A Guide to IRA Reporting and Compliance

Transcription

1 A Guide to IRA Reporting and Compliance September 1, 2014 JM Consultants 6930 Glory Road Baxter, MN Rev. 8/ Rev. 8/2014 1

2 A Guide to IRA Reporting and Compliance Written by JM Consultants JM Consultant s Mission Statement is to provide the best possible IRA products and services at the most reasonable prices. The purpose of this manual is to provide the most up-to-date and comprehensive IRA information possible. The material in this manual is believed to be the most up-to-date available as of the revision date. However IRA rules, regulations and procedures change often. Consequently the accuracy of this manual cannot be guaranteed. If you have any questions about anything in this manual please do not hesitate to contact JM Consultants at or call Please Note: JM Consultants does NOT provide legal, accounting, investment or tax advice. In important matters like this you must always rely on your own legal, accounting. Investment and tax professional before finalizing any decision. JM Consultants 6930 Glory Road Baxter, MN Rev. 8/2014 Copyright September, 2014, All rights reserved. All rights for this textbook are reserved by JM Consultants. This material may not be reproduced in any manner for any purpose without the written permission of JM Consultants. Copyright is not claimed on any material from official U.S. government sources.

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4 Table of Contents Chapter 1 Basic Reporting Principles Chapter 2 Contribution Reporting on Form 5498 Chapter 3 Distribution Reporting on Form 1099-R Chapter 4 Withholding Notices and Systematic Distributions Chapter 5 Required Minimum Distributions (age 70 1 /2 or Older) Chapter 6 Year of Death Procedures and Reporting Chapter 7 Beneficiary Required Minimum Distributions Chapter 8 Creating a Compliance Friendly Filing System Chapter 9 Amendments Chapter 10 Self-Directed IRAs Chapter 11 IRA Audits Chapter 12 Excess Contributions Chapter 13 Recharacterizations Appendix A Life Expectancy Tables

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6 Basic Reporting Principles CHAPTER 1: Basic Reporting Principles Financial organizations offering IRAs have several annual reporting responsibilities. Some reports must be sent to both the IRS and IRA Holders or Beneficiaries, and some are sent only to IRA Holders and Beneficiaries. However, with the exception of Form 1099-R, which has a tiered penalty schedule for failures to report to the IRS based on how late the report is, the penalties for reporting failures are usually the same whether a financial organization has failed to report to the IRS or to the IRA Holder/Beneficiary. The following table summarizes the types of reports that are due each year and when they are due to the IRS and IRA Holders/Beneficiaries, the penalties for reporting failures, and exceptions to the reporting requirement * IRS reporting penalties generally increased for those statements and reports that were filed after December 31, This was a provision of The Small Business Jobs Act of Rev. 8/

7 Basic Reporting Principles * IRS reporting penalties generally increased for those statements and reports that were filed after December 31, This was a provision of The Small Business Jobs Act of ** JM Consultants recommends sending all 1099-Rs regardless of the amount. It provides an accurate audit trail. Rev. 8/

8 Basic Reporting Principles Fair Market Value (FMV) Statement The FMV statement reports the value of an IRA as of December 31 of the year for which the reporting is done and it is sent to the IRA Holder and/or Beneficiary. The IRS prefers the reported FMV reflect accrued earnings as of the reporting date even if the earnings have not yet been posted. If this is not feasible, reporting only posted earnings as of December 31 may be acceptable if this valuation method is applied consistently for all accounts. Fair Market Value is also reported on Form 5498, and the IRS does allow financial organizations to use Form 5498 to satisfy the FMV statement requirement, however, the FMV statement is then due to IRA Holders and Beneficiaries by January 31 rather than May 31 following the year for which the reporting is being done. Although Form 5498 may be used to satisfy the FMV statement requirement, it is not necessary to use Form Any written format may be used to satisfy the FMV statement requirement to IRA Holders/Beneficiaries. However, if no Form 5498 or Annual Account Statement is sent to the IRA Holder/Beneficiaries because no contributions were made for the reporting year, the FMV statement should include a notation indicating what information is being reported to the IRS on Form Note: See Chapter 10, Fair Market Value Issues. Annual Account Statement (Form 5498 and Substitute Form 5498) The Annual Account Statement is a report that is provided to IRA Holders and Beneficiaries that generally reports the same information that is captured on Form 5498, which is filed with the IRS. In other words, the Annual Account Statement reports all IRA contribution information, the IRA FMV (also reported on the FMV statement, a separate reporting requirement) and other information and instructions to the IRA Holder/Beneficiary. There is often confusion surrounding the Annual Account Statement requirement and Form 5498 reporting requirement, because the Form 5498 is usually used to satisfy the Annual Account Statement reporting requirement. Consequently, some IRA administrators mistakenly believe that IRA Holders/Beneficiaries must receive a Form However, it is possible to satisfy the Annual Account Statement requirement without a Form 5498, as long a statement that This information is being furnished to the IRS is printed on the statement and the following information is included in the report sent to the IRA Holder/Beneficiary: Regular Traditional and Roth IRA contributions made in or for the reporting year Rollover contributions made in the reporting year Roth conversion made in the reporting year Recharacterized contributions made in the reporting year Type of IRA Being Reported SEP Contributions (if applicable) SIMPLE Contributions (if applicable) Name and address of financial organization FMV as of the end of the reporting year IRA Holder/Beneficiary instructions similar to those found on Form 5498 Other information as directed by the IRS, which continues to increase Rev. 8/

