Q&A with Donna Fry: Lessons Learned This Tax Season

With implementations for Phase 1 and Phase 2 of the cost basis reporting (CBR) regulations in the not-so-distant past, the industry recently received a much welcome year-long delay for Phase 3. However, industry leaders will not be resting during the extra time, but instead will turn to lessons learned from the past years’ experience in order to be thoroughly prepared for Fixed Income and Options reporting requirements. We recently interviewed Donna Fry, Product Manager at Scivantage and asked her to offer insight into the lessons learned and best practices firms should take away from Phase 1 and Phase 2 and what they should be doing now to prepare for the remaining requirements on the horizon.

Q: What were the some of the major challenges firms faced with Phase 1 and Phase 2 implementations?

A: The IRS delaying the release of the final regulations caused a lot of challenges. This created some difficulties for the industry, as the window to become compliant was left rather small. Adjustments for corporate actions presented yet another challenge. Firms were required to make adjustments, but the necessary information wasn’t always available. To alleviate this, the IRS issued penalty relief to issuers of stock with respect to corporate actions that affect the basis of the stock. Because of this relief, basis information as it related to corporate actions was not always available. This caused some challenges for firms that wanted to provide accurate basis information to the client on their tax returns.

Some industry participants found reporting wash sales and issuing transfer statements to be particular hurdles. Because of the challenges firms were faced with when it came to issuing transfer statements, the IRS advised they would not assert penalties if they failed to provide transfer statements. This provided welcomed relief to the firms. Another challenge was determining the reporting requirements for Exchange Traded Funds (ETFs) since these types of securities fell into the multiple reporting phases. Determining what basis year the ETFs are reported in depends on the type and the structure of the securities.

Firms are also are addressing client complaints because of the influx of 1099 corrections that have been issued due to the new cost basis regulations. With every change in the basis, a new 1099 form must be issued to clients for up to 3 years from when the initial form was supplied.

Q: What was one of the misconceptions industry participants faced regarding the implementation of the CBR regulations?

A: One of the misconceptions industry participants faced regarding the implementation of the CBR regulations was ensuring the 1099 forms would be mailed by the February 15th IRS mailing deadline.  Some firms struggled to meet this deadline and had to request a mailing extension from the IRS.  This delayed mailing was caused from a misconception by industry participants that did not fully understand the scope of the impact the CBR regulations had on their internal process and operations.  Although it is impossible to be fully prepared for the unknown, a good rule of thumb to follow would be to prepare for the worst and hope for the best.  Scivantage Maxit clients that used our custom 1099 tax extract module had a 100% success rate in getting their 1099 forms mailed to investors ahead of the February 15th mailing deadline therefore, avoiding an influx of client complaints and maintaining their high standard of customer service.

Q: What is the general mood of the industry after Phase 1 and Phase 2?

A: Everybody is still in recovery mode. At a recent conference, the overall sentiment was, “We got through it this year; now let’s see what next year will bring.” Everyone is trying to brace themselves to prepare for Phase 3.

Q: What are some of the biggest mistakes industry participants made with Phase 1 and Phase 2 implementations?

A: The biggest mistake a firm could make is not grasping the full scope of the implementation project and having limited resources available. Industry members I’ve spoken with found that there was a lot more work involved than they originally prepared for. In addition, some felt they did not have adequate time for quality assurance testing. Not being prepared with the full support staff and thorough testing are the biggest mistakes.

Q: What should the firms do to avoid these mistakes when looking at Phase 3?

A: Kick off the implementation projects earlier, make sure you have resources and hire enough manpower. We do not yet know what the final regulations will look like for Phase 3, but we do have a pretty good idea. The IRS recently extended the deadline for compliance. However, one of the biggest mistakes a firm can make is think that since there is another year, they can put off starting their projects. At Scivantage, we’re continuing down our original roadmap and aren’t going to wait for the regulations. We have an extra year – take advantage of this time to do all the systems testing.

Q: What else should firms be doing this year to prepare?

A: Firms should also be dedicated to figuring out the full scope of their Phase 3 implementation projects and preparing their game plan. Following Phases 1 and 2, the industry has a general idea of what to expect. Firms should definitely be getting their resources in order – if they need to hire, then they should be hiring and getting the employees trained and ready. I have spoken to a number of clients and they are all taking the same position – they aren’t going to wait for the final Phase 3 regulations to get started. They are going to take advantage of the delay by making sure all their systems are in place in order to avoid any issues in Phase 3. That’s definitely one thing a lot of firms are doing right now.

Q: What are you hearing from the industry now?

A: The biggest shift in the industry we’re seeing right now is the evolution of the year-round tax season. It is no longer October through the end of April. The tax season never ends anymore, because the IRS requires that firms issue corrections for three years, which is an ongoing, continual process. The new reality is that the tax season will always be around and it’s not going anywhere.

Posted in Scivantage Maxit, tax management and tagged , .