Section 6050Y of the Internal Revenue Code requires three parties to file information returns with the IRS whenever a life insurance policy is sold to someone without a close personal or business tie to the insured: the buyer of the policy, the insurance company that originally issued it, and whoever eventually pays the death benefit. Congress added the section through the Tax Cuts and Jobs Act of 2017, effective for transactions after December 31, 2017, to give the IRS visibility into the life settlement market, where investors buy existing policies from the people they insure.1Office of the Law Revision Counsel. 26 USC 6050Y – Returns Relating to Certain Life Insurance Contract Transactions The three filings together let the IRS track the sale price, the seller’s cost basis, and the eventual death benefit so it can check whether each party reported the correct taxable amount.
Which Transactions Trigger Section 6050Y
The core trigger is a “reportable policy sale.” IRC Section 101(a)(3)(B) defines that as any direct or indirect acquisition of an interest in a life insurance contract where the buyer has no substantial family, business, or financial relationship with the insured beyond the policy itself.2Legal Information Institute. Reportable Policy Sale From 26 USC 101(a)(3) A typical life settlement — policyholder sells to an unrelated investor or settlement company — fits squarely inside the definition.
The word “indirectly” does real work. Acquiring an interest in a partnership, trust, or other entity that holds a life insurance contract can itself be a reportable policy sale. That closes the obvious workaround of buying the entity instead of the policy.
Two other situations pull a filing obligation out of Section 6050Y even without a reportable policy sale. The first is a transfer of a policy to a foreign person; the insurer must report once it receives notice of the transfer, including indirect signals like a foreign address change or foreign banking information for premium payments, unless it knows no transfer actually happened or that the new owner is a U.S. person. This piece of the rule applies to transfers after December 31, 2018.3eCFR. 26 CFR 1.6050Y-1 – Information Reporting for Reportable Policy Sales, Transfers of Life Insurance Contracts to Foreign Persons, and Reportable Death Benefits The second is the payment of a death benefit on any policy that previously went through a reportable policy sale, no matter how long ago.
Transfers That Are Not Reportable
Transfers between family members, business partners, or others with a substantial preexisting relationship to the insured fall outside the reportable-policy-sale definition and do not trigger Section 6050Y. Gifts and transfers where the recipient’s basis carries over from the transferor are likewise outside the rule. If none of the three triggers above applies, there is nothing to file under 6050Y.
Who Files What
Section 6050Y assigns a specific form to each party, and each filing feeds the next.
The Buyer Files Form 1099-LS
The acquirer of the policy carries the first reporting duty. For each reportable policy sale, the buyer files IRS Form 1099-LS (Reportable Life Insurance Sale) for every person who received a payment in the transaction. The form captures the amount paid to the seller, the date of the sale, the insurance company’s name, and the policy number.4Internal Revenue Service. Instructions for Form 1099-LS Copies go to three places: the IRS, the seller (who needs it to figure taxable gain), and the insurance company that issued the policy (who needs it to prepare its own filing).
The Insurer Files Form 1099-SB
Once the issuer receives Form 1099-LS — or receives notice that a policy has been transferred to a foreign person — it files Form 1099-SB (Seller’s Investment in Life Insurance Contract).5Internal Revenue Service. Instructions for Form 1099-SB Form 1099-SB reports two numbers. The first is the seller’s “investment in the contract,” which IRC Section 72(e)(6) defines as the total premiums paid over the life of the contract minus any amounts previously received that were excluded from gross income.6Office of the Law Revision Counsel. 26 USC 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts That is the seller’s tax basis. The second is the contract’s surrender value just before the sale.7Internal Revenue Service. Instructions for Form 1099-SB – Seller’s Investment in Life Insurance Contract The insurer is the only party with the complete premium and distribution history needed to produce these numbers.
