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Ad Hoc Subgroup Report (2008 IRPAC Report)

Issues Covered in this Section:

A.  Barter Exchange Back-up Withholding & B-Notice Requirements

B.  Simplifying Employer Tax Compliance for Non Resident Alien Scholars

C.  1099 Reporting for Entities Not Subject to Income Tax

D.  Disaster Relief Reporting Guidance as Applied to IRAs

E.  Requested Clarification to Form 1099-R Reporting Instructions for IRA Distributions

F.  Requested Clarification to Reporting Instructions on HSAs

G.  Rollovers and Direct Rollovers of Required Minimum Distributions are Occurring during Years Employee Retires or becomes Age 70 1/2

H.  Reporting Guidelines for an IRA Beneficiary of a Beneficiary in the Participant Name Field on Form 5498

ISSUES

A.  Barter Exchange Back-up Withholding & B-Notice Requirements

Discussion

Barter Exchanges are defined as third-party record keepers under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and as such are subject to Form 1099-B reporting and subsequent B-Notice solicitations for non-matching TINs.  The B-Notice which states, the payer will back-up withhold, makes an assertion that is impossible for Barter Exchanges to comply with since they do not control any cash for their client members.  In its 2007 Public Report IRPAC made three recommendations regarding this issue:

  1. The IRS should educate the Barter Industry through outreach programs to effectively reduce 972CG penalties.
  2. The B-Notice should be amended to provide language more pertinent to the Barter Industry’s inability to comply with back-up withholding.
  3. Barter Exchanges should be exempt from back-up withholding
    requirements.

In 2008 the IRS concluded that recommendations 2 and 3 above would require legislative changes which are outside the scope of the operating division’s authority.  As a result, the Ad Hoc Subgroup of IRPAC looked at creative new approaches to address the barter back-up withholding issue.

Recommendation

A) Revise Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs

B) Change the text of the IRS.GOV website Topic 420 called Bartering and to the “Barter Exchange” section.

C) Study the procedures relating to Non-Matching TIN Penalties being assessed without Letter 972CG, Notice of Proposed Civil Penalty, to determine if a pattern exists where 972CG penalty notices are not being sent after the CP2100, Backup Withholding “B” Notice Report, letters are sent.

Ad Hoc Chairman, Ron Whitney was asked to advise Barter Exchanges to provide links on their websites to www.irs.gov  after the new website enhancements discussed herein have been implemented.  

The Ad Hoc Subgroup will continue to encourage the IRS to initiate and/or expand partnerships with the Barter Industry to include links on Industry websites that direct members to the enhanced www.irs.gov content pertinent to Barter Exchanges. 

B.  Simplifying Employer Tax Compliance for Non Resident Alien Scholars
 
Discussion

There is confusion over the complexity of reporting and withholding of non-resident aliens, specifically as it covers non-resident alien teachers on J-1 visas.  Assuming teachers are covered for FICA either under a Section 218 Agreement or by Mandatory FICA laws, an educational employer struggles with the complexity of determining proper withholding and reporting. 

When discussing a non-student exchange visitor we are generally talking
about professors, research scholars, alien physicians, government visitors, camp
counselors, Au Pair and Edu-Care Workers, teachers, and international visitors. 
“J” Visa holders must work in accordance with the rules of the exchange program
through which the visa is issued. 

There are treaties with over sixty countries.  Seventy-five percent of the treaties have specific articles on teachers and researchers.  Form DS-2019 with a “Teacher/Professor” indicator may qualify them for treaty benefits if other conditions of the article are satisfied.  Generally, treaty articles allow for a 2 year (Fiscal Year, not calendar year) tax exemption.  If the initial visit exceeds 2 years, the benefit is not available.  If the visit is extended, the benefit is not lost, but it only applies to the first two years.

The employer is hampered by several issues.  One is the obvious complexity of the laws and regulations.  Another is the potential change of status that could occur with an individual.  Additionally, an employer could be confused by the various treaties (which change periodically) but also are at the mercy of non resident aliens who might be tempted to “treaty shop.”  In sum, the employer is challenged unnecessarily to confidently apply the correct reporting and tax withholding.

