IRS EXPLAINS NEW INFORMATION-REPORTING REQUIREMENTS FOR MORTGAGE FINANCING.

Notice 90-70

I. INTRODUCTION AND PURPOSE

This Notice informs persons who participate in home mortgage financing of two new information reporting requirements under the Internal Revenue Code that will become effective January 1, 1991.

First, under section 6050H(b)(2)(C) of the Internal Revenue Code, persons required to file a return of information (Form 1098, Mortgage Interest Statement) to report mortgage interest (mortgage interest recipients), must report certain points on financing provided after December 31, 1990, as set forth in this Notice.

Second, under the authority contained in section 143(m)(8)(D) of the Code issuers of qualified mortgage bonds (within the meaning of section 143(a) of the Code) will be required to report to the Internal Revenue Service the name, address and social security number of those persons who receive federally-subsidized financing (after December 31, 1990) through the issuance of the bond. This will facilitate the Service's enforcement of the recapture rules of section 143(m) of the Code (as amended by the Revenue Reconciliation Act of 1990 ("RRA 1990")).

The purpose of this Notice is to inform affected persons of the information they will be required to collect when these new reporting requirements become effective. Because this Notice is limited to guidance on the collection of prescribed information, the Service will issue additional comprehensive guidance (including forms and instructions) on these new reporting requirements. The additional guidance will be issued in time for affected persons to meet their reporting obligations.

II. POINTS REPORTING ON FORM 1098

BACKGROUND

As the result of amendments contained in recent tax legislation, section 6050H(b)(2)(C) of the Code provides for the reporting of "points" on the return of information required under section 6050H, effective for returns of information the due date for which (without regard to extensions) is after December 31, 1991. Because the return of information under section 6050H of the Code generally includes information regarding the entire preceding calendar year, the first return of information required to be filed after December 31, 1991 will generally report points on financings provided after December 31, 1990.

These new rules are equally effective for the statement of information that must be furnished to the individual payer (hereinafter "mortgagor") of the points. Persons affected by this Notice should note that all rules referring to the return of information that is filed with the Service also apply to the statement of information furnished to the mortgagor. The return of information requirement is currently met by the timely, accurate filing of Form 1098, which will be modified for 1991 for this new reporting requirement. It is anticipated that the form will contain a new box for reporting points titled "Points paid directly by payer(s)/borrower(s) on purchase of principal residence." The Service expects the modified Form 1098 to be available in early January 1991.

REPORTING REQUIREMENTS

Although other amounts may be charged, only the amounts that meet ALL the following criteria are to be reported by mortgage interest recipients as reportable points for purposes of section 6050H(b)(2)(C) of the Code:

A. The amounts are charged for the use or forbearance of money, and not for services;

B. The amounts conform to an established business practice of charging points in the area in which the loan is issued and do not exceed the amount generally charged in the area;

C. The amounts are for mortgage loan proceeds provided for and applied to closings occurring after December 31, 1990;

D. The amounts are paid directly by the mortgagor. An amount is so paid if the mortgagor provides funds (including down payments, escrow deposits, earnest money applied at the closing and funds actually paid over at closing) at least equal to the amount of points required for application at the closing. In view of standard commercial lending practices, for purposes of this reporting requirement an amount charged to the mortgagor as points with respect to the acquisition of a principal residence will be treated as paid directly by the mortgagor. (The determination of whether points are paid directly in transactions other than the acquisition of a principal residence (e.g., home improvements) must be based upon the actual facts of the transaction.)

E. The amounts are for the purchase of the mortgagor's principal residence and the mortgage loan is secured by such residence. The mortgage interest recipient may rely on a signed written statement of the mortgagor that states whether the proceeds of the loan are for the purchase of the mortgagor's principal residence.

The reporting, for example, will not include the following amounts: (1) points paid for loans that will be used for the improvement of a principal residence; (2) points paid for loans to purchase or improve a second or vacation property, investment property, or trade or business property; (3) points paid on a refinancing, a home equity loan or for a line of credit secured by a principal residence; (4) points paid in excess of the amount generally charged in the area (e.g. the payment of excess points to "buy down" the cost of money); and (5) points paid on financing provided for closings occurring prior to January 1, 1991.

