Section 3405

On October 18, 2024, the IRS issued final regulations on withholding for qualified retirement plan payments made to United States taxpayers living outside of the country.  The final regulations come five years after the IRS issued proposed regulations on the topic and almost four decades after the IRS issued Notice…

Continue Reading IRS Issues Final Regulations Governing Withholding on Certain Retirement Plan and Commercial Annuity Distributions Made to U.S. Taxpayers Abroad

The IRS recently published new guidance on the tax withholding and reporting consequences associated with qualified retirement plan distributions to state unclaimed property funds.  In Revenue Ruling 2020-24, the IRS clarified that distributions from qualified retirement plans to state unclaimed property funds are subject to both federal income tax withholding and 1099-R reporting requirements.  In a companion revenue procedure, Rev. Proc. 2020-46, the IRS permitted taxpayers to self-certify for a waiver of the 60-day deadline for rolling over funds between qualified plans when the funds had been distributed to a state unclaimed property fund.
Continue Reading IRS Updates Guidance on Qualified Plan Distributions to State Unclaimed Property Funds

The Treasury and IRS have published final regulations governing federal income tax withholding from periodic payments of deferred income made after December 31, 2020. The new regulations follow changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) to the default withholding rate rules. Payors and plan administrators who hoped that the IRS would set out predictable and uniform standards will be disappointed: while the regulations remove the pre-TCJA default withholding rate, they do not replace it with a new default rate. Instead, the Commissioner of the IRS will be responsible for providing sub-regulatory guidance to determine the default rate. At least for calendar year 2021 distributions, however, there appears to be no need for payors and plan administrators to worry about the transition to a new default-rate-determination method.
Continue Reading IRS Final Regulations on Default Withholding Rates for Periodic Deferred Income Distributions: No Changes for 2021, but Future Rates Not Clarified

The IRS recently released Notice 2020-3, which provides interim guidance on default federal income tax withholding rates applicable to certain periodic payments of deferred income.  The Notice also provides clarity as to how the IRS will accommodate a change that affects the form used to elect federal income tax withholding from wages, but not the form used to make those elections for deferred income distributions.
Continue Reading IRS Issues Interim Guidance on Income Tax Withholding from Deferred Income Distributions

In 1987, the IRS released Notice 87-7 providing guidance on whether certain recipients of payments from employer deferred compensation plans, individual retirement plans, and commercial annuities are subject to federal income tax withholding under section 3405.  The notice provided that:

  • payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address outside the United States;
  • payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address inside the United States, unless the payee has elected no withholding in accordance with section 3405; and
  • payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address outside the United States.

Continue Reading Proposed 3405 Withholding Regulations Three Decades in the Making

The Treasury Inspector General for Tax Administration released a partially redacted report on May 20 asserting that the IRS has failed to take steps to address nearly $2 billion in discrepancies between withholding reported on withholding tax returns and withholding reported on information returns.  The TIGTA report found that 7,265 taxpayers reported nearly $925 million in withholding on Forms 1099 and W-2G in 2016 but failed to file a Form 945, Annual Return of Withheld Federal Income Tax.  In the same year, another 3,163 taxpayers reported $760 million more in withholding on Forms 1099 and W-2G than they reported on the Form 945.  Conversely, the report found 3,527 taxpayers who reported a total of $241 million more in withholding on the 2016 Form 945 than they reported on Forms 1099 and W-2G.
Continue Reading TIGTA Chides IRS for Lax Non-Payroll Withholding Enforcement