Recommendation

The Ad Hoc subgroup recommended that a “decision tree” web link be made available that would allow educational entities such as universities and school board districts (as well as State Agencies) to follow a decision making process that would lead them to the correct tax withholding of income for a Non-Resident Alien Scholar.  Since Tax Treaties can not be substantively changed or altered, either quickly or easily, this recommendation works within existing laws to enhance compliance in an easy to use format.  

The IRS LMSB lead for this project is Lowell Hancock.  Mr. Hancock believes that a decision tree can be provided and he is working on having one designed by late October of 2008.  Depending on actual implementation date, this issue may be a carry over item to 2009 (though at this time it is not anticipated to be so). The addition of this tool on the web site will assist employers to easily navigate a complex issue to ensure there is compliance with Non-Resident Alien Scholars. 

C.  1099 Reporting for Entities Not Subject to Income Tax

Discussion

Individual Retirement Accounts and similar accounts such as Archer Medical Savings Accounts and Heath Savings Accounts ("Tax Exempt Accounts") are generally not subject to income tax on earnings that accrue or are paid to such accounts.  As a result, payers who are otherwise subject to Form 1099 reporting are not required to issue Forms 1099 to Tax Exempt Accounts.

The current versions of the instructions for 1099 reporting are not consistent in describing the Tax Exempt Accounts that are exempt from 1099 reporting.  For example, the 2008 version of the instructions for Form 1099-DIV state that 1099 reporting is not required for "payments made to certain payees including a corporation, tax-exempt organization, any IRA, U.S. agency, state, the District of Columbia, U.S. possession, or registered securities or commodities dealer."  Missing from the description of entities exempt from 1099 reporting are Heath Savings Accounts, Medical Savings Accounts, and Coverdell Educational Savings Accounts.  Similar omissions are present in the 2008 version of the instructions for Forms 1099-INT and 1099-OID, 1099-MISC, 1099-PATR, and 1099-B.

The omission of the 1099 instructions to exempt all Tax Exempt Accounts from 1099 reporting results in a burden to the Service and taxpayers as many payers may issue 1099 forms where such forms are not necessary in order to avoid any possible failure to file penalties.  In addition, some Committee members have indicated that 1099 reporting for Tax Exempt Accounts may result in over reporting of income on Form 1040 as the Payees listed on the 1099s for these accounts will include an individual taxpayer's name.

When the Service was informed of this issue, it began an immediate review of all 1099 instructions to determine which instructions failed to list all Tax Exempt Accounts as exempt from 1099 reporting.

Recommendation

The Ad Hoc subgroup recommended clarification of the instructions to the aforementioned 1099 forms by inserting the missing Tax Exempt Accounts which should result in the filing of fewer unnecessary 1099 forms and may also help prevent the over reporting of income.

The Service has indicated that the 2009 instructions for Forms 1099-DIV, 1099-INT and 1099-OID, 1099-MISC, 1099-PATR, and 1099-B will list all Tax Exempt Accounts as exempt from 1099 reporting.

D.  Disaster Relief Reporting Guidance as Applied to IRAs

Discussion

The disaster relief reporting instructions found in ‘Specific Instructions for Form 5498’ state that special reporting instructions may apply to individual Presidentially Declared Disaster areas.  Also stated is how to find the location of and any special reporting rules applicable to a Presidentially Declared Disaster area.  However, no specific guidance is provided.

Unless otherwise limited, affected taxpayer contributions may be postponed as specified under IRC section 7508A,  Treasury Regulation section 301.7508A and Revenue Procedure 2007-56 due to presidentially declared disaster or a terroristic or military action. 

