2022 post-filing season update

Secure Act RMD requirements

The IRS issued proposed regulations that would implement the required minimum distribution (RMD) changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (NPRM REG-105954-20). The proposed regulations would generally apply to calendar years beginning on or after January 1, 2022. For 2021 distribution calendar year, taxpayers must apply the existing regulations, but take into account a reasonable, good faith interpretation of the SECURE Act changes. Compliance with the proposed regulations satisfies the requirement to take into account SECURE Act changes.

The proposed regulations provide a number of changes, including:

• that if an employee in a plan who dies before the SECURE Act effective date has more than one designated beneficiary, whether the SECURE Act changes apply turns on the on when the oldest of those beneficiaries dies;
• that for ease of administration, the SECURE Act’s effective date language applies to an employee who died before attaining age 70 ½ if the employee would have attained age 70 ½ on or after January 1, 2020;
• that a child of the employee reaches the age of majority on that child’s 21st birthday for purposes of determining eligible designated beneficiary status; and 
• that if the employee has a designated beneficiary who is an eligible designated beneficiary, the plan may provide either that the 10-year rule applies or that the life expectancy payments rule applies.

Payments from individual retirement accounts

The IRS has provided guidance on whether a series of payments from an individual account under a qualified retirement plan is considered a series of substantially equal periodic payments within the meaning of Code Sec. 72(t)(2)(A)(iv) (Notice 2022-6). The guidance applies for purposes of determining whether a distribution from a non-qualified annuity contract is part of a series of substantially equal periodic payments within the meaning of Code Sec. 72(q)(2)(D).

Payments in a series are considered substantially equal periodic payments within the meaning of Code Sec. 72(t)(2)(A)(iv) if they are determined in accordance with one of the following three methods:

• The required minimum distribution method. The annual payment for each distribution year is determined by dividing the account balance for that distribution year by the number of years from the chosen life expectancy table for that distribution year. Under this method, the account balance, the number of years from the chosen life expectancy table, and the resulting annual payments are redetermined for each distribution year. This redetermination of the annual payment is not considered a modification of the series of substantially equal periodic payments, provided that the required minimum distribution method continues to be used and the same life expectancy tables continue to be used, except to the extent required in the notice.
• The fixed amortization method. The annual payment for each distribution year is determined as the amount that will result in the level amortization of the account balance over a specified number of years determined using the chosen life expectancy table under the notice and an interest rate that is permitted pursuant to the notice.
• The fixed annuitization method. The annual payment for each distribution year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the employee’s age and continuing for the life of the employee (or the joint lives of the employee and designated beneficiary).

Taxpayers may use one of the methods above to determine whether a distribution from a non-qualified annuity contract is part of a series of substantially equal periodic payments under Code Sec. 72(q)(2)(D). The guidance is applicable for any series of payments commencing on or after January 1, 2023, and it may be used for a series of payments commencing in 2022.

Developments for businesses

Schedules K-2 and K-3

The IRS has provided further details on additional transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the transition to these new schedules (Notice 2021-39). Those eligible for the relief did not have to file the new schedules for tax year 2021. The new schedules K-2 and K-3 improve reporting by standardizing international tax information to partners and flowthrough investors, making it easier for them to report these items on their tax returns. The changes ease flow-through return preparation compliance by clarifying obligations and standardizing the format for reporting. Penalty relief for good-faith efforts to adopt new schemes is also provided. This transition relief, appearing in the new frequently asked questions (FAQs) on Schedules K-2 and K-3, allows an additional exception for the tax year 2021 filing requirements by certain domestic partnerships and S corporations.

The following conditions must be met to qualify for this exception:

• In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
• In tax year 2021, the domestic partnership or S corporation had no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign source income.
• In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto): (1) Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120- S), and (2) Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, Code Sec. 250, Code Sec. 864(c)(8), Code Sec. 721(c) partnerships, and Code Sec. 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021. If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation need not file Schedules K-2 and K-3 with the IRS or with its partners or shareholders. However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete its tax return, then the partnership or S corporation must provide the information to the partner or shareholder. If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.

Notices of employment tax determination

The IRS has provided guidance on when and how it will issue a notice of employment tax determination under Code Sec. 7436, and how taxpayers petition for Tax Court review of certain IRS determinations under Code Sec. 7436 (Rev. Proc. 2022-13). Under the guidance, the IRS will issue a Section 7436 notice as part of an audit if one or both of the following determinations is made and there is a controversy regarding the determination:

1. one or more individuals performing services for the taxpayer are to be reclassified as employees for federal employment tax purposes; or
2. the taxpayer is not entitled to “section 530” relief.

Even if a Section 7436 notice is not issued, a taxpayer can petition the Tax Court on an IRS determination on worker reclassification or “section 530” relief to the extent that the determination meets the requirements set forth in Tax Court opinions as explained in the guidance. Other determinations by the IRS in connection with proposing employment tax adjustments are not subject to review by the Tax Court. This revenue procedure is effective on February 7, 2022.

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