IRS Revenue Ruling 2018-17 Update

By Angela Gholson Tamhane, Chief Compliance Officer

December 4, 2018

Editor’s Note: Following the drafting of this article, but prior to its publication, the Internal Revenue Service formally extended the deadline for compliance with the withholding and reporting requirements for escheated IRAs by one year.

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.

On May 29, 2018, the IRS released Revenue Ruling 2018-17 (the “Ruling”), Withholding and Reporting With Respect to Payments From IRAs to State Unclaimed Property Funds.[1]  As Keane indicated in a June 2018 blog post, under this Ruling 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, the trustee or custodian of the IRA must also report those designated distributions on a 1099-R, identifying the owner as the recipient.[2]

Upon release of the Ruling, various institutions, associations, professional organizations and trade groups began discussing concerns and potential impositions related to the Ruling’s implementation; currently slated for January 1, 2019, though an extension may be granted. Initial concerns regarding this Ruling came from various fronts, but the overwhelming majority of the concerns were legal and operational in nature.

The first group to contact the IRS documenting industry and advocate concerns was the Holders Coalition, which was developed by the American Council of Life Insurers during the drafting of the Revised Uniform Unclaimed Property Act (“RUUPA”) and consists of various holders and their associations.  Following RUUPA’s adoption, the Holders Coalition decided to continue its work as other opportunities arose, and it didn’t take long for the Ruling to pique its members’ interest.

The Holders Coalition letter, dated September 4, 2018, details the group’s concerns.[3]  Fundamental to those concerns is that securities laws are designed to protect the investor – to wit, holders are precluded from liquidating even a portion of a customer’s account without either prior authorization from the account owner or due process.  In fact, when an IRA is deemed escheatable the entire account is transferred to a state account where the assets are held by the state for the owner.  As indicated in the Holder Coalition letter:

“An example of the regulatory requirements designed to protect an owner’s interest in an account held at a broker-dealer is Financial Industry Regulatory Authority (“FINRA”) Rule 408(a), which defines prohibited conduct to include “[p]urchasing or selling securities in a customer’s account without first contacting the customer and receiving the customer’s authorization to make the sale or purchase.” Holders subject to FINRA’s rule are concerned with the regulatory and civil liability they are likely to incur as a result of liquidating a customer’s account without lawful authority to do so. Similarly, pursuant to 17 CFR §240.17Ad-12, Securities and Exchange Commission Rule 17Ad-12 prohibits a transfer agent from liquidating the shares of its clients’ shareholders.”

The Holders Coalition letter ended with a request to meet with representatives from the IRS and the Treasury Department.  This meeting was held on September 21, 2018, and was attended by members of the Holders Coalition, the Investment Company Institute (ICI), and the Securities Industry & Financial Markets Association (SIFMA), as well as multiple attorneys from the IRS and Treasury.  And while no final determinations were made, the attendees believe that an understanding of the timeframe necessary for the implementation – the amendment of custodial agreements and for the required technical programming to take place – was better understood by attendees after the meeting.

The most recent outreach came from the Committee of Annuity Insurers (the “Committee”), which also included a request for a meeting and was dated October 11, 2018.  The Committee’s letter [4]stated its belief that “there is a pressing need for modifications to the relevant information reporting forms, additional guidance on two aspects of the revenue ruling, and a longer transition period.” The Committee’s correspondence is an interesting fleshing out of the operational issues that may lie ahead, for example:

  • Incomplete information and PII: What if the holder does not have complete owner or beneficiary information (name, address, Social Security Number, etc.)?  Consider – without a valid address, additional communications containing personally identifiable information (such as a Form 1099-R or a statement) could expose the holder to liability under state privacy laws, according to the letter.
  • Presumption Rules for Payee Status: In furtherance of the Committee’s incomplete information concern – “in the case of qualified plans and IRAs […] a payee is presumed to be a foreign person if the payor lacks a Social Security number or a U.S. address for the payee.[5]  The Committee’s letter outlines the problem with this scenario as it relates to withholding and the Ruling, which is written to assume that the owner is a U.S. person:

“[i]n many cases involving escheatment of a traditional IRAs the issuer will not have a SSN or address for the payee, such as a beneficiary of a deceased IRA owner.  In those cases the presumption rules could be interpreted as requiring the issuer to withhold 30% from the escheated amount and report the escheated amount on a Form 1042-S that identifies the missing person as the recipient.”

Acknowledgment of these substantive legal and operational concerns may barely skim the surface of the headaches that await on January 1, 2019.  As discussions with the IRS and Treasury continue, with possible inclusion of FINRA and the SEC in those discussions, institutions hope that a middle ground and reasonable timeframe for implementation can be reached.  We’ll keep you posted via our blog and in upcoming issues of Keanotes.

Go from IRS Revenue Ruling 2018-17 Update back to the Fall 2018 issue of Keanotes.




[4] Footnote Text Pending

[5] Treas. Reg. section 1.1441-1(b)(3)(iii)(C)

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