IRA contributions normally due by April 15 for a prior tax year may be
made through the period of postponement as described by the IRS in a news
release, notice, revenue ruling, revenue procedure, announcement, or other
guidance published in the Internal Revenue Bulletin.  Such contributions may be
deposited after the deadline for Form 5498 reporting.  To our knowledge, the IRS
has provided guidance for affected taxpayers, but has not provided custodians/trustees/issuers of IRAs with reporting guidance for postponed annual
tax year contributions.

Recommendation

The Ad Hoc subgroup asked the Service to provide specific and standardized reporting instructions for postponed annual tax year contributions to IRAs (traditional and Roth).  The new instructions for disaster reporting have been drafted and are scheduled to be added to the 2009 ‘Specific Instructions for Form 5498’.

E.  Requested Clarification to Form 1099-R Reporting Instructions for IRA Distributions

Discussion

The reporting instructions for 1099R

Box 2a . Taxable Amount and Box 2b . Taxable Amount not Determined with respect to traditional and SEP IRA Distributions lack clarity and appear conflicting which results in different Form1099-R reporting results by IRA custodians/trustees/issuers.  Excerpts from the reporting instructions reveal the conflict.

Box 2a states: “Generally, you must enter the taxable amount in box 2a .  However, if you are unable to reasonably obtain the data to compute the taxable  amount, leave this box blank.”; “Traditional IRA or SEP IRA.  Generally you are not required to compute the taxable amount of a traditional IRA or SEP IRA nor designate whether any part of a distribution is a return of basis attributable to nondeductible contributions.  Therefore, report the total amount distributed from a traditional IRA or SEP IRA in box 2a .  This will be the same amount reported in box 1 .  Check the “Taxable amount not determined” box in box 2b .”

Box 2b states:  “Enter an “X” in this box only if you are unable to reasonably obtain the data to compute the taxable amount.  If you check this box, leave box 2a blank.  Except for IRAs, make every effort to compute the taxable amount.”

Recommendation

The Ad Hoc subgroup requested the IRS clarify the Form 1099-R reporting instructions for

Boxes 2a and 2b without recommending specific completion instructions, and since clarity is the issue, have the IRS determine how the future instructions will be written. 

F.  Requested Clarification to Reporting Instructions on HSAs
  
Discussion

One clarification issue was raised on each of the HSA reporting documents, Form 1099-SA and Form 5498-SA. 

First, regarding Form 1099-SA the instructions for

Box 4 . FMV on Date of Death state to enter the FMV of the account on the date of death.  This instruction is adequate when there is one nonspouse beneficiary upon death because this is the amount included in income.  The quandary in the reporting community is how to complete this box if there are multiple death beneficiaries.  Is the total FMV on the date of death shown on each beneficiary’s Form 1099-SA as the instructions indicate or should each beneficiary’s share of the FMV be shown?  Each beneficiary’s share appears to be the needed information for both a beneficiary’s tax records as well as the IRS.

Second, on Form 5498-SA the instructions for

Box 2 . Total Contributions Made in 2008 has confused some in the HSA reporting community.  The confusion involves whether amounts reported in other boxes (and specifically Box 4 . Rollover Contributions) are included with the amounts ordinarily reported in this box which consist of regular tax year type contributions.

Recommendation

The Ad Hoc subgroup has recommended that since each beneficiary’s share appears to be the needed information for both a beneficiary’s  tax records as well as the Service, that the instructions for Form 1099-SA, Box 4 be modified accordingly.  Also recommended was, at a minimum, clarification that Form 5498-SA

Box 2 instructions state Box 4 rollover amounts are not included.

G.  Rollovers and Direct Rollovers of Required Minimum Distributions are Occurring during Years Employee Retires or becomes Age 70 1/2

Discussion

Required minimum distributions (RMD) of plan participants from qualified employer plans are not eligible for rollover or direct rollover to an IRA or other eligible retirement plan and there are many IRS sources to find this information.  However, some plan administrators have an understanding that this rule does not apply until the last day a plan participant must take his/her RMD; which is April 1 following the year the participant turns age 70 ½  or retires, if later.  There does not appear to be information published addressing this rule from a first year perspective.

