A. Electronic Furnishing of Forms 1098, 1099, 5498 and W-2
IRPAC recommends that Form 1098 Series, 1099 Series, 5498, Individual Retirement Account (IRA) Contribution Information and W-2, Wage and Tax Statement would be most effectively and securely delivered electronically subject to recipient’s negative consent. Absent a change in regulations to the affirmative consent requirements, and as a positive first step, IRPAC recommends the IRS publish guidance to clarify procedures by which furnishers of these information statements might standardize the process for obtaining affirmative consent and bring it in line with other electronic business practices. IRPAC supports integrating affirmative consent to electronic delivery of information reporting returns with more global consents to do business electronically with the furnisher. Such an agreement would cover primary business functions that are conducted electronically or that include electronic information delivery components.
In general, a global consent to conduct business electronically would include a systematic process for recording and storing an affirmation of e-consent from statement recipients and would be built on the requirement that the only person permitted to provide the affirmation of consent is the recipient him/herself. An integrated global consent process allows furnishers to leverage extensive work already committed to other electronic business transaction communications and to present a more seamless and user-friendly process to the recipient. The consent would incorporate required consent text and all other requirements for disclosure, format, notice, posting, access periods, and withdrawal of consent can be accommodated within this agreement. IRPAC believes these procedures will enhance elements related to both the delivery and the receipt of information statements. The global consent process, and the related enhancements to the process of electronic delivery of tax information statements, would be more in line with the expectations of recipients and would facilitate the process for both furnishers and recipients.
Guidance for the furnishing of electronic recipient statements is found in Regulations section 1.6050S-2 (Forms 1098-T, Tuition Statement and 1098-E, Student Loan Interest Statement), Regulations section 31.6051-1(Form W-2), Notice 2004-10 I.R.B. 433 (Forms 1099, 5498 and W-2G, Certain Gambling Winnings), and the General Instructions for Certain Information Returns (Forms 1098, 1099, 5498, and W-2G). These sources provide that recipient statements may be furnished in electronic format in lieu of a paper format if the furnisher meets certain requirements. Furnishers of Forms W-2, 1098-T and 1098-E who meet requirements related to consent, disclosures, format, notice and access period; and furnishers of Forms 1099, 5498 and W-2G who meet requirements related to consent, format, posting and notification, are treated as furnishing the required statement. The consent requirement for these returns requires that the recipient must consent in the affirmative.
The affirmative consent model addressed concerns relating to access to electronic business communications that were valid before electronic business became a standard means of doing business. Since the publication of affirmative consent guidance in 2004, the environment and scope for conducting business electronically has changed substantially. Financial institutions, educational institutions and other furnishers of information statements have developed well-established platforms upon which business with employees and other constituents, including information statement recipients, is conducted electronically. For example, educational institutions conduct most, if not all, administrative functions and correspondence with students electronically. Access to university systems providing these functions and services are commonly made available to students via secure institutional portals or websites. Financial institutions have similar systems in place for conducting business electronically with customers.
Statement recipients tend to expect that the conduct of business electronically with statement providers extends to all business with that provider, and typically would not have need to distinguish the delivery of tax statements with delivery of other business statements and communications. Such a distinction would seem arbitrary and unnecessary, and separate communications and methods for consent to do business electronically are burdensome, confusing and ineffective.
IRPAC drafted Q&A guidance for Chief Counsel's review, covering integrated global affirmative consent agreements between furnishers and recipients, and recommended the guidance be posted on www.IRS.gov. Chief Counsel’s Office has approved an FAQ related to the global electronic delivery consent method for Forms 1098-T, Tuition Statement. The FAQ can be found in the Appendix C. Tax Forms and Publications has agreed to publish related content in the 2011 Form 1098-T instructions. IRPAC will continue to pursue Chief Counsel’s approval of similar guidance for all Forms 1098, 1099, 5498 and W-2.
