IRS Rules & Regs

Question 1

First National Bank has foreclosed on several loans. One of the loans is not subject to the requirement to submit an information return on the foreclosed property. Which loan is most likely NOT covered by the regulations?

a. A loan to Brown & Associates, a local law firm, to purchase furniture, secured by the furniture
b. A loan to Mrs. Lynch to purchase stereo equipment for use in her office waiting room
c. A loan to Dr. Stevens to purchase kitchen appliances
d. A loan to Mr. and Mrs. Sanders to purchase a computer for their antique shop

Answer 1

c. A loan to Dr. Stevens to purchase kitchen appliances

The loan to Dr. Stevens is the most likely not to be covered. The other loans are more clearly business and not consumer loans.

Question 2

Mr. Roberts has three loans at First National Bank: Loan A made to purchase a car, secured by the car; Loan B made to purchase stock, secured by a lake lot; and Loan C made to pay taxes, secured by a rental house he owns. Last year he paid $2,500 in interest on Loan A; $550 in interest on Loan B; and $1,000 in interest on Loan C. How much interest will First National Bank report to the IRS?

a. $4,050
b. $1,000
c. $1,550
d. $2,500

Answer 2

b. $1,000

The requirement to report is on a mortgage-by-mortgage basis. Therefore, although the loan secured by the lake lot is a mortgage loan for purposes of the mortgage interest reporting regulation, not enough interest was collected to meet the $600 threshold requirement. The interest from the two loans that meet the definition of a mortgage (Loans B and C) should not be aggregated for reporting purposes.

Question 3

This IRS form is used to report retirement benefit distributions (payments) from pensions, annuities, or other retirement plans.

Answer 3

1099-R

Question 4

What is a middleman?

Answer 4

Any person who makes payments for, collects, or receives a reportable payment on behalf of, or for the account of, another person or otherwise acts in a capacity as intermediary between a payer and a payee. A middleman may also be a person who makes a payment on behalf of another person and who performs management or oversight functions in connection with the payment.

Question 5

This IRS form tell taxpayers how much they paid in student loan interest.

Answer 5

1098-E

Question 6

Taxpayers get this form when they purchase a bond or a note at less than face value. This form states the difference between the bond’s stated redemption price and its issue price.

Answer 6

1099-OID (Original Issue Discount)

Question 7

Which of the following pieces of information is the bank NOT required to report on Form 1099 for foreclosed and abandoned property?

a. The name, address, and TIN of the borrowers
b. A description of the property
c. The original loan amount
d. Whether the borrower is personally liable for the debt

Answer 7

c. The original loan amount

IRS Form 1099-A requires the loan amount outstanding at the time of foreclosure.

Question 8

If the lender is subject to the mortgage interest reporting requirement, which of the following actions is NOT required?

a. The lender must file an information return with the IRS.
b. The lender must report the amount of interest and points on the information return.
c. The lender must report the loan balance as of December 31 of the year preceding the year the report is filed.
d. The lender must send a statement to the borrower.

Answer 8

c. The lender must report the loan balance as of December 31 of the year preceding the year the report is filed.

The loan balance is not information that is required to be reported.

Question 9

Which of the following loans is clearly NOT subject to the IRS mortgage interest reporting requirement?

a. A loan made to purchase securities, secured by rural acreage
b. A loan made to finance a college education, secured by a piece of commercial real estate
c. A loan made to purchase a lot on a lake, secured by a certificate of deposit
d. A loan made to purchase a residence, secured by the dwelling

Answer 9

c. A loan made to purchase a lot on a lake, secured by a certificate of deposit

The mortgage interest reporting regulations cover only loans secured by real property. Only choice (c), a loan secured by a certificate of deposit, would not be subject to the mortgage interest reporting requirement (because it is not secured by real estate).

Question 10

This IRS form tells taxpayers how much they earned in interest income.

Answer 10

1099-INT

Question 11

Which account is NOT subject to backup withholding?

a. A money market savings account owned by Brenda Wilson
b. A time deposit account owned by Bob and Nancy Dawson
c. An IRA owned by Max Jones
d. A savings account owned by Karen Hitchings

Answer 11

c. An IRA owned by Max Jones

IRAs are subject to different withholding rules based on the customer’s election.

Question 12

By which date must an interest reporting statement be sent to the borrower’s last known address?

a. January 15 of the year following the year the interest is paid
b. January 31 of the year following the year the interest is paid
c. February 28 of the year following the year the interest is paid
d. March 1 of the year following the year the interest is paid

Answer 12

b. January 31 of the year following the year the interest is paid

Question 13

How often does the W8-BEN have to be recertified?