9 Basic Reporting Principles RMD Notice Since Form 5498 must be produced for the IRS, it is also used to fulfill the annual RMD Notice. See Chapter 5, Required Minimum Distributions, for information on RMD Notice requirements. Form 1099-R See Chapter 3, Distribution Reporting, for information on Form 1099-R. Form 5498 See Chapter 2, Contribution Reporting, for information on Form Filing Formats Currently there are two filing formats available: electronic through the Filing Information Returns Electronically System (FIRE System), and paper. Filers who are reporting 250 or more returns of the same type are required to file electronically, but the IRS allows financial organizations filing fewer than 250 returns of the same kind to file paper forms. Electronic Filing IRS Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically, should be read completely each year, as advised by the IRS. There are usually small changes in procedures that must be followed. This IRS publication is usually issued in late summer or early fall of the year that it applies to. The 2011 edition included an IRS warning of increased penalties for non-compliance. The 2012 version of Publication 1220 includes this important information for electronic filers. The IRS internet connections for filing information returns electronically is and The Filing Information Returns Electronically (FIRE) system and the test system will be down from 6 p.m. ET December 14, 2012, through January 02, 2013 for yearly updates. In addition, the FIRE system may be down every Wednesday from 2:00 a.m. to 5:00 a.m. ET for programming updates. The FIRE system will not be available for submissions during these times. Form 4419, Application for Filing Information Returns Electronically (FIRE), is subject to review before the approval to transmit electronically is granted. IRS may require additional documentation. If a determination is made concerning the validity of the documents transmitted electronically, IRS has the authority to revoke the Transmitter Control Code (TCC) and terminate the release of the files. The FIRE system does not provide fill-in forms for filing information returns. Rev. 8/

10 Basic Reporting Principles The 2013 edition, published in October 2013, included the following information important to IRAs: Beginning Tax Year 2013 and subsequent, the guidance provided in Publication 1220 will cease to be issued as a Revenue Procedure. This publication will be maintained as a continuous living document incorporating record layout, and other changes, revisions, and deletions. A continuous living document means this document will incorporate changes as they take effect making this document current throughout the filing season. Updates can be found at on the Filing Information Returns Electronically website. AND from a list of nine items (only those pertaining to IRAs): 3. FIRE System is available from January 21, 2014, through December 12, FIRE Test System is available from November 12, 2013, through February 28, Combined Federal/State Filing program additional participating states Michigan (code 26) Vermont (code 50) 9. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc. Code D, Record for Annuity payments from nonqualified annuity payments and Distributions from life insurance contracts that may be subject to tax under section 1411, has been added to the Payee B Record, Field Positions , Distribution Code. Valid with codes 1,2,3,4 or 7. NOTE 1: As of the date this manual went to print, no newer information was available on the IRS website. NOTE 2: The IRS stopped accepting 3 1 /2 inch diskettes for returns filed after December 31, 2006, and stopped accepting tape cartridges for returns filed after December 1, Paper Forms Use of the IRS official paper forms will ensure that the proper format is used. These forms are obtained from the IRS or from a commercial printer. They must be scannable originals. Since few financial institutions use official IRS forms, substitute forms must conform to IRS specifications. IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns, should be referred to, as advised by the IRS. IRS Publications and the IRS website should always be referred to for the latest developments when using substitute forms. Specifications can change even after the official publication. Rev. 8/

11 Basic Reporting Principles The May 2014 version has one item concerning IRAs. It is for Form It is reprinted below Form The height of the following entry boxes have changed: TRUSTEE'S or ISSUER'S name, address, city or town, province or state, country, and ZIP or foreign postal code., TRUSTEE'S OR ISSUER'S federal identification no., PARTICIPANT'S social security number, Street address (including apt. no.), and City or town, province or state, country, and ZIP or foreign postal code. IRS Publication 1179 should always be reviewed annually when using substitute forms. JM Consultants knows that IRA Custodians/Trustees are being penalized for incorrect forms. Rev. 8/

