1 Managing Federal Receivables – Chapter 7 Termination of Collection Action, Write-off and Close-out/Cancellation of Indebtedness Good Morning Students. I am your Professor. In this tutorial I will teach you how to be a good “terminator”, “writer-offer”, “closer- outer” and “discharger of debt”. YOU WILL FOLLOW MY INSTRUCTIONS AND LEARN ALL THE RULES, OR YOU MAY BE TERMINATED, WRITTEN- OFF OR DISCHARGED! Now let us begin……

2 Overview – The Basic Concepts The three basic concepts are: the program (and legal) concept of ceasing collection action on the debt. the accounting concept of reducing the value of the asset (the debt) to zero. the income tax concept of viewing the uncollectible debt as income to the debtor. While all three concepts concern debts that remain uncollected, each concept is governed by separate rules. Accordingly, it is important to understand the differences among the concepts in order to realize which rules apply. WHAT ARE THE THREE BASIC CONCEPTS INVOLVED WHEN A DELINQUENT DEBT BECOMES UNCOLLECTIBLE?

3 Overview - The Program Concept WHAT IS THE PROGRAM CONCEPT? There is an affirmative responsibility to try to collect delinquent debts. The agency must follow appropriate rules when it ceases active collection action on a delinquent debt. Active collection is when the agency is trying to collect the debt using all available and appropriate debt collection tools such as demand letters, garnishment, foreclosure, litigation, or cross-servicing at Treasury’s Financial Management Service. The two types of ceasing active collection are: Termination of collection – This is a decision by the agency to permanently cease active collection on a debt. Suspension of collection – This is a decision by the agency to temporarily cease active collection on a debt.

4 Overview – The Program Concept WHAT IS PASSIVE COLLECTION? When an agency ceases active collection, it may decide to continue passive collection. Passive collection is when the debt is no longer being actively collected, but may remain secured by a judgment lien, in TOP, scheduled for future sale, and/or reported to a credit bureau.

5 Overview – The Accounting Concept WHAT IS THE ACCOUNTING CONCEPT? The accounting concept is known by the term Write-off. Write-off is the accounting action that results in reporting the debt receivable as having no value on the agency’s financial reports and on certain management reports such as the Treasury Report on Receivables.

6 Overview – The Accounting Concept Currently not collectible – debt classification after write-off used when agency intends to continue debt collection action (either passive or active). Close-out – debt classification after write-off when agency does not intend to continue any debt collection action. Though the classifications of write-off are based on whether or not collection action will continue, the rules of write-off are different than those of terminating collection action (ceasing active collection). Accordingly write-off does not always mean that collection action has ended. More on the accounting concept – Write-off actions are governed by OMB Circular No. A-129. Under the OMB Circular, when a debt is written off, the agency must classify it in one of two categories:

7 Overview – The Income Tax Concept Under the Internal Revenue Code and IRS regulations, creditors must report to the IRS certain circumstances when a debt is no longer being repaid. The creditor reports this information on a form 1099-C “Cancellation of Debt”, which the IRS uses to determine if the cancellation or discharge should be considered taxable income to the debtor. Generally, cancellation or discharge of indebtedness occurs after the agency stops all collection action, or the agency cannot pursue collection action. What is the Income Tax Concept?

8 Overview – The Income Tax Concept More on the income tax concept – Under IRS regulations there are 8 identifiable events that result in cancellation of indebtedness. Examples of “identifiable events” include compromise for inability to pay, discharge in bankruptcy, and ceasing all collection action (active and passive). Specific instructions on what must be reported can be found in the IRS “Instructions for Forms 1099-A and 1099-C”.

9 Overview Students! I have finished my overview. You now know there are three basic concepts – the program (and legal) concept, the accounting concept, the income tax concept! You now know that each concept is different, with different rules. It is time to learn more about each concept. Click here to proceed to the next part!