Answer 13

every 3 years

Question 14

By what date must the bank send the borrower a statement in connection with an information return on foreclosed or abandoned property?

a. January 15 of the year following the year of the foreclosure or abandonment
b. January 31 of the year following the year of the foreclosure or abandonment
c. February 28 of the year following the year of the foreclosure or abandonment
d. March 1 of the year following the year of the foreclosure or abandonment

Answer 14

b. January 31 of the year following the year of the foreclosure or abandonment

Question 15

What is the middlemen rule?

Answer 15

All persons engaged in a trade or business who make or receive certain payments in the course of their trade or business to another person must report the amount of these payments on information returns. The party, including any middleman payer, who is responsible for reporting payments is also responsible for any backup withholding.

Question 16

First National Bank does not have the TINs of several borrowers with mortgage loans. What should the bank do to fulfill the mortgage interest reporting regulations?

a. Mail a one-time request for TINs by certified mail to each borrower who has failed to provide one
b. Post a notice in its mortgage lending lobby that TINs are required for mortgage loans
c. Mail a separate request for TINs annually to borrowers who have failed to provide one
d. Include a request for TINs in the annual mailing of the payment coupon book

Answer 16

d. Include a request for TINs in the annual mailing of the payment coupon book

The bank must annually request a TIN from any mortgage interest payor who does not provide it. The mailing does not have to be separate but can be included with statements or payment coupon books.

Question 17

This IRS form tells taxpayers if any debt the taxpayer owed is cancelled, forgiven or discharged.

Answer 17

1099-C (Cancellation of Debt)

Identifiable events: workout agreements, bankruptcy filings, expiration of statute of limitations, etc.

Question 18

Mrs. Franklin has two mortgage loans at First National Bank on which she makes monthly payments. On Loan A she made 13 payments last year, mailing the last payment on December 28. It was received the afternoon of January 2 and credited on January 3. The amount of interest paid on Loan A in the first 12 payments was $1,000. There was $155 of interest on the 13th payment. On Loan B, she made 12 payments; each contained interest accrued to the fourth day of the month. The last payment was mailed on December 19 and was received and credited on December 23. The last payment contained interest accrued to January 4. The total interest paid on Loan B was $2,000, of which $100 accrued between January 1 and January 4 of the next year. How much interest must First National Bank report?

a. $1,155 for Loan A and $2,000 for Loan B
b. $1,155 for Loan A and $2,100 for Loan B
c. $1,000 for Loan A and $2,000 for Loan B
d. $1,000 for Loan A and $2,100 for Loan B

Answer 18

c. $1,000 for Loan A and $2,000 for Loan B

A lender should report the interest received or properly accrued during the calendar year. Therefore, if the payor makes a payment that is not received until the next year, it is not reported until the year it is received. However, under the de minimis rule, any interest received that properly accrues up until January 15 of the next year may be reported in the current calendar year.

Question 19

This IRS form is used to report the IRA contributions made in the preceding tax year.

Answer 19

5498

Question 20

Which of the following groups of employees should be trained on the detailed use of W-9 forms?

a. Senior management
b. New account officers
c. Auditors and accountants
d. Security officers

Answer 20

b. New account officers

New account officers are the ones who need to know the detailed rules for 1099 reporting so they can properly code accounts to allow the bank’s system to compile the information at year end.

Question 21

The bank must use a form ____ to request a TIN from each accountholder at the time of account opening.

Answer 21

W-9

Question 22

This IRS form is used to report amounts paid to foreign persons that are subject to income tax withholding, even if no amount is deducted and withheld from the payment because of a treaty or exception to taxation, or if any amount withheld is repaid to the payee.

Answer 22

1042 S

Question 23

First National Bank made a loan to Lawrence & Co. for the purpose of purchasing landscape equipment, secured by a storage lot the company owned. The borrower made payments for a year and then defaulted. Three months passed without any communication or payments from the borrower, despite the bank’s efforts to locate the company’s owners. The company appears to have ceased operations. What is the bank’s BEST course of action?

a. Do nothing, because the bank has no actual knowledge of abandonment and has not foreclosed on the property
b. Make reasonable inquiries to determine whether the property is abandoned and if so, report it as abandoned
c. Locate the borrower, foreclose on the property, and report the transaction as a foreclosure
d. Report the property as abandoned

Answer 23

b. Make reasonable inquiries to determine whether the property is abandoned and if so, report it as abandoned

Question 24

First National Bank sold several of its mortgage loans to individual investors and now services the loans for the individuals. First National Bank collects more than $600 on most of these mortgages and deposits the money into the account of the investors. At the end of each year, First National Bank sends the investors a summary of transactions on the mortgages and a detailed breakdown of the principal and interest payments made. Who is responsible for filing the mortgage interest information returns?

a. The investors, because they own the loans and the money is collected for them
b. The investors, because they have the necessary information from the servicer
c. First National Bank, because it was the first owner of the loans
d. First National Bank, because it collects the interest and has the information necessary to file the information return

Answer 24

d. First National Bank, because it collects the interest and has the information necessary to file the information return

A person who, in the course of trade or business, collects interest for another person is responsible for filing the information return if the initial recipient has enough information to report.

