IRS Guidance on Abandoned Money Demonstrates Complexity of 1099 Reporting

Clark Sells
June 8, 2018

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.

Take Action

Sovos has been handling 1099 reporting for clients for more than three decades. Find out how Sovos can safeguard your business from the complexities of 1099 reporting, or contact Sovos for more information.

Author
Clark Sells

Relevant Posts

New York Implements Economic Nexus by Resuscitating 1980’s Law

When New York first passed its law defining what constitutes a “vendor” subject to collecting sales tax in the 1980’s, the idea of online shopping sounded like science fiction. In retrospect, NY may have effectively enacted the first “economic nexus” law when they drafted their definition of “vendor” to include a person who regularly or […]

Read More
IRS Uses Unprecedented Methods to Enforce ACA Reporting Penalties

With recent enforcement measures, the IRS has offered definitive proof that the Affordable Care Act (ACA) is still alive and that the agency plans to strictly enforce ACA reporting. Last spring, the agency issued Letter 226J to Applicable Large Employers (ALEs) that failed to cover 95 percent of employees. ALEs are companies with 50 or […]

Read More
Government Shutdown Will Not Move IRS 1099 Reporting Deadlines

UPDATE (Jan. 8): Reporting season is moving forward according to plan. The IRS has announced that it will process tax returns on schedule and without delays. While the agency will clarify its contingency plan in the coming days, organizations should proceed as planned with 1099 reporting and other seasonal filings. The IRS will recall a […]

Read More
4 Big Post-Wayfair State Sales Tax Developments to Watch 2019

The South Dakota v. Wayfair decision last June has created a lot of angst for indirect tax professionals and the businesses they work so hard to protect from the burdens of sales and use tax filing. Six months later as we begin the new year, that angst has not gotten any lighter. Any federal legislative […]

Read More
The 5 Biggest Stories in Indirect Tax Compliance 2018

2018 was a volatile year in indirect tax compliance for tax, finance and IT professionals worldwide. With an increase in globalization and tax gaps surpassing tens of billions in some countries, it’s not surprising that one of the biggest challenges governments are addressing is revenue collection. Like enterprises, governments are creating new, technology-driven processes to […]

Read More