Crypto Tax & Unclaimed Property Compliance – A Year-Round Approach – Part II

Kristine Butterbaugh
June 23, 2022

Part I of II – written by Wendy Walker

Click here to read part I of the series.

This quarterly blog series focuses on tax information reporting (TIR) and unclaimed property (UP) issues impacting businesses facilitating transactions involving digital assets. Each quarter, Sovos experts will provide updates and reminders on tax and UP issues in advance of the next quarter – to help you have a line of sight into what to expect next.

As we approach the third quarter of 2022, the summer lineup is forecasted to deliver some scorching crypto compliance issues in both unclaimed property and tax information reporting – let’s take a closer look.

Unclaimed Property (UP) insights and upcoming preparation

Unclaimed property as it relates to virtual assets has been and continues to evolve. States are modifying legislation to include definitions for virtual assets and state unclaimed property audits are on the rise, which is pushing an increased awareness of unclaimed property compliance.

Last quarter we highlighted the importance of companies to begin working on policies and procedures, engaging dormant customers, putting property tracking in place for owner generated activity and discussing unclaimed property compliance with internal stakeholders.

We are heading into the fall reporting season, which means now is the time that our customers and managed services teams are positioning themselves for success with upcoming unclaimed property due diligence. Due diligence is a special type of communication to owners of unclaimed property, making them aware of an upcoming transfer of the property to the state. The primary objective of due diligence is to return dormant property on a holder’s books to the rightful owner or encourage the owner to initiate an action that would remove the dormant status from an account. State statutes vary on the requirements for due diligence. In general terms, due diligence is completed by way of a mailing to the last known address that the company has on file. State statutes vary on the following topics, to name a few:

  1. Required timing of the letters.
  2. Required language or specific content of the letters.
  3. Whether email due diligence is allowed.
  4. Requirements for certified mail versus mail through the USPS.
  5. Minimum thresholds for due diligence.

It is important to consistently review state statutes before completing your due diligence. This information is available on the various state websites, or you can choose to work with a partner who is an expert in unclaimed property compliance. Laws are changing regularly, and it is important to be aware of changes to ensure full compliance.

Speaking of law changes, below are some recent updates to be aware of:

  • On June 7, 2022, at the National Association of State Treasurers’ (NAST) Treasury Management Training Symposium, during the National Association of Unclaimed Property Administrators’ (NAUPA) track, it was announced that the NAUPA 3 Reporting Format will be available for preview on July 5, 2022. A 90-day comment period is expected and Sovos is monitoring these changes closely.
  • On May 30, 2022, Maryland enacted House Bill 305 into law. Maryland has adopted a Return Mail standard for banking and securities properties and establishes criteria under which a holder is ‘deemed not to have a valid address’ for a property owner.
  • On May 4, 2022, Delaware introduced Senate Bill 281. This bill addresses additional record retention requirements for holders that receive an examination notice or agree to enter into a voluntary disclosure agreement (VDA). It also opens opportunities for the state to conduct examinations without first providing an invitation to enter its VDA program.

Tax information reporting (TIR) – looking ahead to Q3

This past quarter, the focus was on completing the 2021 filing activities including:

  • Verifying that all IRS & state transmittals were received.
  • Filing late originals & corrections to avoid the higher penalty rate.
  • Issuing Forms 5498 IRA Contribution Information to recipients and the IRS.
  • Conducting an internal ‘lessons learned’ discussion to improve key process gaps in advance of the 2022 season.

We also emphasized the importance of checking the health of payee taxpayer identification numbers (TINs) now, to ensure that you have time to get updated information before the 2022 filing season.

That last recommendation couldn’t have been timelier as we look ahead to the compliance activities that businesses are preparing to tackle in Q3.

Prepare to process 972CG Proposed Penalty Notices. During July and August, the IRS typically issues these annual notices to notify businesses of their intent to assess penalties for filing late or incorrect information returns. This year, filers should expect to receive notices related to issues found on returns filed for the 2021 calendar year. When a business receives the notice, they are required to send the payee a request for a new Form W-9 Request for Taxpayer Identification Number & Certification no later than December 31 in the calendar year in which the notice was received. Further, a business is required to write a letter to the IRS within 45-calendar days of receiving the notice to explain why the penalties should not be assessed.
Tips for processing Notice 972CG:

  1. Read available IRS literature related to these noticesPublication 1586 Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs describes the requirements for complying with the notice and provides details about how to request a waiver of the penalty.
  2. Communicate to your mail room or tax department to be on the lookout for the notice. The IRS will mail the notice to the address registered to the company EIN – and if you are a big company, that could mean that the notice gets sent to an incorrect location. Let your mail rooms and tax department know in advance to on the lookout for the notice and to route it to you immediately if it is received.
  3. Analyze the notice contents and send solicitations to payees no later than December 31, 2022. Requests for a new Form W-9 do not need to be sent to payees if:
    a. The payee’s name/TIN information in your records has changed since the time the erroneous Form 1099 was originally filed.
    b. You are no longer doing business with the payee. But make sure to collect a Form W-9 from the payee if you do resume business processing.
    c. You previously sent a First or Second ‘B’ notice (i.e., backup withholding notice) to the payee in response to the IRS CP2100 Backup Withholding Notice.
  4. Cite the appropriate sections of the Treasury regulations in your legal response. A business must demonstrate to the IRS that it complies with the requirements for collecting name and TIN information for reporting on Forms 1099 including:
    a. A regular process for collecting name and TIN information from payees.
    b. Backup withholding 24% on gross payments when payees fail to provide their TIN in the manner required.
    c. Processes to solicit payees for new information when the IRS notifies the business of errors reported on previously filed Forms 1099.
  5. Retain everything in the event of an audit. Ensure your records include the details of why or why not solicitations may have been sent to each payee that appeared on the notice. Retain copies of all solicitation letters and payee responses on Form W-9. And maintain detailed records of correspondence with the IRS including the legal response, any follow up correspondence, and certified mail receipts to demonstrate you responded within the required timeframes.

Finally, if you don’t receive a Notice 972CG from the IRS don’t assume one wasn’t issued. As discussed previously, the penalties for failing to comply with these requirements are steep. Contact the IRS to confirm – their information is located in Publication 1586.

IRS announced that Draft Form 1099-DA Digital Assets will be issued sometime during Q3.

  • At the Council for Electronic Revenue Advancement (CERCA) meeting in May, the IRS announced that a draft version of the form was being readied for release in ‘mid-summer’. They also confirmed that accompanying Proposed Regulations from The Infrastructure Investment and Jobs Act would be released around the same time.
  • There is no change expected in the statutory due date for implementation of the new requirements. The IRS confirmed they are expecting significant volumes of Form 1099-DA to be issued for 2023 and were not planning any delays.

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Kristine Butterbaugh

Kristine Butterbaugh is a Solution Principal at Sovos. She focuses on go to market strategy and emerging markets in unclaimed property and insurance regulatory reporting. She has been involved in the unclaimed property and insurance regulatory reporting segments for over 20 years and is one of our subject matter experts here at Sovos.
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