Question 25

Which of the following interest-bearing accounts is EXEMPT from Form 1099 annual information reporting requirements under IRS regulations?

a. Time certificates of deposit
b. Money market deposit accounts
c. Individual retirement accounts
d. Negotiable order of withdrawal accounts

Answer 25

c. Individual retirement accounts

Question 26

Information reports must include which of the following details?

a. Name, address, and TIN of the borrower
b. Purpose of the loan
c. Address of the property securing the mortgage
d. Fair market value of the property at the time of the loan

Answer 26

a. Name, address, and TIN of the borrower

The names, addresses, and TINs of the interest payor and the interest recipient are required on the information return.

Question 27

On foreclosure, which of the following loans is subject to the reporting requirements for foreclosed and abandoned property?

a. A loan made to purchase a family car, secured by the car
b. An unsecured loan made to purchase a computer used in the borrower’s business
c. A loan made to purchase a residence, secured by the residence
d. A loan made to purchase a home computer, secured by the computer

Answer 27

c. A loan made to purchase a residence, secured by the residence

The requirements to report on the foreclosure and abandonment of security apply to all loans except those secured by an interest in tangible personal property that is not used by a consumer in a trade or business or for investment purposes. In these examples, the loan made to purchase the residence is the only one that is covered. The loan made to purchase the business computer is unsecured and therefore not subject to the requirements. The others are secured by tangible personal property and are not used for business or investment purposes.

Question 28

Walter Johnson has two accounts at First National Bank. His savings account was opened in 1975, and his money market savings account was opened in 1985. He has never supplied a TIN number to the bank. What must First National Bank do?

a. Withhold 28 percent of the payments on each of the accounts
b. Withhold 28 percent of the payments on each account and annually request a TIN on the savings account
c. Annually request a TIN on both accounts
d. Refuse to open future accounts without a TIN

Answer 28

b. Withhold 28 percent of the payments on each account and annually request a TIN on the savings account

For accounts that were opened before 1984, the bank must annually request a TIN. On accounts opened after 1984, the bank should simply begin backup withholding if not provided a TIN at the time the account is open.

Question 29

On March 1, First National Bank opened three accounts: 1) a savings account for Margaret Nelson, who did not have a TIN but signed a certification that she had applied for one; 2) a money market savings account for Linda Miller, who could not remember her TIN but promised to provide it at the earliest possible date; and 3) a certificate of deposit for John Whiteside, who completed a Form W-9 but provided a TIN with only eight numbers. Ms. Nelson provided her newly acquired TIN to the bank on April 15, Ms. Miller provided her TIN on April 5, and Mr. Whiteside provided his TIN to the bank on March 10. Interest was paid on all of these accounts on March 31, and the bank withheld 28 percent of the interest payments. On April 20 all the payees requested that the withheld interest be refunded. What should the bank do?

a. Refund the withheld interest to all payees
b. Refund to Ms. Nelson and Mr. Whiteside because the interest was erroneously withheld
c. Refund only to Mr. Whiteside because the interest was erroneously withheld
d. Refund only to Ms. Nelson because the interest was erroneously withheld

Answer 29

b. Refund to Ms. Nelson and Mr. Whiteside because the interest was erroneously withheld

A refund of the tax withheld can be made only before the end of the calendar year and before the return has been submitted to the IRS. Refunds can be made only if the interest has been withheld in error by the payor. Because the bank had the TIN before the payment of the interest in Mr. Whiteside’s case, the interest was erroneously withheld. Ms. Nelson has 60 days to provide the TIN to the bank.

I believe it is because Ms. Nelson signed a certification on the w-9 that she is awaiting a TIN, from this point the Bank must wait 60 days to withhold interest. since she provided her TIN prior to 60 days from opening the account/certifying she applied for the TIN, the Bank withheld the interest in error.

Question 30

What is the 1099-INT threshold/de minimis?

Answer 30

$10

Question 31

First National Bank receives a notice from the IRS to begin withholding 28 percent of the interest payments on the money market savings account of Myra Wilcox because of payee underreporting. What is the most proper action for First National Bank to take?

a. Send a notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin withholding; stop withholding if Ms. Wilcox can prove to the bank that she is not underreporting
b. Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS
c. Begin withholding with the first payment after 30 days and send a notice to Ms. Wilcox at least 15 days before the first payment from which funds are to be withheld; stop withholding only on written notice from the IRS
d. Send notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin backup withholding with the first payment following 30 days after the notice; stop withholding only on written notice from the IRS

Answer 31

b. Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS

The bank must begin to backup withhold. Notice must be sent to Ms. Wilcox by 15 business days after the date of the first payment subject to withholding. The bank cannot stop withholding until it or Ms. Wilcox receives notice from the IRS that withholding can stop.