12 Basic Reporting Principles Corrections Some corrections require one form to correct and others require two. The table below summarizes which types of corrections can be completed with one form and which require two forms. *For examples of one and two form corrections see Chapter 2, Contribution Reporting on Form 5498 and Chapter 3, Distribution Reporting on Form 1099-R. Rev. 8/

13 Basic Reporting Principles Record Retention for IRA Administrators There are several factors that should be considered when determining how long to retain IRA records including the type of IRA record, the period over which the record might be subject to an audit (by either IRS or banking auditors), and if the records might be the subject of a lawsuit, and a financial organization s storage constraints. The most conservative approach, of course, is to keep all IRA records (plan documents, reporting, correspondence, etc.) forever. If space is a consideration, some financial organizations have started to retain electronic copies of these documents rather than hard copies. If a financial institution electronically archives the actual files, reports and statements we recommend that you have a detailed procedure written for this. It should include timing of the scanning/archiving and what, if any, the destruction period is, and how and by whom it is approved. Before any actual documents are destroyed, a detailed written procedure should become part of your Policies and Procedures. A control sheet should be maintained with all accounts listed. It should also include any older files that are scanned and/or shredded. The date scanned should be noted as well as who scanned it. And, maybe most important, someone should maintain the schedule for shredding, making sure the file is scanned before it is shredded. While we recommend a very conservative time frame for shredding, your financial institution should follow its own legal counsel. In so doing however, remain cognizant that it appears the IRS can require an IRA/HSA/CESA Custodian/Trustee to prove any and all transactions, as far back as they care to go. While three years after filing/amending is the norm, it would be unusual, but it is not impossible, for the IRS to request farther back. Since the IRS has no written policy on electronic documentation for IRA/HSA/CESA Custodians/Trustees, and can very easily audit three tax years back from the date of filing or amending/correcting, four years is an absolute minimum to keep all original documents. Five years is better. Because of this, many financial institutions have a ten year policy for document destruction after they are archived electronically. To give you an indication of what the IRS is thinking, however, IRS Publication 552, Recordkeeping for Individuals (Rev. January 2011, the latest version), instructs the taxpayer, the IRA/HSA/CESA Owner, nothing is mentioned for the IRA Custodian/Trustee, to keep all IRA records until the IRA is closed and all distributions have been made. This would seemingly include until the inherited IRA is fully distributed to the beneficiary. Although not specifically mentioned, one would also expect the IRS to follow these same guidelines for HSAs and CESAs and quite possibly for the IRA/HSA/CESA Custodian/Trustee. NOTE: Recently, the IRS has removed this publication from their web site. Other IRS publications and website locations also do NOT give any further clarification So the operative words in this area should be BE CAREFUL before shredding anything! Other IRS Publications and website locations also do NOT give any further clarification. Then, too, there can be state legal issues. Many states have a period of time after an account is closed that remains open for litigation purposes. Again, your financial institution should follow its own legal counsel on this matter. We like to compare compliance documentation to insurance. Few of us like paying insurance premiums, but when we need insurance, we re sure glad we have it. So look at documentation that way. Do you want minimum documentation insurance (nothing saved), good documentation insurance (minimum 5 years saved), or the best insurance documentation and our recommendation of ten years or longer. Forever is still best! Rev. 8/

14 Basic Reporting Principles Regarding The Scanning of IRA Documents Some financial organizations are moving to paperless environments and storing IRA documents electronically rather than in paper files. The primary reasons for this are ease of access (especially when dealing with multiple branches) and a lack of physical storage space. Of course, there are some risks involved with a paperless approach, including the possibility of losing these critical legal documents in the event of a computer disaster if proper care is not taken to backup files off-site on a regular basis, or in a less serious scenario, the possibility of losing temporary access to this information due to a local system going down. Because of the costs, risks, and technical issues involved with embarking on such a project, it is important to consult with competent legal, technical, and training experts before taking the large step of moving toward a paperless environment. Once a decision has been made to move to paperless, the next decision will be which documents will be stored electronically and which will be stored on paper. Some documents that are commonly scanned for storage include: Signed Plan Documents Distribution and Contribution Forms Beneficiary Election Forms Other Election Forms Correspondence Correction Forms Reporting Forms Other considerations include procedures for scanning and routing documents, how long paper documents will be retained, and training personnel for this major change. Again, the IRS has given no guidance to IRA Custodians/Trustees. One important issue to consider, however, is the availability of reviewing scanned documents. This is especially important for any outside auditor. Limited access will not make an auditor s job easier and the IRS could absolutely demand access. In addition, ease of access is also an important issue for your employees and internal auditors. While the scanning and electronic archiving has become quite common, it may be hard to believe, but auditing electronic documents is usually a slower task than checking actual paper files. Depending on the system used, the auditing of electronic files can be very slow. While it may seem faster if checking only a file or two internally, when needing to find multiple files and multiple reports, it becomes a slower task. Rev. 8/

