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It has long been clear that a taxpayer's gross income includes income from the discharge of indebtedness,1 but for many years the Internal Revenue Code (the Code) did not require lenders to file information returns with respect to discharged debt. In order to encourage taxpayer compliance with respect to discharged indebtedness and to enhance the ability of the Internal Revenue Service to enforce the discharge of indebtedness rules,2 Congress amended the Code in 1993 to require that an "applicable financial entity," such as a bank, domestic building and loan association, or credit union,3 that "discharges" the debt of any person must file an information return with the IRS and provide a written statement to the person whose debt was discharged. Significant civil penalties, ranging up to 20 percent of the amount of indebtedness discharged, may be imposed on an applicable financial entity that intentionally disregards the information reporting requirements.4

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