New federal requirements for cost basis tax reporting enacted in October 2008 require accountants to submit accurate and timely cost basis information to investors and the IRS. The change is the result of the government’s efforts to end under- and over-reporting of capital gains and losses, while raising income to support the Emergency Financial 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 are held on or after January 1, 2011.
Mutual funds and dividend reimbursement plans on or after January 1, 2012
Debt securities, options and other specified securities on or after January 2013.
The new regulations present a huge challenge to brokers, banks, institutions, transfer agents, mutual funds and other media that owe. now provide cost information to millions of individuals as well as the IRS. They must choose whether to build a solution in-house, service from an industry vendor, or buy a partner with a foundational service provider. Firms must focus on this now if they are to meet Congressional deadlines.
New compliance requirement
The Emergency Economic Stabilization Act of 2008 was enacted mainly to establish a fund
The $700 billion package contains new and stricter requirements on financial intermediaries such as issuers, transfer agents, brokers, banks and mutual funds. Essentially, the new legislation is an expansion of the old requirements that brokerages
and mutual fund companies report gross proceeds. It has the practical effect of increasing the standing 1099-B income-reporting forms that brokerages are already required to submit simultaneously to investors and the IRS.
Schedule for implementation
Legislation establishes three levels of implementation based on cost reporting;
- ღᗗ All equity stock acquired on or after January 1, 2010.
All mutual funds and dividend innovation plans (DriP) entered into on or after January 1, 2012.
Other securities of a specific type, such as issues, options, and private placements, acquired on or after January 2013.
COOKERS AND BANK:
Obedience
Brokers, custodians and banks (hereinafter referred to as brokers) have three years to implement system upgrades to track and capture adjusted cost basis information for security transactions that are made for securities acquired on or after January 1, 2011, reporting to Form 1099-B . .
Form 1099-B will change to include new information for the adjusted cost basis. Sectors reporting directly to the IRS and affiliates will need to complete the return form printing process. Also, brokers must decide whether to buy, build or partner to handle the complexities of implementing a cost accounting system.
I will carry the giants
Obedience
As a result, transfer business owners will be required to report their adjusted cost basis to shareholders and the IRS via an updated Form 1099-B. Transfer agents who are required to track and report an adequate cost basis include:
- Transfer agents who manage dividend reinvestment plans, employee stock option plans (ESOPs) and other such plans
- transferring agents who refer gross money to shareholders for the sale of securities, and,
- Generally, transfer agents who now distribute Form 1099-B.
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For equity issues, transfer agents begin to report an adjusted price basis on or after
January 1, 2011. For shares in accumulated dividend reinvestments, and possibly other plans such as ESOPs, transfer agents have until January 1, 2012 to begin reporting the adjusted cost basis. Transfer agents who manage issuer-sponsored or “bank”-sponsored plans (renewable plans, ESOPs and the like) will be required to report expenses on an adjusted basis in the new 1099-B forms.
Form 1099-B will change to include new information for the adjusted cost basis.
Transfer agents reporting directly to the IRS and partners will need to return to the form printing process.
EQUITY ISSUERS:
Obedience
The legislation requires “brokers” to report an adequate cost basis to shareholders and the IRS for equity securities acquired on or after January 2011. The term ‘sector’ is generally used in law and can be misleading. The term refers to all financial intermediaries that report 1099-B financial information to shareholders. These reports will be required to report an adequate cost basis. As the legislation is currently understood, those intermediaries include, but are not limited to, agents, issuers, transfers, mutual funds, brokers, banks and other custodians.
Issuers who have the additional burden of tracking and reporting price adjustment bases are:
- Issuers acting for their transfer agent
- Issuers that manage their own dividend reinvestment plans, employee stock option plans (ESOPs) and other such plans
- Issuers who report gross proceeds from the sale of securities to shareholders, and
- Generally those entities that now report Form 1099-B
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For equity securities, the results must begin to be reported with an adjusted cost basis on or after January 1, 2011. For shares accumulated in dividend reinvestment plans, and possibly other plans, such as ESOPs, statements until January 1, 2012 have an adjusted cost basis to begin reporting. .
PUNISHMENT IN INDULGENT REPORTING
Penalties can be very high, especially for those intermediaries who report incorrect base funds for a large number of investor/shareholder accounts. The penalty is $100 for each false 1099-B form; $50 for a false form sent to the investor/association, and $50 for a false form sent to the IRS. The maximum penalty is $350,000 per year.
