Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel
Tax season is upon us. It’s time to re-read those form instructions and find those IRS.gov bookmarks in your browser. While tax law is complex and requires a high level of specialization, we have collected a selection of tax-related frequently asked questions to make your lives a little easier:
When are marketing bonuses or incentives reportable to the IRS? What form should be used?
It depends on whether the bonus is paid in connection with a deposit account (e.g., a “bonus” under the Truth in Savings definition at 12 C.F.R. § 707.2(e)) or as part of some other incentive program.
The IRS defines interest as amounts paid for the use or forbearance of money, which includes amounts, whether or not designated as interest, paid on savings accounts and other deposit arrangements. See, Internal Revenue Bulletin No. 2000–28 (July 10, 2000). Under 26 U.S.C. § 6049, the IRS treats cash premiums paid with respect to opening accounts as interest which must be reported, if it aggregates to $10.00 or more a year. A 1099-INT would need to be issued for these payments.
Note the slight difference between the IRS threshold ($10 or more) and the NCUA’s de minimus rule regarding bonuses under Truth in Savings (more than $10). See, 12 C.F.R. Pt. 707, Appendix C, comment 707.2(f)-4. Where an incentive of exactly $10 is paid to open an account – it would not be a bonus under NCUA’s Truth in Savings regulation which would require disclosure – but it would be interest under the IRS rules and reportable on the 1099-INT.
Income that doesn’t meet the definition of interest under the IRS rules, such as loan incentives, are reportable as miscellaneous income on the 1099-MISC, if the reporting threshold is met. Under 26 U.S.C. § 6041, the payments should be reported if all miscellaneous payments to the member aggregate to $600.00 or more a year.
There is some disagreement about whether to report on a 1099-INT or 1099-MISC where an incentive is offered in exchange for contracting for multiple services. Credit unions might wish to speak with a tax professional to determine how to report such an incentive payment.
We have some members that are tax exempt. Do we still need to send a 1099-INT for them?
A credit union is not be required to report interest or dividend payments (which are interest for IRS reporting purposes) made to an exempt recipient. This is an excerpt from the Instructions to Form 1099-INT:
“Exceptions to reporting. No Form 1099-INT must be filed for payments made to exempt recipients or to interest excluded from reporting.
Exempt recipients. You are not required to file Form 1099-INT for payments made to certain payees including but not limited to a corporation, a tax-exempt organization, any IRA, Archer MSA, Medicare Advantage MSA, health savings account (HSA), a U.S. agency, a state, the District of Columbia, a U.S. possession, a registered securities or commodities dealer, nominees or custodians, brokers, or notional principal contract (swap) dealers. For additional exempt recipients, see Regulations section 1.6049-4 for more information.”
These exemptions are codified in 26 C.F.R. § 1.6049-4(c)(1)(ii)(A)-(B).
Can a credit union be held liable if an ACH payment of an IRS tax refund is sent to a wrong or fraudulent account?
The Department of Treasury hosts a website containing Frequently Asked Questions for financial institutions regarding direct deposit of IRS tax refunds. Among other information, it states that a receiving depository financial institution (RDFI) is not liable for IRS tax refunds sent to erroneous or fraudulent accounts when the IRS provided incorrect information. An RDFI may rely on the account number only, and is not required to match the name on the account. If the RDFI learns that the refund has been misdirected to the wrong account, it must notify the government of the error, and, while it is not required to return the funds, it is encouraged to do so if they are still available. For more detail, see the Treasury’s guide to federal ACH payments, referred to as the Green Book, Chapter 2, page 7.
NACHA has implemented an opt-in program to allow RDFIs to more easily reject refunds where the name mismatches the account or fraud is suspected. For more information about that program, consult the Treasury’s website.
What should a credit union do if it receives a federal payment for a deceased member?
It depends on what kind of federal payment it is. Some federal benefits, such as social security benefits, are subject to reclamation and others are not. The Green Book, Chapter 5, page 4 contains a table identifying which payments are subject to reclamation.
As an example, the Social Security Administration requires that benefits be returned for the month in which the member died (which would be paid out in the subsequent month). This fact sheet gives some background. Chapter 5 of the Green Book provides detailed reclamation procedures and liability calculations.
On the other hand, IRS tax refund payments sent through the ACH network are not subject to reclamation. If a credit union receives a tax refund for a deceased member, it is not required to take any further action. See, U.S. Department of Treasury’s Direct Deposit of Tax Refunds FAQ website.
NAFCU members with additional questions this tax season should not hesitate to reach out to the Regulatory Compliance Team.
Kaufman & Canoles 2016 Credit Union Legal Predictions
The Winter 2016 issue of Kaufman & Canoles Credit Union Legal Update has been released. It makes six predictions for the legal concerns of credit unions in 2016. Have a look to see their predictions for medallion issues, class action litigation, foreclosures, TRID compliance, mergers and employment issues.