If April made us feel overwhelmed with its daily barrage of information streams, often changing and sometimes contradictory, the tax world offers no solace. In fact, it is the same here as, well, in the other areas of our lives.
For this month, we’ll highlight several of the issues that brokers and other withholding agents should be aware of in this information morass: the confused state of IRA contribution and distribution rules that apply for 2020, some relief for offshore FATCA reporting and special rules for determining tax status for nonresident customers that may be affected by COVID-19 travel challenges. There are also several communiqués of note: an internal IRS memo on procedures for FATCA certification defaults, a comment letter from the Chamber of Digital Commerce to the IRS providing industry thoughts on crypto tax information reporting and an updated set of FAQs from the IRS on 2020 tax filing and payment deadlines.
1. IRAs and Tax Reporting for 2020
(a) Required Minimum Distributions (RMDs). Even prior to COVID-19 relief announcements, the passage of the SECURE Act at the end of December 2019 had changed the rules for RMDs. While previously IRA owners were required to take RMDs beginning April 1 following the year they turn 70½, the SECURE Act moved the RMD starting age from 70½ to 72.
For reporting purposes, IRA custodians and trustees are required to provide IRA owners an RMD statement by January 31 if RMD is required for that calendar year. Earlier this year, the IRS provided financial institutions reporting relief in the form of Notice 2020-06. The relief applied in cases where, due to the short period of time between passage of the SECURE Act and the January 31 deadline, the financial institution included account holders who turn 70 ½ in 2020 in the January 31, 2020 statements. In such cases, Notice 2020-06 allows the financial institution to notify the account holder by April 15 that no RMD is actually required for 2020. Trustees were also encouraged to let IRA participants know that those who turned 70 ½ in 2019 would still have RMD due by April 1.
The latter is no longer true due to the relief provisions of the CARES Act. Under the CARES Act, RMDs are waived for 2020. This includes those who turn 72 in 2020 as well as those who turned 70 ½ in 2019 (and were supposed to take RMD by April 1, 2020). Basically, there is no RMD requirement for 2020. And what this means is that the RMD boxes (boxes 11, 12a and 12b) on the 2019 Form 5498 that would have been due June 1, 2020 (but now due July 15 – see below) should be blank. Yes, confusion abounds.
There are also questions, of course, as to what to do with account holders who have already taken RMD distributions in 2020 but now want to return the money to an IRA or other retirement arrangement. But options available might differ based on underlying facts (e.g., timing when RMD is distributed and types of accounts at issue) and may need to be approached on a case-by-case basis or at least within certain groupings. A tip though is that it is worth looking at Notice 2020-23 in conjunction with Rev. Proc. 2018-58 as the timing of possible rollovers can in some cases be extended (numerous time-sensitive due dates falling on or after April 1, 2020 and prior to July 15 are extended to July 15).
(b) IRA Contributions and Form 5498 Reporting. Under IRS COVID-19 relief, the 2020 tax filing deadline has been extended to July 15, 2020. So too is the deadline for IRA contributions for tax year 2019. In an ordinary year, IRA contributions for 2019 would be due by April 15 and for this year custodians or trustees would be required to file a Form 5498 reporting the contribution to the IRS by June 1. However, under recently issued relief Notice 2020-23 (as read with Rev. Proc. 2018-58), Form 5498 filing for IRA contributions is also extended to July 15. However, this provides no lag in time between the contribution deadline and the reporting deadline. Practitioners have requested the IRS allow an August 31, 2020 deadline but we may need to wait to see if there is further guidance on this front.
(c) IRA Distributions. The CARES Act also allows penalty-free coronavirus-related IRA distributions up to $100,000 to be taken in 2020. The distributed amount can also be rolled back into the IRA over a three-year period (thus avoiding income tax if returned as provided by the Act). These distribution and repayment provisions will likely require brokers to monitor Form 1099-R guidance as well as Form 5498 guidance for 2020 to determine if new reporting codes would be required. The situation appears similar to the qualified birth and adoption penalty-free withdrawals allowed by the SECURE Act – in that case, the IRS has provided a new contribution code for the 2020 Form 5498 for birth and adoption distribution amounts repaid to an IRA.
