I was
reading an IRS Revenue Ruling that made me laugh, albeit in a cynical way.
Here is the
issue:
If an IRA is being sent to a state unclaimed property fund, can the IRS force the trustee to withhold and remit taxes?
There are
several things going on here, beginning with: what is an unclaimed property
fund?
An easy
example is a deceased person’s bank account. Take Florida. If someone dies in
Florida without a will and without requiring probate, you as an inheritor are
going to have difficulties getting to their bank account – unless you name is
also on the account. You likely have to hire an attorney to obtain a court
letter to provide the bank stating that you are a valid inheritor of said bank
account.
How many
folks do think just leave the bank account unclaimed because it isn’t worth the
cost of an attorney?
It is not
just bank accounts. Unclaimed funds can include uncashed dividend or payroll
checks, utility security deposits, safety deposit boxes, retirement accounts and
a hundred variations thereon. The concept is that you are holding somebody
else’s money, and that somebody disappears. It is referred to as dormancy, and the
definition is what you would expect: there has been no activity in the account or
contact with the owner for a while; account statements are returned because of
an invalid address; phone numbers are no longer active.
The “while”
depends on the state and the type of asset. In Ohio, an uncashed payroll check
is considered dormant after one year whereas a customer overpayment requires
three years.
Who reports
this?
The
business, of course. The business is supposed to try to locate the account owner,
but sometimes there simply is no one to contact. When the dormancy period is
up, the business then transfers the monies with its best available information
to the state. The state holds the property until the owner comes forward to
claim it.
The legal
reasoning behind unclaimed property goes back to common law and real property.
If one abandons real property, there is a legitimate public concern that it soon
might become blighted. That concern prompts the transfer (the nerd term is “escheat”)
of the abandoned property to the Crown – or, these days, to the State.
Unclaimed
property is not technically taxation, but its laws operate similarly to tax
statutes.
Many states
have used unclaimed property as a means to fund their coffers. Delaware is one
of the most egregious offenders, with unclaimed property being its third-largest
source of state revenues. Delaware can do this because it is home to so many banks.
Here is a
link if you are interested in your own unclaimed property search:
Back to the
IRS Revenue Ruling. Here is a short paragraph from the lead-in:
Under the facts presented, is the payment of Trustee Y of Individual C's interest in IRA O to the State J unclaimed property fund, as required by State J law, subject to federal income tax withholding under Section 3405 of the Internal Revenue Code?”
A bracing
read, isn’t it? I couldn’t put it down.
Anyway, how
do you think the IRS answered this question?
Pretty much
the way you would expect. The IRS is getting its cut at some point, and this is
as good a point as any. Send the IRS its money, Trustee Y.
