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Welcome to Wolters Kluwer Financial Services' Cost Basis Reporting Resource Center—your source for essential cost basis reporting law compliance information.

Cost basis reporting is law. The Final Phase 3 Regulations Pose Severe Compliance Challenges for Brokers

On April 17, 2013 the IRS released final regulations (TD 9616) setting forth the cost basis reporting rules relating to Phase 3 covered securities—debt instruments and options. The IRS also issued new Temporary Regulations under Internal Revenue Code ("Code") Section 6049 that accompanied the Final Phase 3 Regs. READ THE FINAL REGS.

  • The difficulties making the required calculations for more complex debt mean firms that have not begun developing these rules may be at risk of not meeting the Phase 3 Jan 1, 2014 requirements on time.
  • Additionally, systems based on traditional portfolio accounting rules—rather than actual tax rules and tax required data, will likely result in incorrect calculations and significant regulatory penalty risks.

Wolters Kluwer Financial Services has been a leader educating the industry about this law and about the technology and information complexities that need to be addressed to meet its requirements. Additionally, we offer both the tax intelligence expertise and the technology to help you comply.

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What You Can Find on the Cost Basis Reporting Resource Center

Know the law - Read the law, and other important documents relating to the cost basis reporting law.

Stay current - Access pertinent industry articles and webinar content.

The Final Phase 3 Regs impose a calculation conformity requirement between basis reporting calculations (on Form 1099-B) and interest & OID reporting (on Forms 1099-INT & OID) that did not previously exist. Dated or inadequate systems for Form 1099-INT or OID and the need to calculate adjusted basis for transfers reported during the year before 1099s are prepared will force upgrades to such systems and their reconciliation with basis reporting systems.

Brokers will likely need to make significant investments in understanding the specialized tax rules for debt, options and single stock futures (SSFs) in order to determine the data requirements and specialized calculations needed to comply with the basis reporting rules of the Final Phase 3 Regs.

Brokers will need to be prepared to make additional changes to their reporting processes due to necessary revisions to Form 1099-B to take into account the new rules contained in the Final Phase 3 Regs. Revised forms could be issued more than once. And the expanded calculation rules for determining basis adjustments for debt could result in additional changes in the existing Form 1099-INT & OID reporting rules besides the changes to interest and OID reporting that the Temp Bond Premium Offset Regs will require.

Up To $3 Million in Potential Penalties

There is a significant tax penalty risk if the basis and holding period information reported on Form1099-B is incorrect. Reporting penalties were increased under the Small Business Jobs Act of 2010 (P.L. No. 111-240) enacted on Sept. 27, 2010. There are separate penalties for 1099s provided to the IRS and 1099s provided to taxpayers, and they aggregate to $100 per incorrect 1099 with a maximum annual aggregate of $1,500,000 each ($3m total). Errors due to intentional disregard have a minimum $250 per return with a penalty amounting to the greater of either the minimum or 10% of the amount that should have been reported, with no maximum annual limit. Penalty for incorrect 8937 is the same as for 1099s.

On Friday, October 3rd, 2008, President George W. Bush signed H.R. 1424, the Emergency Economic Stabilization Act of 2008 into law (the Act, Pub. L. No. 110-343). The law requires cost basis reporting by brokers to the Internal Revenue Service (IRS) and to taxpayers. The initial effective date for cost basis reporting for most stocks applies to stock acquired on or after January 1, 2011; for mutual funds and dividend reinvestment plan stock (or similar arrangements) acquired on or after January 1, 2012; and for debt instruments, options and other covered securities acquired on or after January 1, 2013. The provision is scored to raise $6.67 billion over a ten year period. To review the law, click here and go to Title IV, Section 403.

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Money Market Fund Floating NAV Wash Sale, Form 1099-B and Gain/Loss Calculation Relief Issued by IRS

On July 23rd 2014, the IRS issued proposed regulations that expand the existing exclusion from gross proceeds reporting and cost basis reporting on Form 1099-B for “floating NAV” money market funds (MMFs) under new Securities and Exchange Commission rules for certain investment companies. The IRS also issued proposed regulations providing a taxpayer elective simplified net gain/loss method of reporting gains and losses from floating NAV MMFs. Under the elective reporting method, because no loss is determined for any particular redemption of shares, the IRS has stated that the wash sale rule does not apply.

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What's New

Wolters Kluwer Financial Services and Broadridge Tax Services Have Teamed to Develop a Comprehensive Tax Reporting and Investment Compliance Solution. Read the press release.

IRS Issues Final Form 8937 and Related Notice 2012-11 on January 13, 2012

IRS releases final regulations for cost basis reporting phase 3 coverage of debt instruments and options. Read the regs.

Proposed Cost Basis Reporting Regs for Options & Debt Released - IRS REG-102988-11 (Nov. 23, 2011)

IRS issues Notice 2011-56 on issues relating to the basis of stock

IRS Issues New 1099-B Form & Instructions

Understanding the final cost basis regulations

IRS Issues Final Cost Basis Regs


 

Download the Final Cost Basis Regs

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