2. FATCA Relief
While there has been little domestic tax information reporting relief provided to financial institutions, the IRS has allowed an extension for offshore FATCA reporting in several respects. As we have noted previously, the IRS issued an FAQ (Reporting, Q4) that extends to July 15, 2020 the Form 8966 FATCA Report filing deadline for Reporting Foreign Financial Institutions (FFIs) from Model 2 IGA jurisdictions and Participating Foreign FFIs in jurisdictions where the U.S. has not entered into a FATCA intergovernmental agreement or IGA.
Second, for Reporting FFIs in Model 1 IGA jurisdictions that ordinarily file FATCA reports with the tax authorities in their jurisdiction of residence (following which the local tax authorities would exchange such data with the IRS), the IRS has now extended the country-to-country exchange deadline from September 30 to December 31, 2020 for 2019 FATCA reporting data (see FAQs, Reporting, Q5). In conjunction with the country-to-country data exchange deadline extension, a number of local jurisdictions has extended local FATCA (and often also CRS) tax reporting by resident Reporting FFIs.
Finally, in an FAQ (Q21 under FATCA Certifications) issued at the end of April, the IRS also provided an automatic extension for FATCA certifications that would otherwise be due July 1, 2020. Those certifications are now due December 15, 2020.
The challenge now is for financial institutions with a global presence to re-assess the new timelines applicable to its offices and plot out a manageable filing schedule for its compliance team. In a regular year, local FATCA filing deadlines are spread out through the year up until September and reporting is often prioritized by jurisdictional deadlines. If a number of these deadlines (not to mention FATCA certifications) are moved to year-end and no thought is given to managing reporting resources, there may be an unexpected ballooning of reporting workload at year-end.
3. Cross-Border NRA
As part of its COVID-19 relief announcements, the IRS has also issued Rev. Proc. 2020-20 and separate FAQs that provide relief for individuals (and certain businesses with personnel) that end up having to stay within the U.S. longer than expected because of coronavirus-related travel restrictions or impediments. Under U.S. tax rules, staying in the U.S. too long (this is called “substantial presence” and “too long” is based on a formula that calculates days present in the U.S. during a rolling three-year period) can change a nonresident’s status to that of a U.S. tax resident.
From a withholding agent’s perspective, the concern is that a customer may change tax status which would affect tax withholding and reporting. The IRS is now providing a special COVID-19 medical exemption for a 60-day period which would remove the applicable days from being counted for substantial presence and certain other tax status rules. Details may be found in Rev. Proc. 2020-20.
4. Other Items
(a) FATCA Certification Defaults. The IRS published an internal memo dated April 7, 2020 titled, “Procedures for FATCA Certification Event of Default Notices.” The memo provides background on required FATCA certifications and IRS procedures in various cases involving certification failures by the reportable institution, including different stages of contact up to the point of termination of the institution’s FATCA status plus reinstatement procedures.
(b) Crypto Tax Information Reporting. With the IRS currently contemplating issuing guidance on tax information reporting on crypto assets, the Chamber of Digital Commerce has sent a comment letter to the IRS expressing certain insights from the industry perspective on tax information reporting. The letter emphasizes that there are different functional players within the crypto space and “crypto” actually covers a broad range of assets that potentially may require different tax treatment. The letter highlights from the perspective of industry participants the numerous issues that require clarification in terms of tax information reporting guidance.
(c) IRS FAQs on 2020 Filing and Payment Deadlines. The IRS has updated its FAQs on 2020 filing and payment deadlines affected by COVID-19. Among the updated responses is a note that states that only information returns identified in Notice 2020-23 or listed in Rev. Proc. 2018-58 and due between April 1 and July 15, 2020 will have deadlines postponed to July 15, 2020. No other information returns obtain relief. Also, as a follow-up to our note last month regarding estimated taxes, estimated taxes for Q1 and Q2 are now both due July 15.