What Is Section 6050Y? Forms, Deadlines, and Penalties

Internal Revenue Code Section 6050Y requires three parties in a life settlement transaction — the buyer of the policy, the insurance company that issued it, and anyone who later pays out a death benefit — to file information returns with the IRS.1Office of the Law Revision Counsel. 26 USC 6050Y – Returns Relating to Certain Life Insurance Contract Transactions Congress added the section through the Tax Cuts and Jobs Act of 2017, effective for transactions after December 31, 2017, so the IRS could see into the life settlement market, where investors buy existing life insurance policies from the original policyholders. The returns track what the buyer paid, what the seller’s tax basis was, and what any eventual death benefit came to, so each party’s tax reporting can be checked against the others.

What Triggers a Section 6050Y Filing

Three separate events pull a transaction into this reporting regime.

A Reportable Policy Sale

A reportable policy sale is 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) That definition, in IRC Section 101(a)(3)(B), captures the classic life settlement: a policyholder sells their policy to an investor or settlement company with no personal connection to the insured.

The word “indirectly” carries weight. Acquiring an interest in a partnership, trust, or other entity that holds a life insurance policy can itself be a reportable policy sale, which blocks the workaround of buying the entity instead of the policy.

A Transfer to a Foreign Person

Section 6050Y also picks up transfers of a life insurance contract to anyone outside the United States, and the trigger for the insurance company is broad. Any communication carrying foreign indicia — a foreign address on a change-of-address form, foreign banking information for premium payments, or similar signals — puts the insurer on notice unless it knows no transfer occurred or knows the transferee is a U.S. person.3eCFR. 26 CFR 1.6050Y-1 – Information Reporting for Reportable Policy Sales, Transfers of Life Insurance Contracts to Foreign Persons, and Reportable Death Benefits This piece of the rule applies to transfers after December 31, 2018.

A Death Benefit After a Prior Sale

When the insured dies and the policy was previously the subject of a reportable policy sale, whoever pays the death benefit must file an information return covering the payor’s information, each recipient’s name and taxpayer identification number, 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 obligation applies even if the payout is entirely tax-free; the IRS still needs the data to check.

The Three Forms and Who Files Them

Form 1099-LS: The Buyer’s Return

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 sale, the insurance company’s name, and the policy number.4Internal Revenue Service. Instructions for Form 1099-LS Copies go to the IRS, to the seller (who needs it to figure taxable gain), and to the insurance company that issued the policy (which needs the notice to trigger its own filing).

Form 1099-SB: The Insurer’s Basis Report

After the insurance company gets the buyer’s Form 1099-LS — or receives notice of a transfer to a foreign person — it files Form 1099-SB (Seller’s Investment in Life Insurance Contract).5Internal Revenue Service. Instructions for Form 1099-SB The form reports two numbers: the seller’s investment in the contract, defined by IRC Section 72(e)(6) as total premiums paid minus any amounts previously received tax-free,6Office of the Law Revision Counsel. 26 USC 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts and 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 full premium-payment and distribution history needed to compute these figures.

Form 1099-R: The Death Benefit Report

The IRS has designated Form 1099-R for the death benefit reporting obligation.8Internal Revenue Service. IRS, Treasury Issue Final Regulations on New Reporting Requirements for Life Insurance Contract Transactions The payor must furnish a copy to each recipient by January 31 of the year after the payment.9eCFR. 26 CFR 1.6050Y-4 – Information Reporting by Payors for Reportable Death Benefits

Filing Deadlines

The timeline is staggered so each filer has the previous filer’s data in hand.10Internal Revenue Service. General Instructions for Certain Information Returns (2025)

  • The buyer must furnish Form 1099-LS to the issuing insurance company by January 15, or within 20 calendar days of the sale if later, with an additional five-day extension past the end of any state-law rescission period. This early cutoff gives the insurer lead time to prepare Form 1099-SB.
  • The buyer must furnish Form 1099-LS to the seller by February 15 (February 17 for 2026 returns, since the 15th falls on a weekend). The insurer’s Form 1099-SB to the seller is due the same day.
  • Death benefit statements on Form 1099-R go to recipients by January 31.
  • Paper returns to the IRS are due the last day of February (March 2 for 2026). Electronic filings are due March 31.
  • If the insurer receives notice of a transfer to a foreign person after February 2, Form 1099-SB is due within 30 days of that notice instead of the standard deadline.

How the Seller Uses These Forms

The two forms together tell the seller what they owe. Form 1099-LS shows the sale proceeds. Form 1099-SB shows the basis and the surrender value. The taxable gain then splits in two layers. The portion between the seller’s basis and the surrender value — essentially the inside buildup of cash value — is taxed as ordinary income. Anything above the surrender value, the settlement premium the buyer paid on top of what the policy was worth if surrendered, is taxed as capital gain. Sellers commonly face both rates on the same transaction.

Why the Reporting Exists: The Transfer-for-Value Rule

Life insurance death benefits are ordinarily excluded from gross income under IRC Section 101(a)(1).11Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits The transfer-for-value rule is the big exception. Once a policy changes hands for valuable consideration, the new owner’s exclusion shrinks to the amount they paid for the policy plus any premiums they paid afterward. Everything above that is taxable when the benefit pays out. Section 6050Y exists to give the IRS the numbers it needs to run that math.

Several statutory carve-outs under IRC Section 101(a)(2) keep the death benefit fully tax-free even after a transfer:

  • A transfer to the insured.
  • A transfer to a partner of the insured.
  • A transfer to a partnership in which the insured is a partner.
  • A transfer to a corporation in which the insured is a shareholder or officer.
  • A transfer where the transferee’s basis carries over from the transferor, which covers tax-free exchanges and certain reorganizations.

These exceptions line up with why the reportable-policy-sale definition zeroes in on buyers without a substantial relationship to the insured. Those are the sales where the transfer-for-value rule actually bites.

Penalties

Missing or botching a Section 6050Y return exposes the filer to the same penalty structure that applies to information returns generally, under IRC Sections 6721 (failure to file with the IRS) and 6722 (failure to furnish statements to recipients). For returns due in 2026, the tiers are:12Internal Revenue Service. Information Return Penalties

  • $60 per return if corrected within 30 days of the due date.
  • $130 per return if corrected after 30 days but by August 1.
  • $340 per return if not corrected by August 1 or never filed.
  • $680 per return for intentional disregard, with no annual cap.

Annual maximums vary by the size of the filer. The IRS may waive penalties for reasonable cause where the filer acted responsibly and mitigating circumstances existed.13Internal Revenue Service. Penalty Relief for Reasonable Cause

What Section 6050Y Does Not Cover

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 filings. Ordinary lifetime distributions from a policy — withdrawals, loans, surrenders, or maturity payments — are reported by the insurer on Form 1099-R under separate reporting rules, not Section 6050Y itself.14Internal Revenue Service. About Form 1099-R Those distributions do interact with this section, though: after a reportable policy sale, the insurer must use the buyer’s adjusted basis, not the original policyholder’s, when calculating the taxable portion of a later distribution, which is one reason the basis-reporting framework matters.