Holders Eagerly Await News from the IRS and Treasury
By Heather Gabell, Director of Compliance
December 19, 2019
December 19, 2019
Since its release in May 2018, Internal Revenue Service (“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.
Various associations, professional organizations and trade groups have since voiced their concerns to the IRS and Treasury Department. Chief among these concerns are potential violations of federal securities laws which are designed to protect investors. Under these laws, holders are precluded from liquidating even a portion of a customer’s account without prior authorization from the account owner.
In September 2018, members of the Holders Coalition, the Investment Company Institute (ICI), and the Securities Industry & Financial Markets Association (SIFMA), met with the IRS and the Department of the Treasury to underscore the need for additional discussions and a reasonable timeframe for implementation. Because of their efforts, the IRS formally extended the deadline for compliance with the withholding and reporting requirements for escheated IRAs to January 1, 2020 under Revenue Ruling 2018-90.
On July 23, 2019, SIFMA sent a letter to the IRS and Treasury, and included the following suggestions, which would allow holders, owners and the IRS to identify that the assets are IRAs that have escheated to the state, and make it easier for beneficiaries to claim them:
- a distribution code on Form 1099-R; and
- confirmation that the reporting and withholding will occur in the deceased owner’s name, if a beneficiary cannot be located or is unknown.
The Holders Coalition sent a follow-up letter to the IRS and Treasury on November 19, 2019, echoing the concerns raised by SIFMA, as detailed above, and further requesting an exemption from the 10% withholding amount for IRAs registered to deceased owners, where there are unknown or lost beneficiaries.
The Holders Coalition also formed a joint committee with NAUPA, to broker a shared effort that seeks assistance and guidance from the IRS and Department of the Treasury (“Treasury”).
On November 21, 2019, NAUPA submitted a letter to the IRS and Treasury, expressing its concerns with respect to the withholding and reporting of IRAs. NAUPA expressed concerns similar to those raised by SIFMA and the Holder’s Coalition, 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 for reporting IRAs subject to tax withholding, assuming that the January 1, 2020 deadline remains in effect:
Holders reporting [IRAs] 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.
The letters from SIFMA, the Holder’s Coalition, and NAUPA all request an additional extension for implementation purposes, and appeal to the IRS and Treasury for continued communication and feedback. If the IRS and Treasury do not issue an additional extension, holders should be prepared to perform the withholding and reporting requirements after January 1, 2020.