If the rule is ignored and the plan administrator/trustee sends assets (including the RMD) to an IRA by direct rollover; beyond the issue of a plan failing to operate according to its terms, causes other reporting problems.  The IRA custodian/trustee/issuer upon learning of the ineligible rollover is required to modify its rollover reporting and report the RMD amount as a regular tax year contribution on behalf of the participant.  If the amount was directly rolled over to a traditional IRA, which is most common, this individual who is age 70 ½ or older is not eligible to make a regular contribution and thus it turns into an excess contribution that must be removed within a certain time frame to avoid a 6% penalty.

Recommendation

The Ad Hoc subgroup requested that this information be presented in writing by the IRS and be utilized as a future reference to aid in prevention. 

The IRS published a question and answer in the IRS’s spring edition of Retirement News for Employers (RNE) to address the issue.  Following the
Publication, the Ad Hoc subgroup requested that an additional issue be addressed and volunteered to write the document. The answer was published in the summer 2008 edition of Retirement News for Employers:

We’re Glad You Asked!

Each issue of the RNE looks at a common question we receive and provides an answer and additional resources in response to the question.  One of our retired 401(k) plan participants turned 70½ in 2008 and must begin taking his required minimum distributions (RMDs) by April 1, 2009.  During 2008 he requested that his entire plan account balance be sent to his IRA by direct rollover and assured us that he will take his RMD by April, 1, 2009.  As plan administrator, can we send his entire account balance to the IRA?

No. Assuming the retired plan participant has not already taken his RMD for the first required distribution year (2008 in this example), any amounts distributed from the plan in 2008 are deemed to be the RMD for that year until an amount sufficient to satisfy that year’s RMD has been distributed. An RMD is not eligible for rollover, either by 60-day rollover or by direct rollover. After you have calculated and distributed this participant’s 2008 RMD, his remaining account balance can be rolled over in 2008 to his IRA. The plan trustee issues two Forms 1099-R:

  • one for the RMD amount paid to the plan participant,  and
  • a second for the direct rollover paid to the IRA.

A plan participant still employed who does not own more than 5% of the employer may delay taking RMDs until April 1 following the year of retirement, in which case, the same rule as explained above applies: RMDs must first be distributed and are ineligible for rollover to an IRA or to any other eligible retirement plan.

H.  Reporting Guidelines for an IRA Beneficiary of a Beneficiary in the Participant Name Field on Form 5498

Discussion

Reporting instructions for inherited IRAs currently address the account title as being the beneficiary of the deceased IRA owner as beneficiary of the deceased IRA owner.  For instance, “Brian Willow as beneficiary of Joan Maple” where Joan is the original IRA owner and Brian is her beneficiary.  These reporting instructions are found in Specific Instructions for Form 5498 and are supported by the 1989 Revenue Procedure 89-52.  Additionally recent guidance on account titling is found in Notices 2007-7 and 2008-30 with respect to beneficiaries of deceased plan participants following rollover to inherited traditional and Roth IRAs respectively.

A beneficiary of an IRA frequently designates a successor beneficiary(s) to receive distributions over a remaining period dictated by regulations.  This beneficiary of a beneficiary phenomenon and the IRA holding these assets is often times referred to as a ‘stretch’ IRA. 

TE/GE stated that the current guidance does not address the titling issue for Form 5498 reporting and indicated the Service must determine what information it wants to collect with respect to these ‘stretch’ IRAs before providing guidance and reporting instructions. Two issues for consideration include: 1) there is an 80 character limit for the electronic reporting field; and 2) in addition to naming the current beneficiary responsible for taking distribution, is the original decedent’s name necessary, or is the preceding beneficiary’s name necessary, or are all preceding beneficiary names necessary, or is only the name of the party on which the distribution period is based necessary, or some other combination of these parties?

Recommendation

IRPAC will carryover this issue for resolution in 2009.  The reporting community will report on these accounts without uniformity in the meantime.

Page Last Reviewed or Updated: 21-May-2014