2011 Broker, Mutual Fund Reporting Requirements

2011 Broker, Mutual Fund Reporting Requirements

As the end of the year draws near, brokers and other compliance officers must keep in mind that the new cost basis reporting rules go into effect beginning January 1, 2011.  Brokers and mutual fund companies must report to investors and the IRS the basis and other information for most stock purchased in 2011 and all stock purchased after 2012. Specifically, IRC Section 6045(g) requires the reporting of cost basis for sales of covered securities, IRC Section 6045A  requires cost basis reporting by applicable persons for transfers of securities within 15 days of the date of the transfer and IRC Section 6045B requires reporting of certain corporate actions.

A covered security includes all stock acquired beginning in 2011 except stock in a regulated investment company for which the average basis method is available and stock acquired in connection with a dividend reinvestment plan, both of which are covered securities if acquired beginning in 2012. Given these various effective dates, a broker's reporting system will have to identify securities based on acquisition dates.  The staggered effective dates and other complexities has led brokers and others to request a delay in the effective dates of the reporting requirements.  However, the final regulations (effective October 18, 2010) do not extend the effective dates.  See T.D. 9504.

To provide some assistance to the financial industry's efforts to comply with reporting requirements, the IRS issued Notice 2010-67, which provides some penalty relief. IRC Section 6722 imposes a penalty on any transferor that fails to timely furnish a correct transfer statement under IRC Section 6045A to the receiving broker.  The notice provides that the IRS will not assess the IRC Section 6722 penalties for a failure to furnish a transfer statement under IRC Section 6045A for any transfer of stock in 2011 that is not incidental to the stock's purchase or sale.   Further, a receiving broker is permitted to treat this stock as a non-covered security.

The penalty relief provide by the IRS seems to be of minimal help to those tasked with the responsibility of designing the systems and other information tools necessary to comply with the new reporting requirements.  However, the new reporting requirements were put into place by 2008 legislation, giving brokers and others subject to the reporting requirements time to prepare.

All affected by the reporting requirements should note that the IRS intends to modify Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year and to report whether gain or loss is long-term or short-term.

RELATED LINKS: For further information, see:

1-1 Taxation of Securities Transaction Sec 1.04

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