New federal requirements for cost basis tax reporting
enacted in October 2008 require intermediaries to submit accurate and timely
cost basis information to investors and the IRS. The change is the result of a government effort to
end under and over reporting of capital gains and losses, while raising revenue to
support The Emergency Economic Stabilization Act.
As a result of the new legislation, financial intermediaries
will be required to report cost basis information to investors and the Internal
Revenue Service for:
- Equity securities transactions on
or after
- Mutual funds and dividend
reinvestment plans on or after
- Debt securities, options and other
specified securities on or after
The new regulations present an enormous challenge to
brokers, banks, issuers, transfer agents, mutual funds and other intermediaries
who must now prepare to provide cost basis information to millions of
individual investors as well as the IRS. They must choose whether to build an
in-house solution, buy a service from an industry vendor, or partner with a
cost basis service provider. Firms need to focus on this now if they are to
meet the deadlines set by Congress.
The new compliance requirement
The Emergency Economic Stabilization Act of 2008, enacted
mainly to establish the
$700 billion bailout package contains new and stringent
requirements on financial intermediaries such as issuers, transfer agents,
brokers, banks, and mutual funds. In essence, the new legislation is an
expansion of longstanding requirements that brokerages and mutual fund companies report gross proceeds. It has the
practical effect of augmenting standing 1099-B income-reporting forms that
brokerages are already required to submit simultaneously to investors and the
IRS.
Schedule for implementation
The legislation establishes three stages of implementation
for cost basis reporting:
- All equity stock acquired on or
after
- All mutual funds and dividend
reinvestment plans (DRiP) shares acquired on or after
- Other specified securities types,
such as debt issues, options, private placements acquired on or after
BROKERS AND BANKS:
Compliance
Brokers, custodians and banks (herein referred to as
brokers) have three years to implement systems upgrades to track and capture
the adjusted cost basis information for securities transactions that occur for
securities acquired on or after January 1, 2011, for form 1099-B reporting.
The form 1099-B will change to include the new information
for adjusted cost basis. Brokers reporting directly to the IRS and the
shareholder will need to retool the form printing process. Also, brokers must
determine if they will buy, build or partner to handle the complexities of
implementing an adjusted cost basis accounting system.
TRANSFER
Compliance
Like issuers, commercial transfer agents will be required to
report adjusted cost basis to the shareholder and the IRS through the updated
form 1099-B. Transfer agents who are required to track and report adjusted cost
basis include:
- Transfer agents who administer dividend reinvestment plans, employee stock option plans (ESOP) and other such plans
- Transfer agents who report gross proceeds of a sale of a security to a shareholder, and,
- Generally,
those transfer agents who now distribute form 1099-B.
For equity issues, transfer agents must begin to report
adjusted cost basis on or after
The form 1099-B will change to include the new information
for adjusted cost basis.
Transfer agents reporting directly to the IRS and the
shareholder will need to retool the form printing process.
EQUITY ISSUERS:
Compliance
The legislation obligates “brokers” to report adjusted cost
basis to shareholders and the IRS for equity securities that have been acquired
on or after January 1, 2011 .
The term broker is used generically in the legislation and can be misleading.
The term refers to all financial intermediaries who report 1099-B financial
information to shareholders. These intermediaries will be required to report
adjusted cost basis. As the legislation is currently understood, those
intermediaries include, but are not limited to, issuers, transfer agents,
mutual funds, brokers, banks, and other custodians.
Issuers who will shoulder the additional burden of tracking
and reporting adjusted cost
basis include:
- Issuers acting as their own transfer agent
- Issuers who administer their own dividend reinvestment plan, employee stock option plans (ESOP) and other such plans
- Issuers who report gross proceeds of a sale of a security to a shareholder, and
- Generally, those issuers that now report form 1099-B
For equity securities, issuers must begin reporting adjusted
cost basis on or after January 1, 2011 .
For shares accumulated in dividend reinvestment plans, and possibly other
plans, such as ESOPs, issuers have until January
1, 2012 to beginning reporting adjusted cost basis.
PENALTIES FOR INNACURATE REPORTING
The penalties can be very high, especially for those
intermediaries that report inaccurate cost basis for a high number of
investor/shareholder accounts. The penalty is $100 for each incorrect form
1099-B; $50 for the incorrect form sent to the investor/shareholder, and $50
for the incorrect form sent to the IRS. The maximum penalty is $350,000 a year.
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