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IRS Issues Tax Relief on Prohibited Transactions

By Alex Padalka March 29, 2017

The Internal Revenue Service is providing excise tax relief to align with the Department of Labor’s recently issued temporary policy on its fiduciary rule.

Under the new guidance, the IRS will not apply an excise tax nor any related reporting requirements on prohibited transactions to which the DOL’s temporary enforcement policy would apply, according to the IRS.

Prior to the guidance, the IRS would have charged a 15% excise tax on prohibited transactions as defined by the DOL’s fiduciary rule as it was published last year. The excise tax rises to 100% if the transaction isn’t corrected within the tax year, according to the IRS.

The rule, which purports to require brokers to put clients’ interests first, was scheduled to go into effect April 10. But the DOL has proposed a 60-day delay earlier this month, after a memorandum from president Donald Trump directed the agency to review the rule. The DOL has since issued a temporary enforcement policy that in effect says it will not go after firms that don’t immediately comply with the rule, since the fate of the delay itself is uncertain.

Under the DOL’s guidance, advisors who don’t comply with the rule immediately will be off the hook if they take appropriate steps to comply “within a reasonable period” after a decision to delay the rule is reached, even if the decision is reached after the April 10 scheduled implementation date.

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The IRS says it recognizes that it’s bound by the DOL’s interpretation of a prohibited transaction in imposing excise taxes, and is therefore providing temporary relief, the IRS says in its guidance.

The ultimate fate of the fiduciary rule remains in limbo. But Alexander Acosta, Trump’s nominee to head the DOL and who’s expected to sail through his Senate confirmation, said he intends to fully abide by Trump’s directive to review the rule and its effect on investors and the advice industry.