Topic: IRS Reporting
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We have a customer who requested a direct rollover from their 401(k) account to an IRA with us. We just received a letter from the customer’s employer stating that certain funds were not eligible for the rollover and must be returned. The employer used Distribution Code G to identify the direct rollover on its 1099-R Form. How do we code the amount on our Form 5498 to reflect the return?
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We recommend consulting with an accountant or tax professional for guidance on this issue, but our understanding is that Form 5498, which is filled out by banks as IRA trustees or custodians, does not use distribution codes. The distribution codes (such as Code G for direct rollovers) are used in the 1099-R Form, which is…
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For our portfolio consumer mortgage loans, when borrowers receive insurance claim checks, we deposit the checks into escrow accounts from which we disburse funds directly to repair contractors. How should we set up these accounts? Currently, we set them up as savings accounts under the customer’s name, with our bank listed as the custodian. This creates some issues, because when we search our accounts in response to a subpoena or levy or for unpaid child support data matching, these accounts will be listed under the customer’s name, even though the funds in these accounts technically don’t belong to the customer. Should we instead set up the accounts using our bank’s TIN? Should they be deposit or savings accounts?
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We recommend reviewing your mortgage notes and related documents, which may specify your bank’s obligations as to insurance claim proceeds. For example, the Fannie Mae standard note states that the lender is not required to pay interest on property insurance claim proceeds. If your bank’s mortgage notes or other agreements include similar language, then your…
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When we open memorial/benefit accounts, we ask that an individual open the account in his or her name. We have an engagement letter that our lawyer drafted several years ago stating that the bank has no duties, responsibilities or obligations other than to accept the deposits and requiring the individual to hold the bank harmless for the consequences of any action or inaction that the bank takes in regard to the account. Is that the correct way to handle these accounts?
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When opening memorial and benefit accounts, we believe it is a best practice to ask the individuals establishing the accounts to obtain separate EINs to avoid a number of potential problems. For example, using a separate EIN with the memorial fund’s name in your account records should help to avoid confusion for IRS reporting and…
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We prepared an IRS Form 1099-INT for the Lawyers Trust Fund of Illinois for interest income earned on our IOLTA accounts. On the form, we listed the Lawyers Trust Fund tax identification number (TIN) and identified the recipient as “IOLTA.” However, we received a CP 2100A notice regarding backup withholdings from the IRS indicating that we had listed the recipient’s name incorrectly. How should we list the name? Do we need to spell out “Interest on Lawyers Trust Account”?
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First, we note that you do not need to prepare 1099 Forms for the Lawyers Trust Fund of Illinois, because the organization is tax exempt. We spoke with the director of banking for the Lawyers Trust Fund of Illinois, who confirmed that 1099 forms are unnecessary and recommended that banks suppress these forms instead of…
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For how long should we retain charged off loan files when the borrower has gone through the bankruptcy process, leaving no opportunity for collection?
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We recommend retaining documents related to a charged off loan for at least four years, and in some cases, for as long as ten years. The IRS requires you to report debt cancellations over $600 on Form 1099-C (or, for some secured loans, Form 1099-A) and imposes a four-year retention period for the form or…
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We are considering providing new mortgage borrowers a $90.00 gift card for membership to a local organization. Would there be any tax or regulatory implications for a gift like this?
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We are not aware of any disclosure or other requirements that would apply to such a gift, provided that it is given to all new mortgage borrowers uniformly. Notably, the IRS rules require you to report gifts that are valued over $600 on its 1099-MISC form, but the $90 gift cards would not trigger this…
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How should we report mortgage interest on IRS Form 1098 for loans that are on non-accrual status due to delinquencies or partial payments?
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The IRS has not provided guidance on calculating the interest received from borrowers who have become delinquent and are only making partial payments. In the absence of IRS guidance, we can only recommend what we believe is a reasonable approach to calculating interest received for purposes of Form 1098 filings. We recommend reviewing your loan…
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Our auditors told us that a “Doing Business As” (“d/b/a”) checking account was subject to Regulation E because it is held under the sole proprietor’s social security number, not a business tax ID. Is that true? Also, if we offer our consumer Internet banking product to business customers, would that make those business accounts subject to Regulation E?
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No, Regulation E does not apply to a business customer. Regulation E applies only to accounts “established primarily for personal, family, or household purposes.” It would not apply to an account established for a business, regardless of the tax identification number used for the account. Also, a business operating under a fictitious d/b/a name is…
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One of our IRA customers died last year. The customer had reached the age for required minimum distributions (RMDs), but he did not take his distribution for 2015 before dying. The IRA had two beneficiaries, a son and daughter. The son opened an inherited IRA, and the daughter took her portion as a lump sum distribution. Should we have taken out the RMD before distributing the IRA to the son and daughter?
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No, your institution generally is not responsible for taking out the RMD (unless you have agreed to do so in your account agreement). When an IRA owner dies after reaching the age of 70 ½, the IRA’s beneficiaries are responsible for distributing the owner’s RMD for the year of death — it is not your…
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One of our customers recently died. A family member has asked us to keep the customer’s deposit account open for about two months to accept refunds of insurance premiums and other credits. Would you recommend opening a new account using the executor’s social security number (SSN)?
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We believe that your customer would need to obtain an employer identification number, also known as a taxpayer identification number (EIN or TIN), for the estate, even if it qualifies as a small estate under Illinois law. The IRS requires that every estate obtain an EIN, no matter the size of the estate. Your institution…