Little Change, But Some Relief, in IRS' Final Cost-Basis Regs
October 13, 2010
The Internal Revenue Service’s final regulations on how financial firms would have to comply with cost-basis reporting requirements effective beginning January 2011 have done little to assuage the overriding concerns of the securities industry, but offer some relief.
In its final regulations issued late Monday, the IRS said that it will generally allow financial firms which transfer customer accounts between each other a one-year reprieve on any penalties in not filing the appropriate paperwork with each other about the customer’s cost basis
“Although the IRS did not delay the implementation date of the cost-basis accounting rules as many industry executives would have wanted it did ease some of the requirements,” explains Stevie Conlon, senior director and tax counsel from the Waltham, Ma. office of Wolters Kluwer Financial Services, which offers accounting software to accommodate cost-basis reporting
Beginning on January 1, 2011, brokerage firms, mutual fund companies, custodian banks and transfer agents will be required for the first time for equities accounts to track and report the cost of a securities transaction to both the Internal Revenue Service and the investor. Although some firms did so previously, it was only on a voluntary basis and they did not have to guarantee the accuracy of the information.
For mutual funds the regulations come into effect on January 1, 2012 and for debt instruments, options and other securities on Jan 1, 2013. Firms may voluntarily decide to follow the rules for securities accounts opened prior to those dates.
In its final regulations issued late Monday, the IRS said that it will generally allow financial firms which transfer customer accounts between each other the one-year reprieve on any penalties they might have faced for not filing the appropriate paperwork with each other about the customer’s cost basis in the securities being held. The penalty would have been $100 for each return that should have been filed, subject to an annual limit of $3 million.
The IRS is also permitting financial firms which transfer accounts related to an inheritance to rely on their own calculations of the value of the account rather than having to wait for calculations provided by the trustee of the estate of the deceased person.
Such a practice confirms with current industry practice and avoids processing delays for the broker-dealer.
Brokerage firms which have active traders as customers will also not be required to calculate the cost-basis of wash sales as long as the traders indicate to the broker dealer that they are willing to have the broker-dealer value their accounts on a mark-to-market basis.
“Brokerage firms have to optimize their accounting systems based on the expected volume of wash sale transactions which are affected by transaction volumes,” says Conlon. “Therefore, exempting traders with high trade volumes that would have otherwise adversely impacted the performance requirements of operating systems is significant,” explains Condon.
Adapting to the new cost-basis requirements is no easy task. Firms will need to make adjustments to most of their customer interfaces, middle office accounting and tax systems, securities masterfiles and client reporting systems. For starters, firms will need to build or buy tax lot accounting systems. In addition to Wolters Kluwer's others are offered by Scivantage; DST; SunGard Data Systems; Networth Services and Broadridge Financial Services.
