Filing Responsibilities

D

Under the Internal Revenue Code, any person who receives more than $600 of mortgage interest from a borrower must file a Form 1098 with the IRS, which reports the amount of interest received during the year. Additionally, a copy of the Form 1098 must be provided to the borrower.

In this scenario, First National Bank sold several of its mortgage loans to individual investors and now services the loans for the individuals. The bank collects more than $600 on most of these mortgages and deposits the money into the account of the investors. At the end of each year, the bank sends the investors a summary of transactions on the mortgages and a detailed breakdown of the principal and interest payments made.

The question is asking who is responsible for filing the mortgage interest information returns, and the answer depends on who is considered the "lender" under the Internal Revenue Code. The lender is the person to whom the borrower makes the mortgage payments, and who is entitled to receive the interest on the loan.

In this case, the investors own the loans, but First National Bank is the servicer of the loans and collects the payments on behalf of the investors. The bank also provides the investors with a summary of transactions and a detailed breakdown of the principal and interest payments made.

While the investors own the loans and the money is collected for them, they are not considered the lender under the Internal Revenue Code. The bank is the entity to whom the borrower makes the mortgage payments and is entitled to receive the interest on the loan. Therefore, it is the bank's responsibility to file the mortgage interest information returns.

Option D, "First National Bank, because it collects the interest and has the information necessary to file the information return" is the correct answer. The bank is the lender under the Internal Revenue Code and is responsible for filing the Form 1098 with the IRS and providing a copy to the borrower.