Earlier this year, in Revenue Ruling 2018-17 the IRS issued guidance stating that holders of traditional IRAs required to report IRA assets to a state as unclaimed property were required to withhold federal income tax upon such amounts and issue a 1099-R form indicating the owner as the recipient of the funds. The IRS originally set the compliance date for this guidance as January 1, 2019.
This ruling was not without controversy. For example, it seems
incongruous to impose taxes upon the owner of an IRA on account of that
owner taking a “distribution” from the IRA when, in fact, the reason
that the proceeds are being transferred as unclaimed property is because
there has been no contact with, or activity by, the IRA owner for
several years. In addition, the Revenue Ruling raised practical
problems for the securities broker-dealer and/or trustees. For example,
when a securities account such as an IRA is escheated to the state, the
state generally takes custody of those securities. In order to
withhold taxes from an IRA containing only securities before escheat,
however, would the holder be required to liquidate those securities? If
so, is that consistent with the federal securities laws and/or the
holders other duties to the owner? In light of these questions, the
“Holders Coalition” (a group of unclaimed property trade associations
and similar entities) issued a comment letter seeking additional guidance.
While the IRS has not directly responded to the questions raised regarding the Revenue Ruling, it did issue a notice this week
extending the compliance date until January 1, 2020. This will
hopefully give states and the holder community time to work with the IRS
to clarify holders’ obligations with regard to the reporting and
remittance of IRA accounts.