15 Basic Reporting Principles NOTE: Voluntary Truncation IRS Pilot Program Extended for 2013! On February 11, 2013, Internal Revenue Bulletin: issued a Proposed Regulation for IRS Truncated Identification Numbers. For IRAs, it follows the previous procedures for truncating. and, as with many proposed regulations, this proposed regulation can be relied on until such time the IRS states differently. So, for 2013 and future years, truncating is allowed but NOT yet mandatory. For a review of the required procedures, here is a history of this program. On November 19, 2009, the IRS issued Notice , which provided for a voluntary pilot program that permits an IRA/HSA Custodian/Trustee to truncate an individual payee's nine-digit identifying number on paper Forms 1099-R (including substitute and composite substitute statements) issued for calendar years 2009 and The Notice did not apply to filings with the IRS, electronically furnished payee statements, or payee statements not in the Form 1098, 1099, or 5498 series. From the IRS Notice the requirements to participate in this program were: The identifying number must be an Social Security Number, Taxpayer Identification Number, or adoption TIN; The identifying number is truncated by replacing the first five digits with asterisks or Xs (for instance, would be truncated as "***-**-6789" or "XXX-XX-6789"); and The truncated identifying number appears on a paper payee statement (including substitute and composite substitute statements) in the Form 1098, 1099, or 5498 series for calendar year 2009 or If those requirements were satisfied, then the IRA/HSA Custodian/Trustee was deemed to have complied with any requirement in Treasury and IRS guidance, whether in regulation, form, or form instructions, to include a payee's identifying number on a payee statement. The IRS also solicited comments to the Notice by May 1, 2010, specifically concerning: (1) whether truncations should be required, rather than permitted, (2) whether other Form series should be included, (3) whether electronically furnished statements should be included, (4) whether complete numbers should be included upon payee request, and (5) whether truncation creates difficulties for filers and/or payees. On April 14, 2011, the IRS issued Notice to announce an extension of the voluntary pilot program. In order to allow for more time to evaluate the pilot program, the IRS has extended the program as to paper Forms 1098, 1099 and 5498 series furnished for calendar years 2011 and As in the prior announcement, it does not apply to forms filed with the IRS, electronically furnished payee statements, and payee statements not in the Form 1098, 1099, or 5498 series. To participate in this extended program, the same requirements as noted above must be met. The IRS also noted that a filer is authorized to truncate an identifying number on the forms notwithstanding the Rev. 8/

16 Basic Reporting Principles 2011 Instructions for those forms that say the original pilot program expired. The public was again invited to submit comments by July 29, 2011 concerning the Notice. The IRS is particularly interested in the following: (i) comments from filers who participated in the original pilot program for either calendar year 2009 or 2010; (ii) issues payors and payees have encountered; and (iii) comments on whether payors should be allowed to truncate a payee's EIN, whether truncation should be permitted on additional types of payee statements, and whether payors should be allowed to truncate a payee's identifying number on electronically furnished payee statements. Rev. 1/

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18 Contribution Reporting on Form 5498 CHAPTER 2: Contribution Reporting on Form 5498 Before The Start of Each Reporting Year Properly reporting IRA contributions starts with a thorough understanding of what the contribution reporting requirements will be for the year. Consequently, it is highly recommended that before the start of each reporting year, all personnel who are responsible for entering IRA reporting information review the contribution reporting requirements and how they are to be entered on a financial organization s internal reporting system so that they are properly reported on Form It may also be a good idea for client service representatives to keep a log of the types of IRA contributions they report throughout the year, to help facilitate spot-checking of the Forms It is particularly important to note rollover contributions, conversions, recharacterizations, special catch-ups, SEP, and SIMPLE contributions, because these contributions are the most likely to be reported incorrectly. In addition to maintaining a reporting log, it would also be a good idea to create a contribution reporting checklist for client service representatives. The procedures for receiving contributions will vary from financial organization to financial organization. Form 5498 is the IRS form used for reporting IRA contributions and it is due to both the IRA Holder and IRA Beneficiary of the deceased IRA Holder, and to the IRS by May 31, or the next regular business day, of the following year. The due dates are as follows: Due Date Calendar IRA Holder/ Due Date to Year Beneficiary the IRS 2010 May 31, 2011 May 31, May 31, 2012 May 31, May 31, 2013 May 31, June 2, 2014 June 2, June 1, 2015 June 1, May 31, 2016 May 31, 2016 To properly report IRA contributions on Form 5498, one must first become familiar with the form itself. After familiarizing ourselves with the format of Form 5498, we can then address compliance concerns for each of the contribution types, as well as other information that is reported on this form, such as fair market values and required minimum distribution information. Form 5498 is a three-part form. Copy A goes to the IRS, and appears in red in the official form. A black and white facsimile of the 2013 and 2014 Copy A of Form 5498 follows. The 2015 Form 5498 was not available when this manual went to print. Rev. 8/

