The greatest distinction of criminal Alphonse “Scarface” Capone is that he is, still, the best-known person ever to appear on the FBI’s “Ten Most Wanted List.” But what is not as well-known is the reason why he was eventually imprisoned in 1933. “Public-enemy No. 1” was jailed for tax evasion. He had incorrectly reported his income in previous years.
The important lesson here is that stronger penalties apply to a failure to file then those for a failure to pay. So, always file, even if you can’t pay.
And pay attention to any new filing requirements, such as those that were included in the Tax Cuts and Jobs Act of 2017 (TCJA). Probably no one will do time for failure to comply – certainly non-intentionally – but hassles, back taxes, penalties, and advisor fees can be avoided if they are attended to up front.
The Reportable Policy Sales (RPS) Rules
New regulations that require parties to a transfer of policy ownership give proper notice to the IRS are aimed primarily at viaticals and life settlements. The problem is that the requirements are broad enough that they also touch other policy transfers that don’t involve a viatical or life settlement buyer. Consider:
Many policy ownership changes are considered “transfers-for-value” under the IRC that subject the death benefit to income taxation on a large portion of the death benefit.
There were previously few regulations that alerted the IRS to the fact that these transfers-for-value were taking place. As a result taxable death benefits were not being tracked and the government was losing the revenue that should have resulted from assessments against these policies.
The TCJA seeks to remedy this situation by requiring that proper notice be filed when a policy transfer takes place that is likely to be a transfer-for-value.
A Reportable Policy Sales is the acquisition of a life policy by a party that has no substantial family, business or financial relationship with the insured independent of the interest in the life policy being transferred.
If a transfer meets the definition of an RPS then the party acquiring the policy has the duty to provide a Form 1099-LS to the IRS, the carrier, and the previous owner of the policy. The carrier has a responsibility to provide a Form 1099-SB to the previous owner and the IRS and also a Form 1099-R to the owner and the IRS upon the death of the insured.
The difficulty is that the transfers touched by the requirements go beyond conventional outright sales of policies in viatical or life settlement transactions. They can apply to many policy transfers in a business environment and may even apply is some domestic/family changes in ownership.
We have included two important pieces from Principal Financial that provide both a summary of the regulations and extensive Q&As that address many questions you, your client, and your client’s advisors will have concerning these new requirements.
Download Regulations Overview
Download Regulations Q&A
Call with questions on or for assistance in determining whether a policy ownership change you are involved in may require the filings imposed by the new law, at 706-354-0401 or tom@cpsadvancedmarkets.com.
Another little-known fact concerning “Big Al” is that he had a big brother who left home to join the circus when Capone was 9 years old. The brother later became one of most respected and efficient Prohibition enforcement officers in the country, as well as a loving husband and father of four sons. Hardly like two peas from the same pod, as the saying goes.