Contributor: Jeff Naylor
Collecting cost basis data on equities and ETFs for broker-dealers, and reporting it to shareholders on tax forms, has been a significant challenge. Many broker-dealers have struggled with compiling all of the data including books and records, cost basis reporting systems and tax reporting systems together for the 1099-B IRS form. This form is issued by a broker and summarizes the proceeds of all stock transactions and needed for tax filing compliance. For the funds industry, that same challenge exists for the first time with 2012 tax reporting, completed in early 2013. The question now on everyone’s lips is how will the funds’ industry avoid the same fate?
As many fund companies and their transfer agents know, tax reporting is a year-round endeavor. The quality and accuracy of shareholder and IRS reporting is a combination of the right data available to the right systems at the right time. For that reason alone, fund companies and their transfer agents should already be engaged in 2012 tax reporting activities.
Luckily fund managers won’t have to phase their mandatory cost basis implementations. This is something that many broker-dealers find challenging – not only from a system perspective but also a servicing perspective. The fact that 2011 equities are covered for cost basis reporting while mutual funds are not, has added complexity to the broker – dealer’s construction of an accurate Form 1099-B. Likewise, the IRS has been timelier in publishing 2012 Form 1099-B requirements, which provides added lead time to implement the new information reporting requirements.
This being said, most fund companies and their transfer agents will need to integrate cost basis reporting for the first time into their 2012 Form 1099-B. Any significant change to a time-sensitive, deadline-driven process like tax reporting needs to be given due consideration and focused attention to mitigate risk and ensure a smooth implementation. But now is the time to start planning. Fund families and their transfer agents should already have their basic plans in place for 2012 Information Reporting. If no plan exists, that should be cause for concern – something no fund company can afford to have right now.