What Is the 1099-SB Tax Form?
The 1099-SB tax form is a specialized informational document issued by the IRS to report the sale of a life insurance policy. Specifically, this form is provided by the issuer of the policy to a buyer when a policy is transferred in a reportable policy sale. This form contains critical data about the policy's cost basis and other financial details necessary for the new policyholder to calculate potential gains or losses. It is essential for ensuring compliance with IRS regulations and proper tax reporting by all involved parties.
Introduced as part of the Tax Cuts and Jobs Act of 2017, the 1099-SB was first required starting in 2019. Its purpose is to increase transparency in the secondary life insurance market. This form allows the IRS to track the transfer of life insurance policies and prevent tax evasion, especially when a policy is sold at a gain. Prior to this form, determining the cost basis was difficult, often leading to incorrect tax filings.
Only specific transactions require the 1099-SB form. For example, when a life insurance policy is sold to a third party, such as a viatical settlement company or life settlement provider, the transaction becomes reportable. In contrast, transfers between family members or as part of certain trusts may not require this form. Knowing the differences is crucial for avoiding penalties and ensuring proper IRS compliance.
Who Must File and Receive the 1099-SB?
The responsibility of filing the 1099-SB falls on the issuer of the life insurance policy. This entity is generally the insurance company that originally issued the policy. Upon a reportable policy sale, they must generate and provide a completed 1099-SB to the individual or entity who purchases the policy. This information also gets reported to the IRS to support the correct treatment of gains or losses during future policy transactions or redemptions.
It is important to distinguish between the policy seller and the policy buyer. While the seller may receive proceeds, it is the buyer who receives the 1099-SB form. The buyer then uses the information on the form to determine the proper reporting of potential income, particularly if the policy is surrendered or matures. This ensures that any gains are taxed appropriately and are not hidden from IRS scrutiny.
Failure to file or provide a required 1099-SB can result in significant penalties. For 2025, the IRS imposes penalties starting from $60 per form for filings less than 30 days late, escalating to $310 per form for failures not corrected by August 1st. The maximum penalty can reach over $3,783,000 annually for large businesses. Therefore, understanding the necessity of this form and ensuring timely delivery is vital for all stakeholders.
When Should the 1099-SB Be Filed?
The form must be filed with the IRS and sent to the buyer of the policy by the deadline for other 1099 series forms. For transactions occurring in the 2024 tax year, the 1099-SB must be provided to the buyer by January 31, 2025, and filed with the IRS by February 28, 2025 (or March 31, 2025, if filed electronically). Late or incorrect filing may incur the aforementioned penalties and delay proper income reporting by the policyholder.
It’s important to note that the deadline aligns with most other 1099 forms to streamline reporting and IRS verification. Companies must ensure their compliance systems are up to date and capable of generating and distributing the 1099-SB in time. This might involve integrating the form into year-end tax reporting tools or third-party filing systems that handle electronic submissions.
Even if a policy is sold late in the year—say in December—the issuer must still comply with the January/February deadlines. This tight window leaves little room for error, so maintaining real-time transaction tracking and preemptive form preparation is key for smooth operations and regulatory adherence.
| Item | Deadline/Value |
|---|---|
| Form Due to Buyer | January 31, 2025 |
| Paper Filing with IRS | February 28, 2025 |
| Electronic Filing with IRS | March 31, 2025 |
| Initial Late Filing Penalty | $60 per form |
| Max Penalty for Large Entities | $3,783,000 |
How to Fill Out the 1099-SB Tax Form
Completing the 1099-SB form accurately is critical for avoiding compliance issues. The form includes several specific boxes, each requiring exact values related to the policy. The primary sections to be filled are the policy number, date of sale, issuer's name and TIN, buyer's name and TIN, and the cost basis of the policy. The cost basis typically refers to the premiums paid minus any benefits received or adjustments as defined by the IRS.
Before starting, issuers should confirm the policy qualifies as a reportable policy sale. If so, they must gather accurate historical data on the policy including the cumulative premiums, any partial surrenders, loans taken against the policy, and changes in ownership. Each of these elements can affect the policy’s adjusted basis, which in turn determines the buyer’s future taxable income if the policy is redeemed.
The form must then be validated for errors. Most electronic filing systems offer basic error detection, but manual checks should also be conducted. A mistake in any part of the 1099-SB, particularly the cost basis, can lead to significant underreporting of income by the recipient. To protect both parties, issuing a corrected 1099-SB as soon as an error is identified is strongly advised.
- Verify transaction qualifies as reportable
- Collect policy number and sale details
- Calculate cost basis accurately
- Input issuer and buyer TINs
- Double-check for typographical errors
Common Mistakes and How to Avoid Them
One of the most frequent mistakes issuers make is misreporting the cost basis of the life insurance policy. Since this figure directly influences the tax liability of the buyer, even a small error can have significant consequences. To avoid this, issuers must employ a systematic method to track the payment history, surrender values, and any changes made to the policy terms or ownership.
Another common issue is missing the deadline for filing or delivering the 1099-SB. With short time frames, especially during the busy tax season, issuers should plan ahead and integrate filing tasks into their Q4 operations. Using IRS-authorized electronic filing systems can streamline the process and provide immediate confirmation of submission.
Lastly, many issuers fail to issue corrected forms after discovering an error. The IRS requires corrections be made promptly using Form 1099-SB with updated information and proper indication of correction status. Failing to correct known errors could not only mislead buyers but also result in fines during IRS audits.
- Incorrect cost basis calculation
- Late delivery to buyer
- Missing electronic filing deadlines
- Failure to issue corrected 1099-SBs
- Improper classification of policy transaction
Conclusion: Why 1099-SB Compliance Matters
The 1099-SB tax form plays a pivotal role in the transparency and accuracy of tax reporting for life insurance policy sales. By providing precise information about the cost basis of a transferred policy, it ensures that policyholders report correct gains and that the IRS can verify taxable income. The proper filing of this form protects both buyers and issuers from regulatory scrutiny and financial penalties.
With the rise of life settlement markets—now valued at over $4 billion annually in the U.S.—the need for accurate documentation like the 1099-SB is more critical than ever. These transactions often involve complex financial instruments, and the form brings much-needed structure and accountability to the process. Furthermore, it supports fair taxation of financial gains resulting from the transfer of life insurance assets.
Failure to comply can be costly. Not only can fines exceed $3.7 million annually for large issuers, but it can also result in damaged reputations and increased audits. For those involved in the sale or acquisition of life insurance policies, mastering the 1099-SB is a non-negotiable part of financial and tax compliance. When in doubt, working with a certified tax professional or compliance consultant is strongly recommended to avoid missteps.
Evaluation of IQTaxHub
Pros
- Clearly reports life insurance cost basis
- Provides essential details for tax compliance
- Simplifies gain calculation upon policy sale
Cons
- May cause confusion with multiple forms
- Limited use outside insurance policy sales
- Detail errors risk triggering IRS issues
April 19, 2025 at 5:08 p.m.
Last modified:
April 19, 2025 at 8:38 p.m.
