Long-awaited recent guidance from the IRS on abandoned property illustrated why 1099 reporting can be so complicated.
Simply put, there are gaps in reporting regulations that sometimes go unfilled—and then produce surprises when the IRS does fill them. One of those gaps involved abandoned property on deferred income products—essentially, pensions, annuities or insurance policies people leave behind when they die without having named a benefactor.
Long-standing confusion about escheatment
For years, in all 50 states, institutions would escheat abandoned money to the state, which would become custodian of the funds until a relative or other party close to the deceased could claim them. However, in turning money over to the state, institutions were actually making a federally taxable distribution.
Normally, that type of distribution would require reporting on form 1099-R and trigger 10 percent withholding. However, since the IRS had never specified whether escheatment of abandoned money was indeed a taxable event, many institutions didn’t know whether or not to report such transactions. Some did; others didn’t—and some probably didn’t have a standard process.
Clarity from the IRS but panic for some institutions
The IRS recently ruled that escheatment of abandoned funds is a taxable event, does require form 1099-R and does trigger 10 percent withholding. The policy will be in place for all such payments by Jan. 1, 2019, at the latest.
While the IRS brought clarity to the process, it is likely to have caused problems for institutions that had vague policies on how to report or withhold on escheatment or lacked policies altogether.
Now, any institution that didn’t report escheatment of abandoned funds on deferred income products will have to do so, along with withholding 10 percent of the money involved. That’s another 1099 process financial institutions have to implement in a sea of complex and ever-changing reporting regulations. It will end up being burdensome and costly for some companies.
Third parties that manage regulatory changes and automate 1099 reporting processes take the surprises out of 1099 reporting, enabling institutions to adapt to change quickly and easily.