IRS Issues New Guidelines for Cost-Basis Reporting
December 18, 2009
With its proposed new guidelines on reporting the cost basis of securities, the Internal Revenue Service appears to have rebuffed most of the financial services industry’s requests and created more cumbersome provisions than anticipated, say industry experts.
The IRS is seeking comment by Feb. 8 on the guidelines (known as Reg. 101896-09) published on Dec. 17 in the Federal Register.
Included in the Emergency Economic Stabilization Act of October 2008, the new cost-basis accounting rules will require U.S. broker-dealers and other financial intermediaries to report the accurate cost-basis of their investors’ accounts on 1099 forms they provide to clients each January and on forms they give the IRS.
Although the IRS has yet to issue final guidelines it isn’t ready to postpone the timetable for implementing cost-basis reporting – reporting of the original cost of purchasing securities.
The new policies will be effective as of January l, 2011 for equity shares purchased after that date. By January 1, 2012 financial intermediaries and asset managers will have to do so for mutual funds and dividend reinvestment plans. By January 1, 2013 other financial instruments, such as debt issues, options and private placements must comply.
“The securities industry had been expecting a delay in the effective date of the new regulations because if the IRS’ final guidelines come out in May or June, firms will have only six months to prepare,” says Stevie Conlon, tax director of the Gainskeeper tax lot accounting software product for Wolters Kluwer Financial in Minneapolis.
Although some of the largest brokers, mutual funds, custodian banks and clearing firms offer cost-basis reporting as a customer service, so far they have only been required to report to the Internal Revenue Service, the gross proceeds of their clients’ stock, mutual fund and other sales of accounts on 1099 forms. As a result, the IRS has relied largely on investors to come up with the own calculations on their Schedule D forms. Investors typically obtain that information by calling up the corporate issuer or their financial intermediary and there is no way for the IRS to know whether those calculations are accurate.
The proposed regulations clarify that the new cost-basis reporting rules will apply not only to broker-dealers but also transfer agents, custodian banks and mutual funds who might not have been involved with the sale of the securities account. Transfer agents administer the accounts of registered shareholders – those who are registered on the books of issuers under their own names. By contrast, broker-dealers deal with Street-name shareholders who hold their accounts in the name of their financial intermediaries. However, most investors who participate in dividend reinvestment programs (DRIPs) do so through transfer agents.
Penalties for non-compliance will be steep. Broker dealers, mutual funds and others that provide the IRS and inves tors with inaccurate 1099 forms will be fined $100 for each mistake, up to a maximum of $350,000 annually. If the IRS considers an error to be international, it will levy even higher penalties.
Among the most cumbersome of the new proposed requirements, according to Nico Willis, chief executive of Phoenix-based Net Worth Services, is that broker-dealers and other financial intermediaries must immediately file corrected tax forms with the IRS when they receive corrected information.
