A 2012 Tax Reporting Challenge You Might Have Underestimated

Stevie_ ConlonGuest Contributor: Stevie D. Conlon, senior director and tax counsel, Wolters Kluwer Financial Services

It seems investment tax issues continue to become more complex, and this year is no exception for the financial services industry—particularly given the multiple facets of the cost basis reporting law.

One of the law’s requirements is that issuers of securities such as stocks and bonds that engage in a corporate action that has a quantitative effect on basis, such as a stock split or merger, must report the event to the IRS via a new IRS Issuer Return—known as the new IRS Form 8937. Brokers must then take into account any basis adjustments reported on these issuer statements when they compute cost basis reported to investors on Form 1099-B. This is not an easy task.

By the end of 2012, nearly 2,000 issuer statements had been posted. These statements represented approximately 30,000 individual reportable events that must be accounted for by brokers in computing cost basis reported to investors on 2012 Form 1099-B tax returns.

On top of the sheer quantity of statements, locating and interpreting the information they contain is tedious, to say the least. Finding time to process this data will undoubtedly be a challenge for many brokers, who are already busy preparing 1099s for delivery to investors by the Feb. 15 deadline. Many issuer returns include lengthy tax discussions that brokers will need to interpret and apply and the cost basis regulations require that brokers have to take into account all of the information furnished on an issuer return.

Brokers may also discover that there is a lack of information in some cases. Although requirements on the Form 8937 for issuer reporting are extensive, the instructions are general, leaving room for confusing explanations included on the form by issuers. Brokerages and asset management firms may face operational challenges because they aren’t able to locate all of the corporate actions tax data needed to answer their questions.

With just under a month to go until Form 1099-Bs are due to clients, brokers need to assess whether or not they can ensure essential corporate actions details are accounted for. While noncompliance penalties can be steep, the cost basis law does provide some penalty relief for brokers that rely solely on IRS Form 8937s, as well as relief for good faith reliance on third-party information.

Are your in-house resources equipped to find, monitor, track and interpret taxability details from Form 8937s? Additionally, can you count on your third-party providers for detailed foreign and domestic corporate actions taxability information and interpretation for cost basis adjustments?

To learn more about these topics and the questions your firm should be considering, plan to attend the upcoming web seminar, “New IRS Form 8937 puts brokers between a ‘ROC’ and hard place for 2012 Form 1099 Reporting,” later this month.

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