Form 8831 - Jan 2012

IRS Form 8831: Excise tax on excess inclusions from REMIC residual interests

What is Form 8831?

Form 8831 is the IRS form used to report and pay excise taxes on excess inclusions from REMIC residual interests. A REMIC (Real Estate Mortgage Investment Conduit) is an entity that holds a pool of mortgages and issues interests to investors. The residual interest receives whatever is left after the regular interests are paid.

Residual interests can generate excess inclusions, which is taxable income that generally cannot be offset by losses or deductions. The tax code discourages shifting that income to organizations that would otherwise avoid tax on it. Form 8831 is how the resulting excise tax is calculated and paid.

The form covers three specific charges under section 860E:

• Excise tax on transferring a REMIC residual interest to a disqualified organization
• The reduced amount due when that tax is waived after the interest is moved back out
• Excise tax on pass-through entities that hold residual interests for a disqualified record holder

Who needs to file Form 8831?

Filing applies to a narrow group who deal with REMIC residual interests, not to typical individual taxpayers. You generally need Form 8831 if either of these situations applies to you:

• You transferred a REMIC residual interest to a disqualified organization after March 31, 1988.
• You run a pass-through entity that allocated excess inclusions to a disqualified organization holding a record interest.

Pass-through entities here include real estate investment trusts, regulated investment companies, partnerships, trusts, estates and common trust funds. A separate Form 8831 is filed for each transfer, and a separate form is used if you owe tax under both parts.

What counts as a disqualified organization?

The excise tax exists because certain organizations would otherwise escape tax on excess inclusions. Knowing which entities are disqualified is central to whether the form applies to you. The following are treated as disqualified organizations:

• The federal government, any state or local government, any foreign government and their agencies or instrumentalities, with limited exceptions
• Tax-exempt organizations not subject to the unrelated business income tax, other than certain farmers' cooperatives
• Cooperatives described in section 1381(a)(2)(C)

If the transferee or record holder is none of these, the excise tax generally does not apply. This is why documenting the recipient's status matters so much.

How the excise tax is calculated

The tax is tied to the highest corporate tax rate under section 11, which is currently 21 percent. That rate is applied to the relevant excess inclusion amount depending on which part of the form you complete. The figure changes only if the top corporate rate itself changes in the future.

For a transfer, the tax is 21 percent of the present value of excess inclusions expected to accrue after the transfer. If the interest is moved back out within a reasonable time, a smaller amount based on the inclusions that actually accrued can be paid instead.

For pass-through entities, the tax is 21 percent of the excess inclusions allocable to the disqualified holder. This part of the tax is reported and paid separately from any transfer tax.

When and how to file Form 8831

Deadlines depend on which tax you owe, and meeting them avoids interest and late filing penalties. The main filing rules are:

• For a transfer, file and pay by April 15 of the year after the calendar year of the transfer.
• For a pass-through entity, file and pay by the 15th day of the fourth month after the entity's tax year ends.
• Use Form 7004 if you need more time to file, though it does not extend the time to pay.

Form 8831 is a paper form and is filed on its own rather than attached to the REMIC income tax return on Form 1066. Mail it to the IRS address shown on the current form, and pay any balance by check or through the Electronic Federal Tax Payment System.

How to avoid the tax with an affidavit

In many cases the excise tax can be avoided before it ever applies. The tax code provides relief when you can show the recipient is not a disqualified organization. You can generally be relieved of the tax if you obtain a signed affidavit that either:

• Provides the transferee's or record holder's social security number
• States that the party is not a disqualified organization

This relief applies as long as you do not have actual knowledge that the affidavit is false. Collecting the affidavit at the time of the transfer is the simplest way to stay protected.

Need to file Form 8831?

Lumin provides a fillable Form 8831 template that makes it easy to report and pay excise tax on excess inclusions from REMIC residual interests. Complete the required information, review the form, then download it when it's ready to submit. Get started with Lumin for free.