Revenue Ruling 2018-17 on IRA Escheatment
Summary
SIFMA sent recommendations to the IRS and U.S. Treasury on the Revenue Ruling 2018-17 to ensure smooth compliance while reducing any potential negative impacts on savers. SIFMA appreciates the additional time the IRS and the U.S. Treasury provided to comply with the Ruling, which imposes withholding and reporting requirements when our members transfer a shareholder’s traditional Individual Retirement Account to a state, pursuant to that state’s unclaimed property law.
As a follow up to our meeting on February 25, 2019, outlined in this letter are a number of recommendations and clarifications that we believe would help ensure easier compliance with the new reporting and withholding requirements, while at the same time protecting investors’ sensitive information and making it more likely that they will be reunited with their unclaimed property.
Excerpt
Ms. Victoria Judson
Associate Chief Counsel, Tax Exempt and Government Entities
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Mr. William Evans
Benefits Tax Counsel
Office U.S. Department of the Treasury
1500 Pennsylvania Ave, NW
Washington, DC 20220
Ms. Cynthia Van Bogaert
Associate Chief Counsel, Tax Exempt and Government Entities
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Re: Revenue Ruling 2018-17; Withholding and Reporting with Respect to Payments from IRAs to State Unclaimed Property Funds
Dear Ms. Judson, Mr. Evans and Ms. Van Bogaert,
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates your willingness to continue to discuss Revenue Ruling 2018-17 (the “Ruling”) with us and hear our recommendations to ensure smooth compliance while reducing any potential negative impacts on savers. We furthermore appreciate the additional time the Internal Revenue Service (“IRS”) and the U.S. Treasury Department provided to comply with the Ruling, which imposes withholding and reporting requirements when our members transfer a shareholder’s traditional Individual Retirement Account (“IRA”) to a state, pursuant to that state’s unclaimed property law. As a follow up to our meeting on February 25, 2019, outlined in this letter are a number of recommendations and clarifications that we believe would help ensure easier compliance with the new reporting and withholding requirements, while at the same time protecting investors’ sensitive information and making it more likely that they will be reunited with their unclaimed property.
1. Inclusion of a New Distribution Code on Form 1099-R
Form 1099-R is required to be provided to the taxpayer and the IRS when a distribution is made from an IRA, and the 2019 instructions clarify that transfers of IRAs to state unclaimed property departments under escheat laws must be reported on Form 1099-R. SIFMA recommends the IRS add a new Distribution Code to Box 7 on Form 1099-R to clarify that IRA assets escheated to states are IRA distributions includable in gross income. Adding this new code will allow for better information tracking of escheated IRA assets for both the custodians of these assets and the IRS. Moreover, the code will better facilitate the ability of investors to reclaim their assets from the states. Given the upcoming January 1, 2020 effective date of the Ruling and the time that would be required both for the IRS and holders to update the form and systems to capture the new distribution code, SIFMA proposes that this change be effective on the first of a business year with at least a one-year notice (e.g., January 1, 2021).
2. Relief for Sending Sensitive Information to a Known Bad Address
As you are aware, Form 1099-R contains sensitive investor information, including the investor’s taxpayer identification number (“TIN”), account number, and address, among other private financial information. And while some firms may truncate TINs on tax documents and account statements, an informal survey of SIFMA’s membership found that almost no firms truncate account numbers. The circumstances under which an investor’s IRA assets are being escheated to a state as unclaimed property are such that the individual could have been inactive with respect to the account and/or moved from the address of record for a potentially long period of time, sometimes years or even decades. While not every abandoned IRA is due to a returned-mail event, in those instances in which that is the case, the requirement to mail the form to a known bad address could put sensitive personal and financial information at risk with respect to data protection and privacy concerns. We understand that the concern associated with sending sensitive personal and financial information to a known bad address is not unique to the Form 1099-R; however, we believe it is of greater significance due to the fact that the individual could have been inactive with respect to his/her account and/or have changed addresses for a much longer period of time than in the case of an investor-initiated distribution. This is because much of the activity in retirement account products is generally contributions, and those may not occur on an annual basis. This is in contrast to other forms that may be impacted by investor inactivity; for example, the longest an individual receiving a Form W-2 could be inactive or have moved is likely to only be 365 days or less.