B. Form 5498 and Fair Market Value Reporting for Deceased Beneficiaries and Successor Beneficiaries
1. In response to a rejection of IRPAC’s 2009 Public Report recommendation on the same topic, we recommend the 2011 Instructions for Form 5498 apply the same reporting guidelines currently specified for deceased IRA owners/plan participants and their beneficiaries to reporting for deceased IRA beneficiaries and their successor beneficiaries. The result of these new instructions will require a final Form 5498 for the deceased IRA beneficiary and if a year end IRA balance remains, a Form 5498 for the successor beneficiary. The Form 5498 for the deceased beneficiary should state “Deceased beneficiary name as beneficiary of the individual it was inherited from.” The Form 5498 for the successor beneficiary should state “successor beneficiary name as beneficiary of deceased beneficiary name.” Working with the IRS in it’s drafting, in addition to a note in What’s New, we recommend language similar to the following be added to the 2011 Instructions for Form 5498 at the end of the section titled “Inherited IRAs”:
In the case of successor beneficiaries, apply the preceding rules by treating the prior beneficiary as the decedent and the current beneficiary as the beneficiary. Include on Form 5498 and the annual statement the name of the deceased owner and of each beneficiary of the IRA, abbreviating as necessary to fit the space available. Using the example above (Brian Willow as beneficiary of Joan Maple), when that account passes to Brian’s successor beneficiary, Maurice Poplar, Form 5498 and the annual statement for Maurice should state “Maurice Poplar as beneficiary of Brian Willow.” The final Form 5498 and annual statement for Brian Willow will state “Brian Willow as beneficiary of Joan Maple” and will show the FMV as of the date of Brian’s death or year-end valuation, depending on the method chosen.
2. IRPAC also recommended a grandfather provision be added for reporting existing successor beneficiary accounts in existence prior to 2011 which have been reported under a different account title (for example, successor beneficiary name as beneficiary of the original deceased account owner), since no reporting rules existed prior to the expected 2011 guidance. According to IRS officials, a grandfather rule addressing this concern will not be forthcoming.
We began the year by asking for the status of the guidance for Form 5498, Reporting for Successor Beneficiaries. We reiterated that there are no clear guidance/instructions that address Form 5498 reporting for participant name box and fair market values (FMV) in the case of a deceased beneficiary and successor beneficiaries to whom they have left IRA assets. Current guidance only addresses the initial beneficiary and deceased account owner. The 2009 instructions for Form 5498 is a regurgitation of Revenue Procedure 89-52 that addresses Inherited IRAs. IRPAC was advised by IRS TE/GE per the Public Report at the 10/28/09 IRPAC Public Meeting, that the issue would be added to its current priority guidance list.
IRPAC had recommended guidance/instructions providing that Form 5498 reporting for the year of an IRA beneficiary’s death and subsequent years indicate only the successor beneficiary and the original IRA owner or plan participant as well as such successor’s share of any December 31st FMV. To the extent multiple successor beneficiaries exist and have assets remaining, separate Forms 5498 were recommended for each one with their share (amount) of the December 31st FMV. IRPAC also recommended for the year of a beneficiary’s death that no final Form 5498 be required in the deceased beneficiary name. However, IRPAC recommended that guidance/instructions should state that upon request, the beneficiary’s date of death value must be provided to the executor or administrator of the deceased beneficiary’s estate.
IRPAC provided proposed language to be inserted in the instructions for Form 5498 and 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Following receipt and review the IRS reconsidered its original acceptance of the proposal. The IRS wanted a reporting methodology it felt more closely resembled the guidance in Rev. Proc. 89-52. The IRS and IRPAC then mutually agreed to the language presented in the recommendation above. The concern with the reporting language as agreed to is that it presents potential compliance difficulties for IRA custodian/trustees that had guessed at reporting on existing successor beneficiary accounts and is currently reporting FMVs with the original IRA owner/plan participant name. Beginning with 2011 reporting, IRA custodian/trustees will have to determine the deceased beneficiary name from which the successor beneficiary inherited, if any. To address this data verification and reporting concern, IRPAC proposed a grandfather provision to allow continued successor beneficiary reporting using methodology initiated by the custodian/trustee for deaths occurring December 31, 2010 or prior. Without this grandfather provision custodian/trustees that did not guess right regarding the agreed to methodology for 2011 reporting will have to contact every existing beneficiary IRA owner to determine if they have the correct decedent for future reporting. At this point we have been told that no grandfather provision will be forthcoming.
C. Information Regarding Non-Resident Alien Taxation and Tax Reporting
IRPAC recommends that the IRS publish information to assist taxpayers in the following areas of nonresident alien taxation and reporting:
- Tax residency rules
- Income tax rules
- Withholding tax rules (including employment tax)
- Tax treaty rules
- Special tax information for alien categories
The information should be published as web based content on irs.gov in a new section titled “Taxation of Aliens by Visa Type and Immigration Status.”
Based on meetings with the Ad Hoc Subgroup, the IRS LMSB/LBI Operating Division is developing extensive web-based content to provide detailed guidance and background on non-resident alien taxation and reporting issues.
The content will be organized by visa type and immigration status. The treatment of tax residency rules will include detailed discussion of each visa type’s substantial presence tests, followed by the federal income tax, social security and Medicare tax, federal unemployment, and retirement plan distribution tax withholding rules based on resident status. Tax treaty benefits will be explained, as they relate to both payers and payees.