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20 Contribution Reporting on Form 5498 Note: The Void box should be marked on a Form 5498 if a completed or partially completed form is incorrect and you want to void it before sending it to the IRS. Any forms with an x in the Void Box will be completely disregarded by the IRS, and consequently, there is no need to mark the Corrected box if a form is retyped to replace the voided form. Do not use the Void box to correct forms after they are sent to the IRS. Copy B, the IRA Holder s/beneficiary s copy, looks much like Copy A except it is missing the void checkbox at the top of the form, and it has explanations of what the various boxes on the form mean printed on the back to better help the IRA Holder/Beneficiary understand what is being reported. Copy C, the Custodian/Trustee or Issuer s copy, looks exactly like Copy A, except for the color (black and white, not red), and it has information related to reporting deadlines and instructions that are specific to the Custodian/Trustee or Issuer. The purpose of the boxes that contain identifying information about the IRA Custodian/Trustee and Participant (IRA Account Holder/Beneficiary) are obvious for the most part. Please note, however, that according to the general instructions for filing Form 5498, a unique identifier is required for the Account Number field if you have multiple accounts for a recipient or if you are filing more than one information return of the same type. This requirement ensures that corrections are properly processed. It is also important to note that according to the instructions, the account number must not appear anywhere else on the form, which rules out using the Social Security Number. Also, since an IRA can hold multiple CDs as investments, using CD numbers would require multiple Form 5498 filings for the same account in many circumstances, which would not satisfy the reporting requirements of filing one Form 5498 per IRA. Some financial organizations use a basic account number for each customer and apply an appended digit for each new account opened by the customer. For example, a financial organization may create a unique account number for a customer, such as However, the customer s Traditional IRA would be listed as Acct. No , and his Roth IRA might be listed as Acct. No Also, please note if you are using window envelopes for reduced rate mail, be sure the account number does not show through the window. For Example: Account Number Sample: First two numbers = Branch Number Second set of numbers = Part of SSN/TIN Third set of numbers = IRA Type 01 = Traditional IRA 02 = Roth IRA 03 = SEP IRA 04 = SIMPLE IRA 05 = Inherited Traditional IRA Rev. 8/

21 Contribution Reporting on Form = Conduit Traditional IRA 07 = HSA 08 = CESA The left hand portion of the form is self-explanatory with the IRA Custodian/Trustee and the IRA Account Holder/Beneficiary required information. Note: A 5498 must be generated for each plan agreement. What's New for 2014 Form 5498 Box 15a. FMV of certain specified assets. Use box 15a to report the fair market value (FMV) of investments in the IRA that are specified by category code(s) in box 15b. Box 15b. Code(s). Use codes A through H for reporting the types(s) of investments held in an IRA for which the FMV is required to be reported in box 15a. See Reporting FMV of certain specified assets, and the instructions for box 15b, in the Specific Instructions for Form 5498, later. Using new Code K on Form 1099-R, and boxes 15a and 15b on Form 5498, for reporting hard-to-value IRA assets is optional for Although these boxes have been added, the IRS has stated that the procedure is OPTIONAL for The IRS instructions for the NEW codes for Box 15b are the following: Enter the code for the type(s) of investments held in the IRA for which the FMV is reported in Box 15a. A maximum of two codes can be entered in Box 15b. If more than two codes apply, enter code H. A Stock or other ownership interest in a corporation that is not readily tradable on an established securities market. B Short or long-term debt obligation that is not traded on an established securities market. C Ownership interest in a limited liability company or similar entity (unless the interest is traded on an established securities market). D Real estate. E Ownership interest in a partnership, trust, or similar entity (unless the interest is traded on an established securities market). F Option contract or similar product that is not offered for trade on an established option exchange. G Other asset that does not have a readily available FMV. H More than two types of assets (listed in A through G) are held in this IRA. Rev. 8/

