Keane's Unclaimed Property Blog

Compliance Deadline Extended: IRS Rules Escheatment of Traditional IRA Distributions Subject to Federal Tax Withholding

IRS  Ruling 2018-17 Compliance Deadline Extended

As a result of numerous requests made to the Department of the Treasury and the Internal Revenue Service by various trade associations including the Holders Coalition, SIFMA, Investment Company Institute, Unclaimed Property Professionals Organization, Securities Transfer Association, and others, the Internal Revenue Service has formally extended the deadline for compliance with the withholding and reporting requirements for escheated IRAs by one year.

IRS Ruling 2018-17 Compliance Deadline Extended

Under IRS Notice 2018-90, relief is extended until 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.

You can read the complete notice from the IRS here.

Since its release in May 2018, the IRS ruling has raised significant legal and operational concerns for holders, such as the contradiction of federal securities law under FINRA Rule 408(a) and SEC Rule 17Ad-12, and the loss of value in the securities if they are liquidated prior to escheatment. Keane will continue to monitor the activities surrounding IRS Ruling 2018-17 and provide regular updates within this post.


Introduction of IRS Ruling 2018-17: May 2018

Under Revenue Ruling 2018-17, released by the Internal Revenue Service on May 29, 2018, the escheatment of  traditional IRA accounts to the states’ unclaimed property fund constitutes a designated distribution that is subject to federal tax withholding rules for IRAs.

As such, according to this new ruling, the trustee or custodian of the IRA must also report those “designated distributions” on a 1099-R, identifying the owner as the recipient.

IRC Section 3405 states that a distribution from a traditional IRA is a taxable distribution that is subject to a 10% withholding rate (absent an opt out of the withholding election by the IRA owner), which must be reported to the IRS on Form 1099-R.

The ruling provides some transitional relief for holders. The effective date of the ruling is the earlier of January 1, 2019, or the date that it becomes reasonably practical for the IRA custodian to comply with the new requirements.

How Revenue Ruling 2018-17 Impacts Holders:

Many questions remain as to the genesis of the ruling and regarding implementation. The impact on holders of traditional IRAs is substantial, as holders must not only comply with the unclaimed property laws of the various states, but now must also maintain compliance with the IRS federal withholding and reporting rules. Particularly burdensome is the potential liquidation of the owner’s IRA account prior to escheatment, which could in and of itself violate other laws and rules governing retirement accounts.

You can also access the full text of Revenue Ruling 2018-17 by clicking here.

Keane will continue to track and monitor activity on Revenue Ruling 2018-17 and how it relates to the unclaimed property community. We also invite you to sign up for our free legislative alerts to receive real-time updates on the latest happenings within the unclaimed property industry.

Editors Note: This post was originally published in June, 2018 and has been updated based on new activities relating to the IRS Ruling.

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