2011 IRPAC Report: Burden Reduction Subgroup
A. Tax Credit Bonds
To establish a robust system of information reporting with regard to tax credits earned on tax credit bonds issued under IRC § § 54, 54A, 54AA or 1400(l) IRPAC recommends that the IRS adopt an approach in which middlemen and other nominees, bond issuers, and taxpayers report sufficient information to allow the IRS to ensure that the tax credits available to the beneficial owners are not over claimed. To the extent possible, this should be accomplished by relying on information that is available to each party without extraordinary efforts and without creating data flows that are superfluous. Central to this objective is the unique identification of entitlement in the information returns and tax returns that are filed through a chain of nominees. Toward that end IRPAC specifically recommends:
1. Removal of the quarterly identifier from Form 1097-BTC. (Bond Tax Credit)
IRPAC believes that the current draft of Form 1097-BTC should be modified to exclude the unique identifier associated with each credit allowance date in favor of a single box for account number or equivalent established by the filer. When this value is considered in conjunction with the combination of the filer’s employer identification number (EIN), the taxpayer identification number and the credit allowance date, it creates a unique index through which associated aggregate value of tax credits may be sufficiently tracked.
2. Careful consideration of the granularity required for annual reporting that will be matched to the taxpayer’s return
Form 1097-BTC is intended to be furnished to the beneficial owner on a quarterly basis and filed with the IRS annually. IRPAC, therefore, additionally recommends that in developing the associated electronic filing requirements for issuers of Form 1097-BTC the granularity of the data is carefully considered. For example, if taxpayers will not be required to separately account on a tax return for the tax credits associated with each calendar quarter, there would be no need to require anything beyond annual totals on the filing with the IRS of the 1097-BTC because no opportunity for quarterly reconciliation exists.
Tax credit bonds and the associated stripped tax credits present a variety of challenges for information reporting. IRPAC has previously provided substantial commentary on this topic that was incorporated into the 2010 Public Report. For 2011, consultations with the IRS were limited to the reporting regime for tax credits.
The discussions on this topic are ongoing. Most recently, IRPAC agreed to provide additional recommendations regarding the following related questions.
1. Trade fails
For a contracted sale of a tax credit bond, what are the implications if the seller has failed to deliver the bonds to the buyer and a credit allowance date passes? Are there substitute tax credits? How should they be reported? What is the impact to the IRS attempt to account for all credits being claimed?
2. Enterprise level reconciliation
Part of the projected approach to tracking tax credit claims is to have taxpayers provide an annual reconciliation with their tax returns. What is the most reasonable and effective approach for taxpayers such as financial institutions that are both beneficial bond owners as well as a nominee for other beneficial owners to whom they have reported tax credits on Form 1097-BTC?
Form 1097-BTC as currently structured contains the usual IRS convention of a check box at the top of the form to indicate when a form is a corrected version. The 1097-BTC is unique because payers are required to report quarterly to beneficial owners, but only annually to the IRS. Further, the form has a separate box for the amount of tax credit applicable to each calendar quarter. What is the most effective way to distinguish to a recipient whether a correction reflects a change to a previous quarter or reflects a corrected annual filing with the IRS?
Issues regarding information returns for accruals of original issue discount (OID) on stripped tax credits remain a work in progress. IRPAC provided recommendations to the IRS on this matter in 2010 and looks forward to contributing to development of a successful reporting regime for these and other tax credit bond events in 2012.
B. Form 1099-B Modifications
Cost basis regulations have introduced several new concepts and reporting requirements which call for changes to the Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, and amended guidance for substitute forms (payee statements) in IRS Publication1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. IRPAC has made many recommendations to the 1099-B and substitute form instructions, as well as the corresponding Schedule D, Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets, to be part of the taxpayer's Form 1040 filing. The key comments on Form 1099-B are set forth below:
1. Exempt inclusion of certain gains and losses on the 1099-B and expand instructions to explain when offsetting the basis from gross proceeds would not result in the correct taxable gain or loss. The larger number of these events involve reorganizations, but there are other cases such as after certain short sale adjustments and when involving certain S Corporation transactions, to name a few in a fairly long list that was outlined in IRPAC's initial comments in 2009 Public Report. IRPAC provided the IRS with several examples where the end result would be different from the instructions. The initial 2011version of Form 1099-B included a box for reporting the gain or loss on a tax lot closed during the year. The corresponding instructions advised the recipient that the reported amount was the result of the difference between reported gross proceeds and the reported cost basis. Ultimately, the IRS removed the requirement to report the amount of gain or loss entirely.
2. Provide the payer community instructions with examples for reporting reorganizations. Although the box for reporting gains or losses was removed, instructions with examples are still needed to assist the payer community in correctly reporting transactions involving reorganizations. The final version of the cost basis regulations [Reg. §1.6045-1(a)] makes clear that shares distributed in a reorganization can be "covered" for cost basis reporting. In addition, taxable payments (boot) remain reportable on the 1099-B. IRPAC has explained to the IRS the diverse industry practices and has provided the IRS with the examples that need to be addressed in instructions to assist payers in correctly and uniformly handling these events.