22 Contribution Reporting on Form 5498 Account Valuations (FMV) When IRA Asset Values Are Not Readily Determined An accurate valuation (FMV) of a Traditional, SEP, SIMPLE and Inherited IRA is required in order to calculate the correct RMD amount for a year. FMV is also needed for certain other IRA transactions. Obtaining the FMV is an annual requirement for the IRA Custodian/Trustee. In some cases, IRAs contain assets which are difficult to value without specialized expertise, such as real estate investments, limited liability partnerships, or annuities with a large death benefit. It is the custodian s or trustee s responsibilities to obtain an accurate valuation of these investments each year to provide an accurate fair market value in Box 5 of Form It is also the responsibility of the trustee or custodian to provide an accurate fair market value each year. This will generally require the services of an expert in the specific type of valuation that must be conducted (e.g., real estate, business, or actuarial, in the case of an annuity with a death benefit.) This responsibility can not be passed on to the IRA Holder or Beneficiary. While the IRA Holder can be asked to obtain the FMV, the IRA Custodian/Trustee is required to obtain the FMV regardless of circumstances. If the FMV is obtained late, the FMV Statement and Form 5498 MUST BE AMENDED! There are NO EXCEP- TIONS! NOTE: While IRA Custodians/Trustees can ask the IRA Holder to obtain the FMVs, the IRA Holder can NOT make the evaluation themselves. A verifiable source and/or independent third party must be used. Again, if the FMVs are not obtained by the time your FMV Statements are sent to the IRA Holders, the IRA Custodian/Trustee must amend all FMV Statements and 5498s when the complying FMV is obtained. It is also important to note that any cost in obtaining the FMV is a valid expense of the IRA and can be paid from the IRA. Rev. 8/

23 Contribution Reporting on Form 5498 Explanations for Numbered and Blank Box on 2013 Form Rev. 8/

24 Contribution Reporting on Form 5498 Note: If an IRA is funded both with employer SEP contributions, as well as with the IRA Holder s regular, annual Traditional IRA contributions, the SEP contributions should be reported in box 8 and the Traditional IRA contributions should be reported in box 1. SEP contributions made in 2013 for 2012 are reported on a 2013 Form SEP contributions made in 2014 for 2013 are reported on a 2014 Form Regular, Traditional IRA contributions made for 2012 during the carryback period between January 1, 2013 and April 15, 2013, should be reported on the 2012 Form Regular, Traditional IRA contributions made for 2013 during the carryback period between January 1, 2014 and April 15, 2014, should be reported on the 2013 Form When a financial organization is not certain whether an IRA is a Traditional IRA or a SEP IRA, the IRS instructions indicate that the IRA box should be marked in box 7, rather than the SEP IRA box. Rev. 8/

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27 Contribution Reporting on Form 5498 Note: If an IRA is funded both with employer SEP contributions, as well as with the IRA Holder s regular, annual Traditional IRA contributions, the SEP contributions should be reported in box 8 and the Traditional IRA contributions should be reported in box 1. SEP contributions made in 2014 for 2013 are reported on a 2014 Form 5498, but regular, Traditional IRA contributions made for 2014 during the carryback period between January 1 and April 15, 2015, should be reported on the 2014 Form When a financial organization is not certain whether an IRA is a Traditional or a SEP IRA, the instructions indicate that the IRA box should be marked in box 7, rather than the SEP IRA box. Rev. 8/

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30 Contribution Reporting on Form 5498 Filing Returns with the IRS All returns sent to the IRS should be reviewed to help prevent the need for later corrections. If filing Form 5498 in a paper format, you must send the transmittal Form 1096 with the paper forms you are submitting. A separate Form 1096 is required for each type of form you are submitting (e.g., one Form 1096 would be required for all paper Form 1099-Rs that are submitted and one would be required for all Form 5498s that are submitted) For organizations that are using substitute reporting forms, they must conform to the specifications in IRS Publication The 2013 Forms 1096, Annual Summary and Transmittal of U.S. Information Returns, follows. The 2014 Form was not available at the time of printing of this manual. Rev. 8/

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35 Contribution Reporting on Form 5498 Third Party Providers A transmitter, service bureau, paying agent, or disbursing agent may sign Form 1096 on behalf of any person required to file (the payer) if the conditions in 1 and 2 below are met. 1. The third party provider has the authority to sign the form under an agency agreement (oral, written, or implied) that is valid under state law and 2. The third party provider signs the form and adds the caption For: (Name of payer). Signing of the form by a third party provider on behalf of the payer does not relieve the payer of the liability for penalties for not filing a correct, complete, or timely Form 1096 and accompanying returns. Recordkeeping Financial organizations should keep copies of information returns filed with the IRS or have the ability to reconstruct the data for at least five years after filing them for IRS purposes; however, a financial organization may want or need to retain them for longer for bank auditors, customer service, or legal purposes. Shipping Information forms should be sent to the IRS in a flat (not folded) first class mailing. If you are sending many forms, you may send them in separate packages. If multiple packages are sent, write your name, and number each package separately, and place Form 1096 in package number one Electronic Reporting Currently the only methods available for filing returns are electronic or paper. Electronic filing is the preferred method for filing information returns with IRS, although paper filing is still allowed for those filing less than 250 information returns. For those filing 250 or more information returns, only electronic filing is allowed unless a financial organization applies for and receives a hardship waiver. Publication 1220 provides the procedures for reporting electronically and is updated annually. Financial organizations may file information forms electronically through the Filing Information Returns Electronically System (FIRE System); however, special software is required that can produce a file in the proper format according to Pub The FIRE System does not provide a fill-in form option. The FIRE System primarily operates 24 hours a day, 7 days a week, and may be accessed via the Internet at However, there are certain times of the year it is NOT available. Rev. 8/

