The Internal Revenue Service is getting ready to print the final version of major new life insurance policy sale tax reporting regulations in the Federal Register, on Halloween.
The new IRS regulations show how life insurance policyholders, life insurers, agents, life settlement providers, and others are supposed to comply with the new transaction rules created by the Tax Cuts and Jobs Act of 2017 (TCJA).
The statute added Section 6050Y to the Internal Revenue Code.
IRC Section 6050Y requires “every person who acquires a life insurance contract or any interest in a life insurance contract in a reportable policy sale” to create a transaction notice.
The notice must give the name, address and taxpayer identification number of the policy buyer; the names, addresses and taxpayer identification numbers of each recipient of the payments; the date of the sale; the name of the policy issuer; the policy number of each contract involved; and the amount of each payment.
The policy buyer is supposed to send a sale statement to each person listed on the notice.
The IRS released draft IRC Section 6050Y regulations in March.
In the new final regulations, IRS officials use the term “life settlement” several time.
But IRC Section 6050Y itself never uses the term life settlement, and the title of the new final regulation packet is “Information Reporting for Certain Life Insurance Contract Transactions and Modifications to the Transfer for Valuable Consideration Rules.”
Officials use the term “life settlement” only in the “preamble,” or introduction, to the regulations, not in the official text of the regulations.
It’s possible the IRS or another state or federal agency could end up applying the 6050Y reporting requirements to life insurance policy sales that are not typically thought of as being life settlement transactions.
Brokers, Escrow Agents and Actuaries
In a typical life settlement transaction, a consumer who has a life insurance policy might use a broker to offer the policy to a life settlement provider, through a “secondary market” transaction. The life settlement provider, in turn, might sell one or more policies to investors, such as pension funds, private equity funds or ordinary mutual funds, through a “tertiary market” transaction.
Commenters involved in the life settlement sector asked the IRS to eliminate or reduce IRC 6050Y reporting obligations for many of the players in the market, such as the tertiary market investors.
Commenters told the IRS that some companies, such as a securities firm or a tertiary market player, could end up holding official title to a policy without knowing enough about the policy to fill out a 6050Y form.
IRS officials say in the preamble to the regulations that they decided to require tertiary market investors to comply with the 6050Y reporting requirements.
If parties have set up simultaneous life insurance policy transfers, or a ”series of prearranged transfers,” to accomplish a policy sale, the parties can have one of the acquirers, or a contractor, handle the 6050Y reporting, through a “unified reporting” process, officials say.
If any party, other than the policy seller, receives less than $600 in payments in connection with an otherwise reportable policy sale, that party does not have to file a 6050Y report, officials say.
IRS officials talk about what will happen if some parties, such as the policy seller and the ultimate policy owner, fail to provide the information that the other parties need to comply with Section 6050Y.
A party that has made a good faith effort to comply can ask for a waiver of the usual 6050Y violation penalty, officials say.
“The filer must show that the failure was due to a failure of another person, who is required to provide information to the filer that is necessary for the filer to comply with information reporting requirements, to provide information, or to provide correct information,” officials say. “In addition, a filer seeking a waiver based on reasonable cause must establish that it acted in a responsible manner both before and after the failure.”
The new reporting requirements will apply to reportable life insurance policy sales made after Dec. 31, 2018, and to reportable death benefits paid after Dec. 31, 2018.
The effective date for other purposes, such as taxable amount calculations, will be Thursday, according to the text of the regulations.
A link to a preview copy of the IRC 6050Y final rule is available here.
— Read Life Settlement Players Struggle With Tax Form Void, on ThinkAdvisor.