3. IRPAC maintains its recommendation that the payee instructions to the 1099-B specifically acknowledge that the recipient might not be able to independently compute the amount of gain or loss using information found solely on Form 1099-B, such as in the context of wash sales that occur in several accounts or between accounts held at different institutions, and to clearly state that it is the taxpayer's responsibility to file a correct tax return.
4. Make the substitute payee statement instructions flexible enough to accommodate information beyond the requirements of the official form under the new cost basis provisions. In addition to phasing in cost basis reporting over three years, the legislation established the concept of covered and noncovered tax lots. Reporting requirements differ for the two, with the more rigorous requirements applying to covered lots. In many instances filers may have information that is useful to the taxpayer, but is not required on the Form 1099-B. Revenue Procedure 2009-49 (the most recently published guidance for substitute Forms 1099) prohibited the inclusion, within a substitute form, of information not required by the official form, and if the instructions remain the same, the payer community will be forced to supply cost basis information in several places in their yearend tax statements to their clients or even in separate mailings. This will make for a very burdensome filing process and may result in the taxpayers filing an incorrect return. IRPAC recommends, therefore, that filers of substitute forms be permitted to display information that is not required by the form or is not reported to the IRS due to the lot’s noncovered status along with the required information as long as the statement clearly reflects what is being filed with the IRS.
5. IRPAC continues to recommend that the IRS provide corresponding guidance on disclosures and descriptions used to alert form recipients which information is not reported to the IRS. With this flexibility, filers will be able to make clear what type of transaction (merger, tender, put, sale, etc.) is being reported, include any special considerations such as the redemption of a contingent payment debt instrument, indicate whether the amount reported reflects option premium, identify the lot relief method employed and annotate complex corporate actions.
6. With only a few months left in 2011, flexibility in substitute form instructions will be important as the payer community works through their own systems to comply with fairly complex cost basis reporting requirements. Over the next few years every filing season will bring new limitations which will make substitute form development difficult. For 2012, mutual funds and dividend reinvestment plan shares become covered, and reporting debt obligations and options will be required in 2013. This information is already covered in many payer yearend tax statements. Although the return preparer community has asked that the payee statement be made uniform, IRPAC notes that cost basis information has been supplied for decades and that many systems are fairly sophisticated and are different. Many will not be able to conform to radical changes in their layouts except over time. Flexibility will be very important as we move forward.
7. Specifically, IRPAC recommends allowing the format of substitute Forms 1099-B to logically group information into sections such as long term and short term rather than provide repetitive, distinct declarations on each reported item. When designing substitute Forms 1099-B, there are several required elements that would best serve as the foundation for sorting and grouping reportable amounts rather than as data elements that are repeated line after line. In lieu of an indication of a term on each line item, the section in which like tax lots were grouped would be clearly labeled as “long-term” or “short-term.” Within these groupings, designation of whether basis is reported to the IRS should also be handled in this manner. Similarly, allowing CUSIP number and security description to appear a single time within a section as the heading to a series of closing transactions for that security creates an efficient presentation for the recipient and also frees space within each line for reporting the newly required data elements of date of acquisition and cost. With reporting on a tax lot rather than transaction level, these considerations have greater importance because they have a moderating effect on the inevitable increase in printed pages. Any official guidance that helps to restrain cost and environmental impact (cutting down the paper bulk and mailing cost) while providing taxpayers with a robust substitute information return is welcome. IRPAC provided a mockup of a substitute Form 1099-B to illustrate these points. [See APPENDIX C]
8. To more accurately describe the information found on Form 1099-B, IRPAC recommends removing reference to price (a unit concept) in favor of proceeds (a transaction concept).
9. References on Form 8949 should be changed to reflect whether cost basis was reported to the IRS rather than whether it appears on the 1099-B. Recognizing the additional data reported on Form 1099-B, the IRS introduced Form 8949, an adjunct to Schedule D that a taxpayer includes with his or her return. The initial draft of Form 8949 distinguishes between items for which cost basis appears on the 1099-B and items for which it does not. In light of the need for flexibility to include items on the payee statement (substitute 1099-B) that are not reported to the IRS as explained above, IRPAC recommends that references on Form 8949 be changed to reflect whether cost basis was reported to the IRS rather than whether it appears on the 1099-B.
The most recently published instructions for filers of Form 1099-B provide an initial indication of the IRS’s concurrence with these initiatives and IRPAC looks forward to their incorporation into the more formal guidance of Publication 1179 for 2011.
Regulations covering inclusion of cost basis and other related information on Form 1099-B have created a new paradigm for information reporting. Previously, sales of securities (or other dispositions) were reported to the IRS at the transaction level. Any number of tax lots owned by an investor could be sold and reported as a single transaction. Of course the tax liability had to be calculated by the taxpayer on a lot by lot level and many financial service firms provided, as a courtesy, a separate, more granular report to their clients to assist with that responsibility.
