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Managing Federal Receivables - Financial Management Service_1_

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									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……

                                                      1
Overview – The Basic Concepts
     WHAT ARE THE THREE BASIC CONCEPTS INVOLVED
     WHEN A DELINQUENT DEBT BECOMES
     UNCOLLECTIBLE?
      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.

                                                                      2
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.

                                                                       3
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.



                                                              4
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.


                                                   5
Overview –
The Accounting Concept
   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:
    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.                                          6
Overview –
The Income Tax Concept

   What is 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.

                                                            7
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”.



                                                               8
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!

                                                                      9

								
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