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Resource Center—your source for essential cost basis reporting
law compliance information.
Cost basis reporting is law. The Final Phase 3 Regulations Pose Severe Compliance Challenges for Brokers
On April 17, 2013 the IRS released final regulations (TD 9616) setting forth the cost basis reporting rules relating to Phase 3 covered securities—debt instruments and options. The IRS also issued new Temporary Regulations under Internal Revenue Code ("Code") Section 6049 that accompanied the Final Phase 3 Regs. READ THE FINAL REGS.
- The difficulties making the required calculations for more complex debt mean firms that have not begun developing these rules may be at risk of not meeting the Phase 3 Jan 1, 2014 requirements on time.
- Additionally, systems based on traditional portfolio accounting rules—rather than actual tax rules and tax required data, will likely result in incorrect calculations and significant regulatory penalty risks.
Wolters Kluwer Financial Services has been a leader educating the industry about this law and about the technology and information complexities that need to be addressed to meet its requirements. Additionally, we offer both the tax intelligence expertise and the technology to help you comply.
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The Final Phase 3 Regs impose a calculation conformity requirement between basis reporting calculations (on Form 1099-B) and interest & OID reporting (on Forms 1099-INT & OID) that did not previously exist. Dated or inadequate systems for Form 1099-INT or OID and the need to calculate adjusted basis for transfers reported during the year before 1099s are prepared will force upgrades to such systems and their reconciliation with basis reporting systems.
Brokers will likely need to make significant investments in understanding the specialized tax rules for debt, options and single stock futures (SSFs) in order to determine the data requirements and specialized calculations needed to comply with the basis reporting rules of the Final Phase 3 Regs.
Brokers will need to be prepared to make additional changes to their reporting processes due to necessary revisions to Form 1099-B to take into account the new rules contained in the Final Phase 3 Regs. Revised forms could be issued more than once. And the expanded calculation rules for determining basis adjustments for debt could result in additional changes in the existing Form 1099-INT & OID reporting rules besides the changes to interest and OID reporting that the Temp Bond Premium Offset Regs will require.
Up To $3 Million in Potential Penalties
There is a significant tax penalty risk if the basis and holding period information reported on Form1099-B is incorrect. Reporting penalties were increased under the Small Business Jobs Act of 2010 (P.L. No. 111-240) enacted on Sept. 27, 2010. There are separate penalties for 1099s provided to the IRS and 1099s provided to taxpayers, and they aggregate to $100 per incorrect 1099 with a maximum annual aggregate of $1,500,000 each ($3m total). Errors due to intentional disregard have a minimum $250 per return with a penalty amounting to the greater of either the minimum or 10% of the amount that should have been reported, with no maximum annual limit. Penalty for incorrect 8937 is the same as for 1099s.
On Friday, October 3rd, 2008, President George W. Bush
signed H.R. 1424, the Emergency Economic Stabilization
Act of 2008 into law (the Act, Pub. L. No. 110-343). The
law requires cost basis reporting by brokers to the Internal
Revenue Service (IRS) and to taxpayers. The initial effective
date for cost basis reporting for most stocks applies to
stock acquired on or after January 1, 2011; for mutual
funds and dividend reinvestment plan stock (or similar
arrangements) acquired on or after January 1, 2012; and
for debt instruments, options and other covered securities
acquired on or after January 1, 2013. The provision is
scored to raise $6.67 billion over a ten year period. To
review the law, click
here and go to Title IV, Section