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Unclaimed Property Focus
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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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IRS Extension Provides IRA Holders an Extra Year

Posted By Administration, Thursday, November 29, 2018

On May 29, 2018, the Internal Revenue Service issued Revenue Ruling 2018-17, clarifying the agency’s position on traditional individual retirement account escheatment. Specifically, the ruling states that IRA holders – or trustees – must withhold 10 percent federal income tax and issue form 1099Rs when reporting unclaimed IRAs to the states. At that time, holders were given a compliance deadline of  Jan. 1, 2019, or as soon as it becomes “reasonably practicable” to do so.

 

UPPO worked closely with the Holders Coalition and other organizations, including SIFMA and ICI, whose members are likely to be affected by this ruling to formulate a strategy for raising these issues with the IRS and other agencies, such as the SEC and FINRA, which may have conflicting opinions on the practice. Members of the Holders Coalition, including UPPO representatives Jen Borden and Dana Terry, met with the IRS in September to discuss a variety of concerns.

 

These efforts contributed to an extension of the compliance deadline from Jan. 1, 2019, to Jan. 1, 2020. On Nov. 20, 2018, the IRS issued Notice 2018-90 announcing an extension:

 

“Relief is extended to payments made before the earlier of January 1, 2020, or the date it becomes reasonably practicable to comply with the withholding and reporting requirements described in Rev. Rul. 2018-17.”

 

Revenue Ruling 2018-17 clarifies that Section 3405 of the Internal Revenue Code considers “any distribution or payment from or under an IRA… as includible in gross income,” and thus subject to tax withholding by the holder/trustee. Some holders already have held this position and routinely withhold tax and issue 1099Rs for escheated IRAs. Others do not. 

 

Although the IRS ruling provides clarity and paves the way for consistent practices, it creates challenges for securities holders, who would need to liquidate property before reporting it to the state and withholding the 10 percent federal income tax. This practice could conflict with other regulations.

 

The extension allows for an additional 12 months to seek guidance and clarification from other regulatory bodies and put practices in place to comply with the IRS requirement.

 

UPPO will continue to monitor issues related to the IRS ruling and will provide members with any relevant updates that occur. 

Tags:  1099  banks  IRS  securities 

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IRS Guidance Presents Challenges for Securities Holders

Posted By Contribution from Mike Ryan, 2018/19 UPPO eastern vice president, Thursday, August 16, 2018

On May 29, 2018, the Internal Revenue Service published Revenue Ruling 2018-17 – Withholding and Reporting with Respect to Payments from IRAs to State Unclaimed Property Funds. The ruling, which clarifies that property in an IRA that is escheated to the state meets the definition of a designated distribution under Section 3405 of the Internal Revenue Code (IRC) and therefore is subject to applicable tax withholding and reporting to the IRS.  

 

The ruling appears to be the result of guidance requested from the Information Reporting Program Advisory Committee (IRPAC), which provides an organized public forum for discussion of tax information reporting issues between IRS officials and representatives of the public.

 

According to the ruling, the payment of an individual’s interest in a traditional IRA to the state unclaimed property fund is a payment from an IRA that is treated as includible in gross income. The analysis in the ruling concludes that under Section 3405(e)(3), a nonperiodic distribution is a designated distribution that is not an annuity or similar periodic payment. Therefore, the payor shall withhold 10 percent of the distribution unless the IRA owner has previously established a different withholding rate or opted out of withholding.  

 

Because the escheatment of an IRA account is to be treated as includible in gross income and therefore subject to applicable withholding rules, it is also required that the distribution and withholding be reported on Form 1099, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 

 

Although the position presented in the revenue ruling implies that escheated IRAs have always been considered includible in gross income and subject to withholding and reporting, the ruling provides for an effective date of the earlier of Jan. 1, 2019, or the date it becomes reasonable practicable for the holder/trustee to comply with the requirements.  

 

The release of this Revenue Ruling has left many in the unclaimed property industry scratching their heads with concerns of how to execute a distribution for the IRA account, particularly those in the securities industry. This is because holders in the securities industry (broker dealers, equity stock, mutual funds, etc.) where IRAs are not held in a cash position are faced with concerns of liquidating a customer’s assets without their consent in order to fulfill the IRS reporting obligations. For these holders, compliance with the Revenue Ruling may not be possible without creating compliance issues with other federal regulations. 

 

Internal and/or external legal counsel should be consulted before liquidating securities to satisfy the IRS reporting requirement to determine what, if any, Securities and Exchange Commission (SEC) and/or Financial Industry Regulatory Authority (FINRA) violations may be present.  

 

Since most banks and financial organizations have already been withholding when reporting IRA assets in cash positions, this ruling will likely not have an impact on their process. If holders in the securities industry determine they will make the distribution from the IRA in order to fulfill the IRS withholding and reporting requirements, extensive system enhancements may be necessary. Systems will need to have capability to execute the distribution from the IRA, withhold the applicable tax, and report the distribution and withholding to the IRS and the owner by using IRS Form 1099-R.  

 

Holders will also be faced with decisions on how to report the distributions to owners when there is a bad address on the account. Generally, holders cease sending first class mailings to customers who have bad addresses.