This information will enhance tax reporting of nonresident alien payments, and also improve compliance with withholding rules related to payments to nonresident aliens.
This recommendation for web-based content was initiated in 2008 and has been documented in IRPAC’s last two Annual Reports. IRPAC will continue to work next year with Large Business and International (LB&I) on the development of this content.
D. Reporting Guidelines for the Return of Mistaken HSA Contributions to an Employer
1. IRPAC recommends the IRS add guidance to the 2011 Instructions for Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA, and Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, stating that if an excess employer contribution (and earnings on them) is returned to an employer using guidance from Notice 2008-59 Q/A 24, the health savings account (HSA) custodian /trustee does not report the excess contribution nor does it report the distribution to the employer. Working with the IRS in it’s drafting, in addition to a note in What’s New, we recommend language similar to the following be added to the instructions:
In Form 1099-SA instructions, Box 1: Do not report the withdrawal of excess employer contributions (and the earnings on them) returned to an employer as a distribution from an employee’s HSA. In Form 5498-SA instructions, Box 2: Any excess employer contributions (and earnings on them) withdrawn by the employer pursuant to Notice 2008-59 Q/A 24, available at /irb/2008-29_IRB/ar11.html, should not be reported as a contribution.
2. We also recommended the IRS add guidance to the instructions for the return of HSA contributions to an employer following the determination that an employee was never an eligible individual pursuant to Notice 2008-59 Q/A 23. The IRS declined based on the reasoning that if an individual was not an eligible individual, he never established an HSA and since there is no HSA there is no associated HSA reporting.
This recommendation and discussion is generated based on Q/As 23 and 24 of IRS Notice 2008-59, Health Savings Accounts. This issue is two-fold, one is when you have an individual that was never eligible for an HSA and the other when an employer contribution (not elective contributions) exceeds the maximum annual contribution allowed. According to the IRS Tax Exempt and Government Entities Division (TE/GE), if an individual was not an eligible individual, the HSA never existed. Form 1099-SA distribution reporting for assets returned to the employer in the year of original contribution or at any future date is not applicable. A financial organization would treat it like a regular bank account or investment account owned by the individual. Thus, if a financial organization learns of ineligibility in the year of individual contributions or subsequent years it may be negligent for other 1099 reporting (interest, dividends, basis tracking, etc.) and may have issued Forms 1099-SA and 5498-SA in error as well. IRPAC suggests that the IRS considers adding such language to IRS model Forms 5305-C, Health Savings Custodial Account, etc., HSA agreement. IRS TE/GE stated it is on a 3-year cycle and they will look into it, although unlikely.
Second, with respect to an employer exceeding the eligible individual’s annual maximum contribution limit and then such amount is returned to the employer in the same year, as described in Q/A 24 of Notice 2008-59, there is no guidance for reporting. IRS TE/GE stated that in this instance the HSA custodian/trustee will not report the excess amount contributed by the employer on Form 5498-SA and the distribution of excess as adjusted back to the employer in the year of contribution is not reported on Form 1099-SA. IRPAC noted that not reporting the contribution or distribution is more difficult than reporting it.
IRPAC requested that the reporting instructions for Forms 1099-SA and 5498-SA reflect this lack of reporting and Tax Forms and Publications agreed to draft language and agreed to have it reviewed by IRPAC. Additionally, if an employer does not have this excess as adjusted returned to it, the contribution remains reportable and the individual must deal with the contribution as HSA excess contribution. According to IRS TE/GE, in the near term do not expect anything published on HSAs due to Health Care Tax Legislation.
IRPAC requested that the 2011 reporting instructions for Forms 1099-SA and 5498-SA reflect both the lack of reporting regarding excess employer contributions to an eligible individual employee’s HSA and the earnings on them, and also for employers that contribute to an ineligible employee. The IRS stated it will not address an ineligible individual’s contribution or distribution in its reporting instructions, since the account was never an HSA. However, with respect to the return of excess contributions to an employer in the year of contribution due to an employer contribution in excess of the annual limit, the IRS, in conjunction with IRPAC input, will add language to the instructions as described in the recommendation.
IRPAC also requested the IRS to include information in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, that if an individual was never an eligible individual, an HSA was never established and if an employer made the contribution and it was not returned timely it would be considered wages for the employee reported on Form W-2. IRS TE/GE was hesitant to make such statements in the Publication because of confusion it may generate.
