The evolving tax reporting laws continue to create significant challenges for financial institutions. When the Internal Revenue Service (IRS) releases new rules, many organizations, during the open comment period, carefully review the proposed mandates and provide both analysis and recommendations on the complex reporting requirements. On May 13, 2013, the IRS announced it was issuing the proposed and temporary regulations, 1.6049-9T. These guidelines relate to the reporting of bond premium and acquisition premium, subject to reporting for a debt instrument acquired on or after January 1, 2014.
Responding to the IRS’ request for comments on the regulations, the Information Reporting Program Advisory Committee (IRPAC) opined and made suggestions on several of the IRS proposed adoptions. In its comment letter to the IRS, IRPAC addresses a variety of issues, including reporting for market discount, premiums and the handling of tax exempt original issue discount, as well as final regulations regarding Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options.
Further, IRPAC offers several proposals to address the burden of supporting the various elections that provide taxpayers with information required to complete their tax returns, and details numerous recommendations for taxpayer resources to complement information returns; returns that will be useful to compile the most accurate tax returns and smoothest implementation of the new requirements.
Among IRPAC’s recommendations:
- – Instructions to the recipients of payee statements should stress that although the forms have been enhanced to provide additional useful information, the taxpayer should exercise even more care to identify amounts that do not appear on the statements but must be considered when completing the tax return.
- – Firms that use substitute payee statements should be given the latitude to vary the labeling of the boxes containing interest to indicate explicitly when the reported amount is net of premiums.
- – To help standardize income reporting on fixed income instruments, it would be practical and efficient to treat market discount as interest.
IRPAC also asserts that there are scenarios that can’t be fully anticipated by the information reporting program. Taxpayers have expectations that the enhanced information returns are all inclusive of the information they need; thus it is critical that the IRS provide resources that advise taxpayers of their ultimate responsibilities. These will provide an outlet to which brokers can refer taxpayers if and when questions arise.
IRPAC suggests that the IRS establish a cost basis web page for taxpayers, that explains the elections available and what can be expected of the financial institution. IRPAC said the IRS should also illustrate circumstances in which the information return might be insufficient for accurate completion of a tax return, and guide the taxpayer toward any required adjustments to income beyond what is reported on the information return.
In its comment letter, IRPAC noted that the IRS should ensure that instructions to recipients of information returns stress the taxpayer responsibility to guarantee the accuracy of the information, determine what information is not included and adjust accordingly on his or her tax return when certain scenarios are encountered. The instructions, said IRPAC, should stress that a corrected payee statement is not always the appropriate remedy for a situation.
Additionally, the organization suggests that the IRS should emphasize instructions provided to the broker by the taxpayer do not constitute effective election or revocation under the applicable rules for the election, and the taxpayer is responsible for the accurate completion of a tax return regardless of what is contained in the information return.
Cost basis reporting requirements are extremely complex and with the looming new developments, firms that do not begin preparing and streamlining operations will struggle to meet the IRS regulatory requirements as each proposed addition is finalized. As the largest cost basis reporting product in the industry, Scivantage Maxit® has transformed the way broker-dealers, mutual funds, custodians and prime brokers complete cost basis reporting requirements, while reducing operational costs. As the industry continues to evolve, leveraging flexible technology solutions such as Scivantage Maxit® has become the key piece of achieving tax reporting compliance.