the insured. The form ensures accurate documentation of the settlement amount, the payment recipient, and the tax implications for both the seller and the acquirer involved in the transaction.
For help reporting life insurance sales or handling IRS issues, start your case review with our team today.
When You’d Use Form 1099-LS (2019)
You must file Form 1099-LS (2019) when specific types of life settlement transactions occur that qualify as reportable policy sales under IRS rules:
- Reportable Policy Sale: This applies when a buyer acquires an interest in a life insurance policy from someone with whom they share no close personal or business relationship, making it a reportable life insurance sale under federal law.
- Indirect Acquisition: This situation arises when a person obtains an interest in a life insurance contract indirectly, such as through a trust, partnership, or other legal entity that holds the policy.
- Payments to Multiple Recipients: You must file the form if more than one payment recipient—such as the seller and a life settlement broker—receives proceeds from the same transaction.
- Rescinded Sales: If a reported life settlement transaction is later canceled or revoked, a corrected tax form must be filed within 15 calendar days of receiving notice of the cancellation.
Make sure to resolve unfiled individual returns to ensure all life settlement proceeds are accurately reported on your tax return.
Key Rules or Details for 2019
These requirements ensured that each reportable life insurance sale was properly documented and reported to the Internal Revenue Service:
- Who Must File: The acquirer’s information must be included on the form, and any person or entity that purchases a life insurance contract directly or indirectly is responsible for filing.
- Separate Filing per Policy: You must file a separate Form 1099-LS for every life insurance policy and for each payment recipient involved in the transaction.
- Issuer Notification: The life insurance company or policy issuer must receive Copy C when a policyholder’s contract is acquired directly by the buyer.
- Payment Thresholds: All sellers must be reported, regardless of the payment size. Brokers or intermediaries must be reported only if they receive $600 or more from the settlement amount.
- Corrected Returns: A corrected tax form must be submitted promptly if any detail, such as the acquirer’s interest, payment data, or policy number, was previously filed incorrectly.
Step-by-Step (High Level)
Filing Form 1099-LS (2019) correctly requires careful attention to detail and compliance with the IRS tax filing process. Below is a concise guide outlining each essential step:
- Collect Required Information: Gather the acquirer’s information, payment recipients’ details, policy issuer’s name, policy number, sale date, and settlement amount for every transaction.
- Verify TINs: Confirm that all taxpayer identification numbers (TINs) provided by sellers and intermediaries are correct by using Form W-9 or the IRS TIN Matching Program.
- Prepare the Form: Report the cash payment, date of sale, and other life insurance policy details accurately on each form.
- File with the IRS: Submit Copy A of the form either by paper filing or electronically through the FIRE (Filing Information Returns Electronically) system, based on the number of forms filed.
- Furnish Copies: Provide Copy B to each payment recipient and Copy C to the policy issuer when applicable, following the prescribed IRS deadlines.
- Retain Records: Keep copies of all filed tax forms and related documentation for at least four years to meet reporting requirements and support future audits if necessary.
If you’d like professional help handling correspondence or filings, consider setting up a Power of Attorney for IRS matters.
Common Mistakes and How to Avoid Them
Filing Form 1099-LS (2019) requires precision, as even minor oversights can result in penalties or delays. The following are common filing mistakes and how to avoid them:
- Missing Filing Obligation: Many acquirers fail to realize they must report reportable life insurance sales; always verify whether your life settlement transaction qualifies under Internal Revenue Code Section 6050Y to ensure compliance.
- Incorrect or Missing TINs: Errors in taxpayer identification numbers are among the most frequent filing issues; always request and confirm Form W-9 details for each payment recipient using the IRS TIN Matching Program before submission.
- Reporting the Wrong Date: The sale date is often entered incorrectly as the payment or contract date; consistently report the exact date when ownership of the life insurance contract officially transfers to the acquirer.
- Failing to Notify the Issuer: Some acquirers overlook sending Copy C to the policy issuer; always determine whether your transaction qualifies as a direct acquisition and provide the issuer with a copy when required.
- Not Correcting Rescinded Transactions: Canceled life settlement transactions are sometimes left uncorrected; always file a corrected Form 1099-LS within 15 calendar days of the rescission notice to maintain accurate reporting.
If you incur penalties for errors or late submissions, you may qualify for IRS penalty abatement for information return errors to reduce or eliminate certain charges.
What Happens After You File
Once you file Form 1099-LS (2019), the Internal Revenue Service (IRS) compares the reported information against the tax returns of all payment recipients. Sellers must report any cash payment received from the life settlement transaction as taxable income. Depending on the premiums paid and cost basis, part of the proceeds may be treated as ordinary income.
Understanding the IRS collection process can help you respond quickly to any notices or compliance actions related to life settlement transactions.
FAQs
What is the policy’s cash surrender value, and how does it affect taxes?
The policy’s cash surrender value represents the amount a policyholder would receive if they terminate the life insurance contract before maturity. When reported under IRS Form 1099-LS (2019), any amount above the total premiums or cash value may be treated as ordinary income or capital gain, depending on prior deductions and tax treatment.
How does the Jobs Act impact reportable policy sales?
The Tax Cuts and Jobs Act (Jobs Act) clarified the definition of reportable policy sales and required uniform reporting for life settlement companies and viatical settlement providers.
What is a viatical settlement provider, and are they treated differently in the financial industry?
A viatical settlement provider purchases a life insurance policy from an individual with a terminal illness or a chronic condition. Although these life settlement transactions often provide immediate funds, they are still reportable on Form 1099-LS (2019), and the IRS may review the death benefits, cash surrender, and remaining proceeds to ensure proper tax filing.
What is the difference between a death benefit and a net death benefit in life settlements?
The death benefit is the full payout amount a life insurance company pays upon the insured’s death. In contrast, the net death benefit is the amount remaining after deducting other considerations, such as premiums paid or policy loans, to determine the actual value of the policy.