36 Contribution Reporting on Form 5498 Due dates File Form 5498 electronically through the FIRE System by May 31, 2013 for 2012, June 2, 2014 for 2013 and June 1, 2015 for Who Must File Electronically If you are required to file 250 or more information returns, you must file electronically. The 250-or-more requirement applies separately to each type of form. The electronic filing requirement does not apply if you apply for and receive a hardship waiver. Year of Death Reporting Requirements It is important for beneficiaries to be able to separately track the IRAs they hold as beneficiaries from the IRAs they hold as owners, because different taxation and distribution rules apply to each. Revenue Procedure provides two options for satisfying the year of death reporting requirements for the FMV and Form Generally, financial organizations must report the FMV statement for the decedent and each beneficiary on Form 5498 regardless of which reporting option it elects to use. An exception to this requirement exists if a beneficiary takes a total distribution of his or her beneficial portion of the inherited IRA by December 31 of the year of death. In this case, no FMV or Form 5498 must be generated for that beneficiary, however, an FMV statement and Form 5498 must still be generated in the name of the decedent in the year of death and for any other beneficiary who has not fully depleted his or her share of the IRA by December 31 of the year of death. Option One 1. Report the IRA s FMV as of the date of death for the deceased IRA Holder in box 5 of Form Report the FMV of each beneficiary s portion of the Inherited IRA as of 12/31 of the year of death in box 5 of Form Option Two 1. Report the IRA s FMV as 12/31 of the year of death in box 5 of Form 5498 for the deceased IRA Holder, which must be zero. 2. Report the FMV, of each beneficiary s portion of the Inherited IRA as of 12/31 of the year of death in box 5 of Form If option two is used, a financial organization must also provide the deceased IRA Holder s executor or representative with a date of death valuation within 90 days of their executor s request for such information. If a financial organization is not notified of an IRA Holder s death until after the deadline for filing Form 5498 (May 31), it is not required to file a corrected Form 5498 nor furnish a corrected annual statement. Although it is recommended. However, it must still provide the date-of-death valuation in a timely manner to the executor or administrator representative upon request. If a financial organization is notified of an IRA Holder s death after they have sent out Form 5498, but before the deadline for sending it out, they must correct their reporting according to the option they have chosen for reporting in the year of death. Rev. 8/

37 Contribution Reporting on Form 5498 Note: If a spouse beneficiary transfers the deceased spouse s IRA into his or her own IRA, any distributions taken will be coded based on the age of the spouse beneficiary (code 1 or 7 for a Traditional IRA and Q, T, or J for a Roth IRA), rather than as a death distribution (code 4, Q or T), as is the case if the assets are moved into an inherited IRA account. Please note that the actual transfer of a deceased IRA Holder s assets to an inherited subaccount is not a reportable event. Example: IRA Holder dies November 6, 2013, age 75 The 2013 RMD was not taken Financial Institution is NOT informed of the death until March 10, 2014 The IRA Holder s December 31, 2013 FMV Statement is already sent The 2013 Form 5498 has not been sent out yet Solution: The financial institution MUST amend the IRA Holder s 2013 FMV Statement: It must be re-issued reporting the FMV as the date of death FMV or zero! If the zero option is used, the statement must also include notice to the deceased IRA Holder s representative that the Date of Death FMV is available upon request. If requested it must be provided within 90 days in any reasonable format. The financial institution must also determine who the beneficiaries are and prepare a December 31, 2013 FMV statement for each of them, using their names as beneficiary of the deceased and their SSNs and/or TINs. The reported FMV is their share of the December 31, 2013 total balance. Form 5498s must be prepared by June 2, 2014 for the deceased IRA Holder and all beneficiaries. Caution: If any IRA transactions occurred between the date of death and the notification of death, they must be accounted for by the financial institution because the IRS position is the IRA balance as of the date of death belongs to the beneficiaries, NOT the estate of the deceased. This means the beneficiaries in this example must be shown as owning the Inherited IRA at the end of the year. This may be a bit tricky to enter into your computer system. Manual corrections may be necessary, but it is required. The 50% penalty applies to the beneficiaries who were responsible for it starting the date of death. They may request an abatement of the penalty when filing/amending their 2013 personal tax returns, showing the penalty. Since it will not be paid out sooner than 2014, reported on a 2014 Form 1099-R, it will be taxed in (Hint: If they have not satisfied the delinquent RMD there is little chance the IRS would abate any penalty.) Rev. 8/

