Advisers’ Role With New IRS Regulations to Report Supplemental Information

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The Emergency Economic Stabilization Act of 2008 contains new requirements for brokerage firms and mutual fund companies regarding customer statements and Internal Revenue Service reporting. Traditionally, firms provide information on gains and losses as supplemental information to investors on the 1099-B, but did not report this supplemental information to the IRS. Under the new regulations, custodians will be required to report adjusted cost basis as well as gross proceeds to the IRS, and whether the holding period of the disposed security was short-term or long-term.

What does this mean for the average adviser? Hopefully not much, but I do feel there are many unanswered questions operationally. This will certainly increase your customer-service burden during tax season:

Account Transfers – Have always been difficult, but now as a client transitions his or her account you may need to get involved in transferring cost basis and making sure they are done correctly. The consequence of not doing this means you will scramble at the end of the year trying to get the information, or at minimum, the custodian will be asking you to get the information.

Corporate Actions – are another mess. Sure, the custodians are able to keep up with splits, but who is going to figure out the mess that happened with GM?

Accountant/Client/Custodian – Who is responsible for cost basis information? The accountant will tell you the client, client will depend on the custodian, but can the custodian take complete responsibility? I do not think so. They will probably need to rely on information from the client.

Correcting Statements – This is the biggest issue I see. Since this information will be “officially” reported to the IRS, it will probably be a good idea to scan through your clients’ cost basis information before year end. I have never had a good time trying to get these forms corrected once the reports are issued. The time you spend on helping the client getting this information corrected will surely be much greater than scanning through the information.

Overall the rule is a good one to keep everyone honest, but in my opinion there are many operational questions that will need to be resolved over time.

Ash Bhatnagar, CFP®
RIA Independence Co.
Princeton, N.J.

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