Question 32

Form 1099-A must be filed with the IRS by ______ __ of the year following the calendar year the property is foreclosed or abandoned (_____ __ if filing electronically).

Answer 32

February 28

March 31

Question 33

Which of the following actions subjects a lender to mortgage interest reporting requirements?

a. The lender holds mortgage loans in the course of its trade or business.
b. The lender is a qualified FHA or VA lender.
c. The lender receives at least $500 in interest on a mortgage loan during a calendar year.
d. The lender offers unsecured home improvement loans.

Answer 33

a. The lender holds mortgage loans in the course of its trade or business.

Lenders that hold mortgages in their regular course of business are required to report interest received if the interest is $600 or more.

Question 34

A bank has given a customer a merchandise gift with a fair market value of $25.00 for opening a deposit account. Which of the following statements describes the proper reporting status of this gift?

a. If the cost of the gift is under $20.00, it is not reportable to the IRS.
b. The cost of the gift is credited to the customer’s account as a bonus, increasing the account balance.
c. The fair market value of the gift is reported to the customer on the periodic statement.
d. The fair market value of the gift is added to the interest paid and reported on Form 1099-INT.

Answer 34

d. The fair market value of the gift is added to the interest paid and reported on Form 1099-INT.

Payments of more than $10 must be reported.

Question 35

This IRS form covers a wide range of payments that taxpayers receive, such as rent, royalties, prizes, awards and substitute payments in lieu of dividends.

Answer 35

1099-MISC

Question 36

This is an annual IRS notification to taxpayers when the 1099 has been filed with either a missing or incorrect TIN/name combination

Answer 36

B-Notice

Question 37

On which of the following loans does First Savings Bank NOT have to provide a 1098-E (Student Loan Interest) report?

a. A $10,000 tuition loan made to Bobby Wilcox, a student at the state university, guaranteed by the Department of Education
b. A $35,000 line of credit made to Don and Barbara Cocelli, secured by their home, for the payment of certified school expenses for their twin daughters at an accredited private school
c. A $15,000 loan to Linda Chu to be used for the purpose of paying tuition and fees and purchasing college books, lab equipment, and a computer for use in her education at the local community college
d. A $12,000 loan to Paul and Rhonda Pena and their daughter Jennifer, used to pay her college tuition as well as the tuition at the private high school her sister, Jeanne, attends

Answer 37

d. A $12,000 loan to Paul and Rhonda Pena and their daughter Jennifer, used to pay her college tuition as well as the tuition at the private high school her sister, Jeanne, attends

This loan is not solely for educational expenses at a post-secondary school because part of it went to pay Jeanne’s high-school tuition. Because the purpose of the loan is not solely for a qualified education loan, it is not covered.

Question 38

Banks must keep W-9 forms for __ years from account opening.

Answer 38

3

Question 39

For a U.S. bank with domestic and foreign locations, which transaction does NOT require an information return to report the amount of interest paid?

a. A loan made to James Roberts, a U.S. resident, payable at the bank’s New York office, to purchase securities secured by the borrower’s home in Mexico
b. A loan made to Robert and Louise LeBlanc, who are resident aliens, payable at the bank’s New York office, secured by a piece of real property located in Canada
c. A loan made to Smith and Withers, a partnership formed for the practice of law, located in the United States, payable at the bank’s New York office, guaranteed by Mr. Smith and Mr. Withers, and secured by the law firm’s office building
d. A loan made by Mrs. West, a U.S. citizen, to purchase a mobile home and the lot on which it will be placed; both the mobile home and lot are located in the United States

Answer 39

c. A loan made to Smith and Withers, a partnership formed for the practice of law, located in the United States, payable at the bank’s New York office, guaranteed by Mr. Smith and Mr. Withers, and secured by the law firm’s office building

Loans secured by real property and payable at a bank location within the United States are covered by the regulation if they are made to individuals. If the property is located outside the United States, the borrower must be a U.S. citizen or a resident alien individual for the property to be covered. Therefore, interest paid on all of the loans described is subject to the reporting requirements except (c). The loan to the law firm is not covered because it is not a loan to an individual.

Question 40

This IRS form is used to report gross proceeds from a sale or exchange of real estate and certain royalty payments.

Answer 40

1099-S

Question 41

This IRS form tells taxpayers how much they paid in mortgage interest.

Answer 41

1098