E. Form 1099-R Reporting under EPCRS Guidelines for SEP, SARSEP and SIMPLE Excesses Returned to Employer
IRPAC recommends the IRS add guidance to the 2011 Instructions for Form 1099-R for reporting the return of excess Simplified Employee Pensions (SEP), Salary Reduction Simplified Employee Pensions (SARSEP), and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) employer contributions from an Individual’s IRA to an employer/plan sponsor as prescribed under Employee Plans Compliance Resolution System (EPCRS). The correction and reporting stated for these returns in Revenue Procedure 2008-50, Section 6.10(5) and Appendix F - Streamlined Voluntary Compliance Program (VCP), Schedules 3 and 4 are not reflected in Form 1099-R instructions. Working with the IRS in its drafting, in addition to a note in What’s New, we recommend language similar to the following be added to the 2011 Instructions for Form 1099-R under the section titled Distributions under Employee Plans Compliance Resolution System (EPCRS):
If excess employer contributions (other than elective deferrals), and the earnings on them, under SEP, SARSEP, or SIMPLE IRA plans are returned to an employer, enter the gross distribution (excess and earnings) in box 1 and 0 in box 2a. Enter Code E in box 7.
The purpose of reviewing this issue is that IRA custodian/trustee/issuers do not have clear reporting instructions. The current EPCRS Rev. Proc. 2008-50, Appendix F, Schedules 3 and 4, for streamlined VCP program corrections and distribution reporting for SEP/SIMPLE, and Section 6.10 (5) only address the amount of excess employer contributions (plus earnings on them) returned to the employer as a taxable amount of zero. The instructions for Form 1099-R are silent as to this issue and the issue of an applicable code to use in Box 7. The instructions for Form 1099-R say to use Code E for EPCRS distributions of elective deferrals and employee contributions. According to IRS TE/GE, as long as the taxable amount is zero, there will be no difference with the code no matter what year the distribution occurred.
A suggestion was made to add a sentence stating for a return of employer excess contributions use Code E if nothing else is appropriate.
IRPAC, IRS TE/GE, and Tax Forms & Publications collaborated in drafting language to be included in the instructions for Forms 1099-R and 5498 under the section titled Distributions under Employee Plans Compliance Resolution System. In addition, the IRS will look to expand the description of Code E in the chart of codes in the instructions on page 13 of the Form 1099-R instructions, distribution code definition. According to IRS TE/GE, the updated Revenue Procedure to Rev. Proc. 2008-50, which will include 403(b) plans, should not affect this correction methodology.
The IRS encourages employers/plan sponsors to use EPCRS, not just the general instructions, for purposes of this SEP/SARSEP/SIMPLE IRA correction.
F. Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information Due Date Change
IRPAC proposes that the due date to the participants for Form 5498-SA HSA, Archer MSA, or Medicare Advantage MSA information be changed from May 31 to January 31. The May 31 date can remain the same for submitting to the IRS.
There are three reporting statements associated with health savings accounts not filed by an HSA owner: Form W-2, specifically Box 12a, Code W; Form 1099-SA Distributions from an HSA, Archer MSA, or Medicare Advantage MSA; and Form 5498-SA. When a person prepares their individual income tax return, they may need all three statements to accurately complete Form 8889, Health Savings Accounts. Taxpayers and tax practitioners rely on various IRS reporting statements. The timeliness of receiving a Form 5498-SA on May 31 when the other reports are due to the taxpayer on January 31 creates a gap. IRC Sections 223(d)(4)(B) and 219(f)(3) state that contributions to an HSA for a tax year must be made be by the tax return filing due date (not including extensions). Generally, contributions for tax year 2009 can be made from 1/1/09 until 4/15/10. Therefore if one hasn’t contributed up to the limit by the end of the year, then they have until 4/15/10 to make a contribution for the difference. It is burdensome for taxpayers to extend their returns for the sole purpose of waiting for the Form 5498-SA to verify their contribution amount. From the practitioner’s point of view, having contribution information by January 31 allows practitioners to advise the taxpayer how much they can contribute if they are short. If practitioners know the amount contributed and the additional amount the taxpayer will contribute, there is no need to receive the Form 5498-SA on May 31 for this purpose. In addition, if practitioners have prepared a return before May 31, the taxpayers generally will not forward the Form 5498-SA for verification purposes. The results of not having timely information for taxpayer return filing include excess contributions, under contributing, taking incorrect deductions and filing of amended returns.
Another issue regarding contributions is that family members or any other person may also make contributions on behalf of an eligible individual. If the practitioner does not have the Form 5498-SA by January 31 reporting all contributions through the prior December 31, then the practitioner might not have the correct contribution amount to show on the tax return.
The IRS commented that anything relating to the Health Savings Accounts have been put on hold due to the more immediate concern regarding the Affordable Care Act. Additionally, the IRS responded that to make any change to a deadline for Form 5498-SA they would likely need to make an earlier participant reporting deadline for the entire Form 5498 series and they were currently not interested in making this change.