COVID-19: IRS Insights for IRA Owners, Guidance Needed for IRA Providers

Morgan Lewis
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Morgan Lewis

All IRA owners have until July 15, 2020 to make IRA contributions for 2019 and pay early distribution penalties for 2019, but a few questions remain on deadlines and reporting for IRA providers.

On March 13, 2020, the president of the United States issued an emergency declaration in response to the coronavirus (COVID-19) pandemic and instructed the secretary of the US Department of the Treasury to provide taxpayers adversely affected by the pandemic with relief from tax filing and payment deadlines. On March 23, 2020 the Internal Revenue Service (IRS) provided this guidance in Notice 2020-18 (which supersedes prior guidance published in IRS Notice 2020-17).

In Notice 2020-18, the IRS specifies that any “person,” which includes any individual owner of an individual retirement account or annuity (IRA), with a federal income tax payment or federal income tax return due April 15, 2020, is an “affected taxpayer” and now has until July 15, 2020 to make such payment or file such return. IRA owners do not have to file Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return) in order to take advantage of the postponed deadlines.  

On March 24, 2020, the IRS provided answers to frequently asked questions related to the relief provided in Notice 2020-18.  The answers are in the form of FAQs (Filing and Payment FAQs) and address, in part, what Notice 2020-18 means for IRA owners (please note we are referencing the FAQs as of March 25, understanding that the IRS may subsequently update them). While the answers to the FAQs provide responses to general inquiries and are not citable as legal authority, they provide helpful insights into IRS policies and interpretations of tax law.

In the Filing and Payment FAQs, the IRS confirmed the following:

  • July 15, 2020 Is the IRA Annual Contribution Deadline for 2019. Annual contributions to IRAs for a calendar year are generally due by the due date for filing tax returns for that year, excluding extensions. For most IRA owners, the deadline for making annual contributions for the prior calendar year is April 15 of the current year. However, as a result of the relief granted in Notice 2020-18, the deadline for all IRA owners to make annual IRA contributions for 2019 has been extended to July 15, 2020.
  • July 15, 2020 Is the Payment and Reporting Deadline for 2019 Early Distribution Penalty Tax. If the owner of an IRA takes a distribution before he or she reaches age 59½, the distribution will be subject to a 10% additional penalty tax on the amounts includible in gross income on the distribution unless one of the limited exceptions applies. If an IRA owner owes the 10% penalty tax for an early distribution taken in a prior calendar year, payment is due by the due date for filing tax returns for that year without extensions. The IRA owner is also required to report the additional tax on IRS Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) by the same deadline. As a result of the relief granted in Notice 2020-18, the deadline for all IRA owners to report and pay the 10% additional tax for early distributions taken in 2019 has been extended to July 15, 2020.

A Few Open Issues Still Remain

Hopefully, the IRS will provide additional clarification and guidance on the following outstanding issues:

  • IRA Owners Need Clarification on Deadlines Related to Excise Tax on Excess IRA Contributions. The Filing and Payment FAQs do not specifically address whether and how the relief in Notice 2020-18 applies to the 6% excise tax on excess IRA contributions made in 2019 or whether Notice 2020-18 extends the deadline (currently, April 15, 2020/October 15, 2020, with a regular extension) for withdrawing a 2019 excess contribution and any related earnings to avoid the 6% excise tax.
  • IRA Providers Need Guidance on Form 5498 Reporting for 2019 IRA Contributions. Notice 2020-18 states that it does not extend the deadline for the filing of any federal information return, which includes IRS Form 5498 (IRA Contribution Information). This presents a complication for reporting 2019 IRA contributions. The current deadline to file Form 5498 with the IRS and provide copies to IRA owners for 2019 IRA contributions is June 1, 2020. To ensure that all contributions for 2019 are captured on the Form 5498 and IRA providers have adequate time to prepare the Form 5498, hopefully the IRS will extend the Form 5498 reporting and disclosure deadline to some time in September 2020.

Implications and Next Steps for IRA Providers

Based on the Filing and Payment FAQs, IRA providers may want to consider taking the following steps:

  • Review communications addressing the deadline for making IRA contributions for 2019. If any communications hardwire April 15, 2020 as the IRA contribution deadline for 2019, consider sending notices to IRA owners informing them of the extended deadline.
  • Review IRA contribution forms and make updates if needed to reflect the IRA contribution deadline for 2019.
  • Address any operating system restrictions to ensure that 2019 IRA contributions made by the July 15, 2020 deadline are coded properly for 2019.
  • Remain in contact with legal advisors and track additional IRS guidance on developments that might address the unanswered questions about the filing deadline for Form 5498, the 6% excise tax, and the deadline for withdrawing 2019 excess contributions and related earnings.

On a related note, legislation pending before Congress would temporarily waive required minimum distributions for IRAs (and defined contribution plans) for 2020 and permit certain “coronavirus-related distributions” to be made free from early distribution penalties.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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