The Death Benefit Payor Files Form 1099-R
When the insured dies and the policy had previously been sold in a reportable policy sale, whoever pays the death benefit must file an information return reporting the payor’s information, the name and taxpayer identification number of each recipient, the date and gross amount of the payment, and the payor’s estimate of the buyer’s investment in the contract.1Office of the Law Revision Counsel. 26 USC 6050Y – Returns Relating to Certain Life Insurance Contract Transactions The IRS has designated Form 1099-R for this.8Internal Revenue Service. IRS, Treasury Issue Final Regulations on New Reporting Requirements for Life Insurance Contract Transactions This return is required even if the entire death benefit turns out to be tax-free, because the IRS uses it to confirm whether the transfer-for-value rule applies.
Deadlines
The deadlines are staggered so each party has time to use the previous one’s filing.
The acquirer must send Form 1099-LS to the issuer by January 15, or within 20 calendar days of the sale if later, with an additional five days past the end of any state-law rescission period. The issuer needs that lead time to prepare Form 1099-SB.9Internal Revenue Service. General Instructions for Certain Information Returns (2025)
The acquirer must furnish Form 1099-LS to the seller by February 15, and the issuer must furnish Form 1099-SB to the seller by the same date. For 2026 returns the date shifts to February 17 because the 15th falls on a weekend. For death benefit payments, the payor must furnish the recipient’s statement by January 31.9Internal Revenue Service. General Instructions for Certain Information Returns (2025)
Section 6050Y returns filed on paper with the IRS are due by the last day of February — March 2 for 2026, since February 28 is a Saturday. Electronic filings are due March 31. When an insurer receives notice of a transfer to a foreign person after February 2, Form 1099-SB is due within 30 days of that notice rather than on the standard date.9Internal Revenue Service. General Instructions for Certain Information Returns (2025)
What the Seller Does With the Forms
If you sold a policy, you use both forms to work out what you owe. Form 1099-LS shows the sale proceeds. Form 1099-SB shows your basis in the contract and the policy’s surrender value just before the sale.
The gain splits into two layers. The portion of the gain equal to the surrender value minus your basis — essentially the inside buildup of cash value — is taxed as ordinary income. Anything you received above the surrender value is taxed as capital gain. One transaction can produce both.
For a buyer who later collects on the policy, Section 101(a)(1) normally excludes life insurance death benefits from gross income,10Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits but the transfer-for-value rule shrinks the exclusion after a sale: the new owner can exclude only what they paid for the policy plus later premiums, and the rest is taxable. The reporting on Form 1099-R gives the IRS the figures to enforce that limit.
Penalties for Noncompliance
A missed or incorrect 6050Y return draws the standard information-return penalties under IRC Sections 6721 (failure to file with the IRS) and 6722 (failure to furnish statements to recipients). The penalties are assessed per return and climb with how late the fix comes. For returns due in 2026:11Internal Revenue Service. Information Return Penalties
- Corrected within 30 days of the due date: $60 per return.
- Corrected after 30 days but by August 1: $130 per return.
- Not corrected by August 1 or never filed: $340 per return.
- Intentional disregard: $680 per return with no annual cap.
Annual caps depend on the size of the filer. Businesses with average annual gross receipts above $5 million face caps of $683,000, $2,049,000, and $4,098,500 across the three tiers. Smaller businesses face caps of $239,000, $683,000, and $1,366,000.12Internal Revenue Service. 20.1.7 Information Return Penalties
Penalties can be waived for reasonable cause. The filer has to show both that they acted responsibly before and after the failure — requesting extensions, trying to prevent the problem, correcting it quickly — and that significant mitigating factors existed, such as being a first-time filer of the form, a strong compliance history, or circumstances beyond their control.13Internal Revenue Service. Penalty Relief for Reasonable Cause A de minimis exception also treats a return as correctly filed if no single incorrect amount differs from the correct amount by more than $100, or more than $25 for withheld tax.14Office of the Law Revision Counsel. 26 USC 6721 – Failure to File Correct Information Returns
The whole system depends on recordkeeping that long predates the sale. Insurers need complete premium histories back to the policy’s inception to compute the seller’s basis. Buyers need to track what they paid and every premium afterward, because that number becomes the basis for any later surrender or death-benefit calculation. Older policies that changed hands informally before 2018 are where these filings most often break down.