Since its release in May 2018, IRS Revenue Ruling 2018-17 has raised significant legal and operational concerns for holders. Under the Ruling, the escheatment of an IRA to the state constitutes a designated distribution, subject to a 10% federal tax withholding. The trustee or custodian of the IRA must also report the designated distribution on a Form 1099-R.
On November 21, 2019, National Association of Unclaimed Property Administrators (NAUPA) submitted a letter to the IRS and Treasury, expressing its concerns with respect to the withholding and reporting of IRAs. NAUPA expressed concerns and urged the IRS and Treasury to issue additional guidance or provide an extension for compliance with the Revenue Ruling.
NAUPA then issued the following guidance to holders when reporting IRAs and the tax withholding, assuming that the January 1, 2020 deadline remains in effect.
On January 1, 2020, The Internal Revenue Service’s Revenue Ruling 2018-17 will go into effect concerning withholding and reporting taxes with respect to payments from Individual Retirement Accounts (“IRAs”) to state unclaimed property programs. Holders reporting these properties should make use of the NAUPA Standard Deduction and Withholding code “TW” to represent “Income Tax Withheld.”
The value “TW” should be recorded in the PROPERTY record in the PROP-DEDUCTION-TYPE field. The amount of Federal Tax Withheld should be stored in the PROP-DEDUCTION AMOUNT field. This code should be used for any taxes withheld from remitted properties.
The value of the property before the deduction should be stored in the PROP-AMOUNT-REPORTED field. The amount remitted to the state after the Federal Tax Withholding should be stored in the PROP-AMOUNT-REMITTED field.
It is imperative that all withheld taxes are reflected in reports of unclaimed property, so that the claimants may be so advised and address this in conjunction with their tax reporting.
In the event of multiple deductions, the Tax Withholding code should take priority. Since only one deduction field is available, the state and federal withholdings should be totaled for inclusion. We hope that holders would consider providing additional information to the states for the detail of the deductions.
For more information related to the NAUPA reporting standard, please visit: https://unclaimed.org/wp-content/uploads/NAUPAStandardElectronicFileFormat-11.20.19.pdf
Companies who withhold taxes should report and remit those taxes to the Internal Revenue Service or other taxing agency. Contact your legal or tax advisor for reporting and remittance instructions.
For more information on the Revenue Ruling 2018-17, visit: https://www.irs.gov/pub/irs-drop/rr-18-17.pdf