WASHINGTON — America’s Credit Unions is asking the Internal Revenue Service and Treasury Department to clarify car loan interest deduction rules by the end of November, warning that unresolved reporting questions could produce inconsistent tax statements and costly system changes for credit unions.
In an Oct. 30 letter to IRS Chief Executive Officer Frank J. Bisignano, the association also requested protection from reporting penalties for lenders that apply reasonable interpretations in good faith before receiving further guidance.
James C. Akin, the group’s head of regulatory advocacy, said credit unions need answers on refinancing, borrower certifications, rebates, insurance premiums and other issues as they prepare Form 1098-VLI statements for 2026.
The association said final regulations published Sept. 8 left limited time to program systems before the Jan. 31, 2027, statutory deadline to furnish borrower statements. Although regulators said lenders would have approximately 18 months from enactment to begin reporting, credit unions could not complete changes addressing allocation and refinancing requirements until the final rule appeared, the letter said.
Without clarification, lenders could report different amounts of qualifying interest for identical circumstances, leaving borrowers with different deductions depending on which credit union holds their loans, the association warned.
Simpler Reporting & Borrower Information
One of the association’s requests would allow lenders to report total interest and outstanding principal on loans determined to qualify in whole or in part, with a notice that borrowers must identify any nonqualifying portion. The group proposed adding a checkbox to Form 1098-VLI and borrower instructions explaining the calculation.
That approach would resemble mortgage interest reporting and the transitional vehicle loan reporting method permitted for 2025, the association said. If a regulatory amendment is necessary, it asked the agencies to announce their intent to make the change and allow lenders to rely on that announcement for 2026 and later years.
The group also sought confirmation that lenders may collect eligibility information after approving and funding loans, provided they obtain it before the first information return is due. Requiring the information before approval could introduce manual reviews into automated lending systems and delay decisions, it said.
Other information requests included:
- Allowing reliance on borrower certifications signed under penalty of perjury for facts within borrowers’ knowledge, absent conflicting records, and publishing a model certification.
- Specifying outreach steps for missing information and allowing lenders that receive insufficient responses to treat affected loans as nonreportable under the vehicle loan reporting requirements.
- Applying information received later only to returns whose original due dates follow receipt of that information.
Allocating Interest & Handling Rebates
The letter said the final rule requires principal and interest payments to be divided proportionally between qualifying and nonqualifying portions of a loan. Credit union servicing systems generally maintained a single balance and did not split earlier payments that way.
For loans with no amounts added after origination, the group requested permission to apply the original qualifying percentage to annual interest and the relevant outstanding principal balance, avoiding reconstruction of individual payments made in 2025 and 2026.
The association also asked that manufacturer rebates assigned to dealers at closing be treated like cash down payments, applied first against negative equity and other nonqualifying amounts. Negative equity is debt on a trade-in that exceeds its value.
In an example cited in the letter, treating a $4,000 rebate as a down payment would make 95.2% of a $42,000 loan qualify, compared with 85.7% if the rebate reduced the vehicle’s purchase price. For dealer discounts, the group sought confirmation that lenders may use the contract’s discounted cash price.
Refinancing & Insurance
For loans that originally qualified only in part, America’s Credit Unions asked the IRS to confirm that the full outstanding balance could qualify when refinanced. Alternatively, it requested permission to carry forward the original qualifying percentage using a written statement from the borrower or prior lender.
The group also sought confirmation that eligible loans remain eligible through successive refinancings for the original borrower, with applicable limits based on the immediately preceding loan.
On insurance, the association requested confirmation that collateral protection premiums added after origination do not qualify. It proposed allowing lenders either to recalculate the qualifying percentage when nonqualifying amounts are added or to exclude those amounts and their interest directly when separately tracked.
For monthly credit life and disability coverage, it asked the IRS to distinguish between:
- Premiums added after refinancing, which the group said should not qualify, along with the interest on them.
- Premiums for coverage elected when a vehicle is purchased, which it said should qualify to the same extent as coverage financed through a single premium
Borrower Deaths & Penalty Relief
The association also sought guidance on reporting interest paid by estates and on loans assumed or refinanced after a borrower’s death. It asked that surviving original co-borrowers retain eligibility when they meet original-use requirements, while heirs who do not meet those requirements would not qualify.
The group requested clarification on accrued interest and fees included in payoff balances after a death.
Finally, America’s Credit Unions asked that guidance differing from a reasonable interpretation applied in good faith affect only later calendar years. It also sought assurances that lenders using such interpretations on statements already filed or furnished would be considered to have acted responsibly and would not face reporting penalties.
