IRS Issues Ruling Providing for Withholding on Transfer of IRA Funds to State Unclaimed Property Funds and Filing of Forms 1099R

The various states have laws on their books that require an entity holding “unclaimed property” to turn that property over to the state.  Generally, this transfer takes place when the account owner fails to take any action with regard to the property and the holder of the property is unable to locate that owner.

Such property can include individual retirement accounts.  In Revenue Ruling 2018-77 the IRS rules on circumstances when the payor will or will not be required to withhold taxes from the transfer to the state as well as the reporting requirements on a Form 1099R when such a distribution takes place.

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Taxpayer's Taking of Funds from IRA to Send to Soon to Be Former Spouse Was Not a Tax Free Transfer of the IRA

While it is possible to transfer some or all of an IRA account tax free to the soon to be ex-spouse pursuant to a divorce, certain rules need to be followed.  In the case of Kirkpatrick v. Commissioner, TC Memo 2018-20, the taxpayer discovered that a failure to follow these procedures can be a very costly mistake.

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IRS Provides for Automatic Qualified Plan/IRA Late Rollover Relief

The IRS, likely hoping to reduce the number of letter ruling requests related to late IRA rollovers, has released Revenue Procedure 2016-47 that provides automatic relief for certain late rollovers of IRAs and qualified plan distributions.  The procedure generally allows a plan administrator, IRA custodian or trustee to rely upon a certification from a taxpayer in accepting a rollover from a taxpayer that he/she meets certain requirements qualifying for automatic relief from late rollovers.  However, if the administrator, custodian or trustee is aware the certification is not correct, he/she will not be allowed to rely on the certification.

Previously Revenue Procedure 2013-16 provided for automatic relief only in limited situations related to errors committed by financial institutions.  Otherwise a taxpayer generally had to apply and pay for a private letter ruling granting relief.

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Assignment of Portion of Decedent's IRA to Spouse as Community Property Interest in Lawsuit Settlement Creates Taxable Distribution to Named Beneficiary

Community property law and federal tax collided and the tax result can be best called “messy” in PLR 201623001.  The final result created a harsh result and tax being due from a taxpayer who had a portion of an inherited IRA that was treated as community property taken away.

The taxpayer (referred to as “Taxpayer A” in the ruling) applying for the ruling was the surviving spouse.  Her deceased husband had three IRAs but named their child (referred to as “Taxpayer B” in the ruling) as the sole beneficiary of the IRA.  While the ruling doesn’t tell us the full details, we know the spouse filed suit against the decedent’s estate for her community property interest in the assets owned by her and her deceased spouse.  Thus it’s possible her deceased spouse had effectively “disinherited” her by leaving all of his assets to the child.

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Taxpayer Needs to Choose Paying Tax on Income or Having IRA Overfunded

In IRS Information Letter 2015-0026 a taxpayer discovered that sometimes when the IRS changes its mind in what appears to be a taxpayer favorable fashion, taking advantage of that relief may introduce its own complications, in this case triggering the excess contributions tax of IRC §4973.

In this case the taxpayer had received Medicare waiver payments as a caregiver.  In Notice 2014-7 the IRS had determined that such payments were excludable from income and allowed taxpayers to amend their returns to take advantage of this change in position.

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Taxpayer Who Erroneously Established Non-IRA Account With Online Bank Allowed Late Rollover Relief

The “kinder, gentler” IRS seems to be making a limited return in the area of IRS waivers of late IRA rollovers.  Recent rulings have taken a broader view than the IRS did in the past of a financial institution “error” for which the IRS deem to meet the test in Revenue Procedure 2003-16.  An example of a rather broad view of financial institution error is found in PLR 201530024.

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Taxpayer Denied Late Rollover Relief Despite Medical Condition Due to Use of Funds to Pay Personal Bills

The IRS under IRC §408(d)(3)(l) has the authority to waive the 60 day period for the rollover of funds from one IRA account to another and, in Revenue Procedure 2003-16 one of the reasons enumerated by the IRS for granting such relief is if the taxpayer is prevented from completing the rollover due to medical issues.

So the taxpayer in PLR 201523025 should have been in good shape.  After taking a distribution that he planned to roll over to improve his return from one IRA account the taxpayer suffered a medical injury at work and was put on medical leave.  That leave period expired after the end of the 60 day period.  As well, he was caring for his disabled spouse at the time.  The IRS has quite often granted relief based on such facts.

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Attempt to Avoid Fees on Transferring IRA Creates Late Rollover, IRS Grants Relief

A taxpayer who received advice from an adviser at a financial institution to which he planned to transfer her IRA was given relief by the IRS in PLR 201508021.  That by itself is not unusual, but the nature of the “deficiency” in the advice was a bit unusual, as the situation was one where the IRS could have concluded that this was actually a taxpayer error, something the IRS has generally not been willing to forgive.

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Late Rollover Allowed When Custodian Transferred Funds to State Agency Without Taxpayer's Knowledge

What happens if your IRA runs afoul of (or your custodian believes it runs afoul of) your state’s unclaimed property law and the account is forwarded to the state?  Well, technically your funds are no longer held by an IRA custodian—a problem, as that creates a deemed distribution of the funds in the IRA.

This problem appears to be what confronted the taxpayer in PLR 201504021.  The facts indicate that the IRA custodian, without the taxpayer’s knowledge, transferred the taxpayer’s account to “Division M of State N.”  While the exact details are, as required, redacted, it seems reasonable to assume that “Division M” was the state’s unclaimed property department.

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