38 Contribution Reporting on Form 5498 Corrections Correcting Form 5498 sometimes requires one form to correct and sometimes requires two forms. The table below summarizes which types of corrections can be completed with one form and which require two forms. Incorrect money amount or checkbox or Incorrect payee name or Form should not have been filed (e.g., a transfer that is reported as a contribution or a distribution) No TIN or Incorrect TIN or Incorrect payee name AND address or Wrong form used to file information Prepare a new information return Mark x in the corrected box Correct incorrect information and leave correct information as is Prepare a new Form 1096 transmittal form Provide information requested on Form 1096 File Form 1096 and Copy A of corrected form with IRS Do not include original reporting form Prepare a new information return Mark x in the corrected box if there was one previously issued even if it did not include all the information. Enter information exactly as it was entered on the original return, but enter zeros (0) for all money amounts. Report ALL correct incorrect information on a new form. Do not mark corrected box. Prepare a new Form 1096 transmittal form Enter description of correction at bottom of Form 1096 (e.g., Filed to Correct TIN) Provide information requested on Form 1096 File Form 1096 and Copy A of corrected form with IRS Do not include original reporting form Rev. 8/

39 Contribution Reporting on Form 5498 One Form Correction (Incorrect Participant Name) In this example, a Form 5498 was generated in the name of Russell N. Cattell; however, all the information being reported is actually for Brandon Cattell. The part of the Form 5498 that is incorrect is circled below for illustrative purposes only. To correct the 2013 error, simply create another Form 5498, mark the corrected box, report all the information as it was on the first Form 5498, but correct the participant s name to Brandon Cattell, and submit to the IRS. If there are fewer than 250 corrections of the same form being submitted to the IRS, the correction may be done on paper and transmitted with Form However, if 250 or more corrections of the same form are being submitted to the IRS, the corrections must be submitted electronically. Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Rodeo Way Bronco TX ORIGINAL X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX CORRECTED Rev. 8/

40 Contribution Reporting on Form 5498 If corrected for 2014 Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Rodeo Way Bronco TX ORIGINAL X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX CORRECTED Rev. 8/

41 Contribution Reporting on Form 5498 One Form Correction (Incorrect Dollar Amount) In this example, a Form 5498 was generated in the name of Brandon Cattell for a 2013 $3000 conversion contribution; however, there was a data entry error, and the conversion was entered without decimal and cents amount (i.e., $ ). The part of the Form 5498 that is incorrect is circled below for illustrative purposes only. Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX ORIGINAL To correct the error, simply create another Form 5498, mark the corrected box, report all the information as it was on the first Form 5498, but correct the contribution amount ($ instead of $3000), and submit to the IRS. If there are fewer than 250 corrections of the same form being submitted to the IRS, the correction may be done on paper and transmitted with Form However, if 250 or more corrections of the same form are being submitted to the IRS, the corrections must be submitted electronically. X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX CORRECTED Rev. 8/

42 Contribution Reporting on Form 5498 If corrected in 2014 Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX ORIGINAL X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX CORRECTED Rev. 8/

43 Contribution Reporting on Form 5498 Two Form Correction (Incorrect Participant Name AND Address) In this example, a Form 5498 was generated in the name of Russell N. Cattell; however, all the information being reported is actually for Brandon Cattell and in addition, Brandon s address is incorrect on the form. The parts of the Form 5498 that are incorrect are circled below for illustrative purposes only. Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Ordeo Way Bronco TX ORIGINAL With a two form correction, the first step is to undo what was reported improperly. To do this, everything is reported the way it was originally, but the corrected box is marked and all dollar amounts are replaced with zeros as shown below. X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Ordeo Way Bronco TX CORRECTED Rev. 8/

44 Contribution Reporting on Form 5498 If corrected in 2014 Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Ordeo Way Bronco TX ORIGINAL X Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Russell N. Cattell X 123 Ordeo Way Bronco TX CORRECTED Rev. 8/

45 Contribution Reporting on Form 5498 The final step in a two form correction is to create a new Form 5498 with the proper information on it. This means correcting the participant s name to Brandon Cattell and fixing the address and submitting this Form along with the corrected Form to the IRS. If there are fewer than 250 corrections of the same form being submitted to the IRS, the correction may be done on paper and transmitted with Form However, if 250 or more corrections of the same form are being submitted to the IRS, the corrections must be submitted electronically. If corrected for 2013 Trustworthy Financial Corp. 300 Integrity Way Anywhere, USA Brandon Cattell X 123 Rodeo Way Bronco TX Note The CORRECTED box is NOT checked. Rev. 8/