INCOME TAX TREATMENT OF LENDER

The information required to be reported under this Notice is collected and reported for purposes of verifying deductions claimed by mortgagors. This information is not collected for purposes of determining the appropriate reporting of income by mortgage interest recipients. Thus, reporting is required with respect to the amounts that meet the criteria set forth above, irrespective of the mortgage interest recipient's method and timing of accounting for such points as income for federal income tax purposes.

III. REPORTING THE PRESENCE OF FEDERALLY-SUBSIDIZED INDEBTEDNESS

BACKGROUND

If a taxpayer disposes of an interest in a residence, with respect to which there was federally-subsidized indebtedness (for which the taxpayer was liable in whole or in part) that was provided after December 31, 1990, section 143(m) of the Code provides (subject to specified exceptions) for the recapture of a portion of the subsidy. Rules for the determination of the recapture amount are found under section 143(m), as amended by RRA 1990. In addition, sections 6045(a) and 6045(e)(4) of the Code give the Service the authority to require reporting by those responsible for reporting real estate transactions to facilitate the Service's enforcement of the recapture rules of section 143(m) of the Code. Under section 143(m)(7) there is a separate reporting requirement.

The Service has determined that the recapture rules of section 143(m) of the Code can be most effectively enforced, with the minimum overall reporting, recordkeeping and processing burden, if the issuer of federally-subsidized indebtedness reports the information. In addition, because of exceptions contained in the regulations implementing section 6045(e) of the Code, certain transactions subject to recapture under section 143(m) are not currently subject to information reporting under section 6045(e). For those exempted transactions, it is necessary that the Service receive information on the presence of federally-subsidized indebtedness prior to the disposition of the taxpayer's residence.

However, in the case of a mortgage credit certificate, the mortgage lender is currently required to report (on Form 8329, Lender's Information Return for Mortgage Credit Certificates (MCCs)) sufficient information, for purposes of the Service's enforcement of the recapture rules of section 143(m) of the Code. Therefore, the requirements of this Notice are limited to issuers of qualified mortgage bonds.

Accordingly, the purpose of this portion of this Notice is to advise issuers of qualified mortgage bonds of the information they must collect to comply with this new reporting requirement. More comprehensive guidance (including guidance on the information that the issuer must furnish under section 143(m)(7) of the Code) will be issued by the Service on these new reporting requirements.

AUTHORITY

The reporting requirements contained in this portion of this Notice are imposed by the Service under the authority contained in section 143(m)(8)(D) of the Code.

REPORTING REQUIREMENTS

Issuers of qualified mortgage bonds must, with respect to financing provided after December 31, 1990, directly or indirectly through the issuance of qualified mortgage bonds, report the name, address (of the residence purchased with the subsidized financing) and social security number (SSN) of taxpayers receiving such financing, in accordance with the form to be developed and its instructions. The SSN may be solicited and collected by the use of Form W-9 and must be solicited and collected by the issuer at or before the time the financing is provided. The issuer may rely on the mortgage lender's solicitation and collection of the mortgagor's SSN. However, the issuer is ultimately responsible for the timely, accurate filing of the information return.

RESERVE REPORTING UNDER SECTION 6045(e)(4)

The Service will reserve, until otherwise provided in regulations or forms and instructions, its authority under sections 6045(a) and 6045(e)(4) of the Code to require the real estate reporting person to report with respect to the presence of federally- subsidized indebtedness. Any such reporting requirements will not be effective for financing provided (or certificates issued) prior to the issuance of those requirements.

IV. DRAFTING INFORMATION

The principal author of this Notice is Arthur E. Davis III of the Office of Assistant Chief Counsel (Income Tax & Accounting). For further information regarding this Notice, contact Mr. Davis on (202) 377-9581 (not a toll-free call).