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Individual Tax

IRS extends relief period for IRA payments to State unclaimed property funds

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Notice 2018-90, 2018-49 IRB

In a Notice, IRS has extended the period with respect to which a party that makes a payment from an IRA to a state unclaimed property fund will not be penalized if it doesn’t meet federal income tax withholding rules under Code Sec. 3405 or reporting rules under Code Sec. 408(i).

Background—withholding from IRA distributions. Code Sec. 3405 provides federal income tax withholding rules with respect to designated distributions. Under Code Sec. 3405(e)(1)(A), a designated distribution means, except as provided in Code Sec. 3405(e)(1)(B), any distribution or payment from or under an employer deferred compensation plan, an IRA, or a commercial annuity. The flush language under Code Sec. 3405(e)(1)(B)provides that any distribution or payment from or under an IRA (other than a Roth IRA as defined in Code Sec.408A) is treated as includible in gross income.

Code Sec. 3405 requires federal income tax to be withheld from two types of designated distributions from IRAs, each with its own withholding rules: periodic payments under Code Sec.3405(a), and nonperiodic distributions under Code Sec. 3405(b). Under Code Sec. 3405(e)(3), a nonperiodic distribution is a designated distribution that is not an annuity or similar periodic payment. In the case of a nonperiodic distribution under Code Sec. 3405(e)(3)Code Sec. 3405(b)(1) provides that the payor must withhold from such distribution an amount equal to 10% of the distribution. Code Sec. 3405(b)(2) provides that an individual may elect not to have Code Sec. 3405(b)(1) withholding apply with respect to any nonperiodic distribution.

Background—reporting IRA distributions. Under Code Sec. 408(i), the trustee of an IRA must make reports regarding such account to IRS and to the individuals for whom the account is maintained, with respect to distributions aggregating $10 or more in any calendar year. Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is used to satisfy this reporting obligation.

Background—Rev Rul 2018-17In Rev Rul 2018-17, 2018-25 IRB, Individual had an interest in a traditional IRA trusteed by Trustee. He did not make a withholding election with respect to her interest in IRA. State law required Trustee to pay Individual’s interest in IRA to the State unclaimed property fund under which a claim for property could be made by the owner. In 2018, Trustee paid Individual’s interest in IRA, which had a value of $1,000, to the State unclaimed property fund.

IRS concluded that withholding was required from the payment to the fund.

IRS said that the payment of Individual’s interest in IRA to the fund is a payment from an IRA that is treated as includible in gross income (pursuant to the flush language of Code Sec. 3405(e)(1)(B) for purposes of Code Sec. 3405(e)(1)(B)(ii). Thus, the payment is a designated distribution for purposes of Code Sec. 3405. The payment from IRA is not an annuity or similar periodic payment under Code Sec. 3405(e)(2). Thus, it is a nonperiodic distribution as defined in Code Sec. 3405(e)(3). Because Individual did not make a withholding election with respect to the payment, a 10% withholding rate applied to the payment pursuant to Code Sec. 3405(b)(1), and Trustee had to withhold federal income tax of $100 (10% of Individual’s $1,000 interest in IRA).

IRS also concluded that, pursuant to Code Sec. 408(i), Trustee had to report the $1,000 distribution from IRA ($900 of which was paid to the State unclaimed property fund and $100 of which was remitted as federal income tax withholding) on a 2018 Form 1099-R identifying Individual as the recipient.

But, IRS provided transition relief. It said that a person will not be treated as failing to comply with the withholding and reporting requirements described above with respect to payments made before the earlier of Jan. 1, 2019 or the date it becomes reasonably practicable for the person to comply with those requirements.

IRS extends transition relief.  IRS has now provided that the transition relief in Rev Rul 2018-17 is extended so that a person will not be treated as failing to comply with the withholding and reporting requirements described in Rev Rul 2018-17 with respect to payments made before the earlier of Jan. 1, 2020, or the date it becomes reasonably practicable for the person to comply with those requirements.

References: For withholding on retirement plan benefits, see FTC 2d/FIN ¶ J-8501United States Tax Reporter ¶ 34,054.

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