Jitasa Nonprofit Blog

IRS Offers More Taxpayers Relief From Fraudulent Student Loan Debt

The Treasury Department, in conjunction with the Internal Revenue Service, is providing relief to certain taxpayers who borrowed money to attend a for-profit or nonprofit school that later discharged student loan debts. Referred to as Revenue Procedure 2020-11, the measure provides a safe harbor for students that had student loans discharged because their schools were closed or involved in some type of fraud.

Girl holding text books

Previously, the IRS offered relieve to students from Corinthian College or American Career Institutes Inc., whose loans were discharged under a “Closed School” and “Defense to Repayment” discharge process thanks to legal cause of action which resolved allegations of fraudulent business practices, which included unfair, deceptive, and abusive acts.

According to the IRS, it is appropriate to offer relief to students as follows:

  • Borrowers in the Closed School discharge process in which a student or parent acting on behalf of a student obtained the federal loan and, while the student was attending the school, it closed. This also applies to students who withdrew from school within a defined time frame prior to the school’s closing.
  • Borrowers who have loans discharged under the Defense to Repayment process, which provides for the Education Department to discharge a Federal Direct Loan obtained by a student or parent for a student, assuming the borrower establishes that a school’s actions would give rise to a cause of action against the school under applicable state law.
  • Borrowers involved in a legal settlement discharge process in which federal and state agencies have brought legal causes of action that have resulted in settlements resolving various allegations of unlawful business practices.

Although the IRS recognizes that a great number of these students would qualify for student loan forgiveness from COD income under previous code provisions, this will make the process simpler for students who are trying to determine whether they qualify for the exclusion.

The IRS will not say that a creditor that is an applicable entity under Sec. 6050P must file information returns and also supply payee statements for the discharge of debts within the scope of the procedure. Filing information returns may cause the IRS to mistakenly issue underreporter notices to taxpayers, and payee statements given to taxpayers may also cause confusion. The IRS then does not want creditors to file Forms 1099-C and Cancellation of Debt for taxpayers who qualify for such relief.

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