 

The IRS has provided transition relief by providing a compliance date of “January 1, 2019, or the date it becomes reasonably practicable for the person to comply with those requirements,” however, it may take holders a more substantial amount of time to adequately update and test systems. 

 

In light of the new revenue ruling and pending tax implications to IRA customers, holders should consider enhancing owner location efforts as a means of reducing the number of IRAs escheated and subject to the ruling. 

Tags:  1099  IRA  IRS 

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UPPO Advocacy Update: June 2018

Posted By Administration, Thursday, June 28, 2018

To help members remain aware of UPPO’s advocacy activities, the Unclaimed Property Focus blog recently began including a monthly Advocacy Update. Following are June 2018 activities and trends from UPPO’s Government Relations and Advocacy Committee (GRAC).

 

IRS Revenue Ruling

Most state legislatures are currently in recess. However, GRAC’s work continues. The biggest issue arising in June was the IRS Revenue Ruling stating that traditional IRA holders must withhold 10 percent tax and issue a 1099-R when reporting unclaimed property to the states. This ruling appears to be written with banks in mind, but it presents significant issues for the securities industry. UPPO is working with the Holders Coalition and other organizations whose members are likely to be affected by this ruling to formulate a strategy for raising these issues with the IRS and other agencies, such as the SEC and FINRA, which may have conflicting opinions on the practice. 

 

Priority Issue Workgroups

The GRAC Priority Issue Workgroups continue refining their messages and strategies. The Record Retention, SOL and Estimation group, for example, is reviewing UPPO’s positions in these areas as established during development of the Revised Uniform Unclaimed Property Act to ensure they remain relevant. 

 

As more and more legislatures and regulatory agencies take on issues affecting unclaimed property compliance, advocacy has become an increasingly important role for UPPO.

Please take a few minutes to complete our Government Relations and Advocacy Survey to help us build our grassroots network. Responses will give us the ability to mobilize UPPO members when we are faced with legislative and regulatory challenges and opportunities.

 

 

Tags:  1099  IRS 

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IRS Ruling Clarifies Reported Unclaimed IRAs are Taxable

Posted By Administration, Monday, June 18, 2018

 

On May 29, 2018, the Internal Revenue Service issued Revenue Ruling 2018-17, clarifying the agency’s position on traditional individual retirement account escheatment. Specifically, the ruling states that IRA holders – or trustees – must withhold 10 percent federal income tax and issue form 1099Rs when reporting unclaimed IRAs to the states. Holders are expected to comply by Jan. 1, 2019, or as soon as it becomes “reasonably practicable” to do so.

 

“Before this ruling, the obligations regarding tax withholding for reported IRAs were unclear,” said Freda Pepper, counsel with Reed Smith’s State Tax Group. “Often, when reporting an IRA to the state, holders don’t liquidate it but rather transfer custodianship of the IRA to the state. There has been confusion among holders and the states whether that was a taxable event.”

 

The ruling clarifies that Section 3405 of the Internal Revenue Code considers “any distribution or payment from or under an IRA… as includible in gross income,” and thus subject to tax withholding by the holder/trustee. 

 

Some holders already have held this position and routinely withhold tax and issue 1099Rs for escheated IRAs. Others do not. 

 

“From a banking perspective, some are already doing this and others will need to come into line with it,” said Tom Powers, business operations analyst at U.S. Bank. “Holders in the securities industry will definitely be affected by this ruling. Their distributions aren’t as clean cut as traditional banking products because they’re dealing with full shares and fractional shares. The way states want shares reported to them makes it more cumbersome for them. The ruling also covers individual retirement annuities, which are often offered by insurance holders, so they will be affected as well.”

 

Although the IRS ruling provides clarity and paves the way for consistent practices, it creates challenges for securities holders.

 

“With securities, there has to be some sort of liquidation of the property before it is reported to the state in order to withhold the 10 percent federal income tax,” Pepper said. “This could be logistically difficult. Should they try to determine the value equal to 10 percent of the IRA’s funds and liquidate just that? Or should they liquidate the entire value, which could have other tax implications for the owner?”

 

States also face some issues resulting from the IRS revenue ruling. Some have taken conflicting positions on whether reported unclaimed IRAs require withholding. For example, Pennsylvania changed its law in 2016, making unclaimed IRAs reportable after three years of inactivity regardless of the owner’s age. Generally, an early distribution would carry a tax penalty. However, the state took the position that transfer of custodianship would not result in a taxable event. The state will need to revisit this position in light of the conflicting ruling from the IRS. 

 

Because IRS revenue rulings typically address a very specific scenario presented to them for clarification, this specific ruling covers only traditional IRAs. However, there may be implications for other retirement products as well, according to Powers.

 

“With a Roth, you can take out your principal whenever you want because you’ve already paid taxes on that, but you haven’t been taxed on the earnings,” he said. “Dividends and interest become taxable when you retire. When transferring a Roth to the state, that taxable amount gets transferred. If there are tax implications for traditional IRAs, there almost have to be tax implications for Roth IRAs as well.” 

 

While holders and states have some issues to grapple with as a result of the IRS ruling, it should help owners. 

 

“Ultimately, this should get the property to the rightful owner quicker,” Pepper said. “Once a 1099 is issued, they will become aware the IRA has been escheated, allowing them to question the transaction and claim their property.”   

 

Tags:  1099  IRS 

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