With the advent of the new cost basis regulations, the style of reporting that was previously provided as a courtesy essentially becomes the requirement, raising the need to distinguish between covered and noncovered lots as defined by the regulation. The report that financial service firms have been providing to their customers collectively contains both covered and noncovered securities and to comply with the new reporting requirements governing substitute/composite statements may pose a variety of challenges.
Information that is needed by the taxpayer to complete Schedule D and Form 1040 will sometimes be required by Form 1099-B and sometimes will not. This distinction is understandable as it provides different requirements for covered and noncovered lots during the transition to more robust 1099-B reporting. There are many instances, however, where brokerage firms have information available that should be presented to the payees regardless of whether there is a regulatory requirement. This information consists primarily of the data elements that are required for covered tax lots. There is no logical reason to segregate this information, creating a mixed bag presentation of information. Consider an investor that sold in a single transaction, a covered and a noncovered lot of the same security which both result in long term capital gains. When completing his or her tax return, should that investor be required to find the relevant cost basis information in separate places in a single document? Would such a presentation improve the chances of the investor reporting the gain or loss correctly? IRPAC believes that the flexibility to present each of these in the same way, in the same document organized to coincide with the tax return requirements is essential.
We also note that in recent years information reporting requirements have introduced considerable flexibility in the presentation of complex information similar in scope to the new requirements of the 1099-B. Consider, for example, reporting for Widely Held Fixed Investment Trusts (WHFITs) as described in § 1.671-5(e). Under these regulations, trustees or middlemen are not required to provide a payee statement. Rather, the requirement is that for a trust interest holder (TIH) for whom a 1099 is filed with the IRS a “written tax information statement” must be supplied. This statement is required to include all the information contained in the Forms 1099 and “…any other information necessary for the TIH to report, with reasonable accuracy for the calendar year…” items of income, credit or expense to which he or she is entitled. This broad language (along with the introduction of the additional written statement in lieu of a payee statement) seems to be acknowledgement that inclusion of relevant detail and representation of the information for certain investments should not be artificially constrained.
IRPAC, with the recommendations contained herein, is seeking to reconcile the willingness of the financial services firms to serve taxpayer needs with the IRS’s requirements for arrangement and presentation of information on substitute/composite Forms 1099-B.
C. Business Master File – Address Change Procedures
The business address shown on the IRS Business Master File (BMF) should be static and be changed only by specific written request. Further, the structure of the BMF should be changed to allow multiple addresses for one company based on departmental functions.
Currently the business address shown on the IRS BMF is changed every time a return is filed. Since most companies file multiple types of returns with the IRS on a regular basis, the address on the BMF is being changed every time. This presents a major problem to businesses that use different mailing addresses for each department that files a particular form for the company. For example, the payroll department that files Forms 941, 940, etc. quarterly and the annual Form W-2 has one address. The department that files the annual corporate tax return Form 1120 may have a different address. Still another department may handle the filing of information return Forms 1096 Annual Summary and Transmittal of U.S. Information Returns, 1099, Certain Information Returns, etc. using yet a different address depending on where that department is located. Since the IRS sends its correspondence to the last address shown on the BMF, notices are being sent to the wrong department on a regular basis thereby causing undue delay in correspondence getting to the proper person in the company.
Further it has been discovered that the BMF is being updated any time the IRS receives any “clear and concise written correspondence.” As an example, an individual who had an account at a large bank wrote a letter to the IRS referring to the bank’s corporate name and EIN. Based on the address shown on the correspondence, the IRS changed the corporation’s mailing address on the BMF to the individual’s mailing address. As a result of this erroneous change of address, all of the bank’s mail was then sent to the individual account holder. This is an obvious example of a serious problem with the breach of privacy and confidentiality laws as well as causing an undue delay in actually getting the IRS notices concerning the corporation to the correct address for the corporation.
The problem lies with IRS Revenue Procedure 2010-16. This procedure states in part, that “the address shown on ANY form of written correspondence received by the IRS updates the address on the BMF.” The Burden Reduction sub-group had a discussion with IRS personnel from the Service Centers. It was determined that there is inconsistent treatment of the address updates in the pipe line process.
Some of the more experienced employees that are aware of the problem, have by-passed the system requirements to update BMF address by only updating an address when a specific box is checked as applicable on various forms received. While still others are changing the address every time a return is filed as required by the Revenue Procedure cited above. We were told by IRS Service Center personnel that there have 12 projects trying to deal with this issue since 2008 and that there is still no clear resolution.
We reviewed the draft version of Form 8822-B, Change of Address – Business, to be released to the public on January 1, 2012. This form allows for a mailing address and a business location address. However, it does not allow for multiple mailing addresses based on department function.
In its October 2010 report, IRPAC recommended some of these same changes to be made. The way this process is being handled, it could lead to privacy issues.
This issue was also discussed with Nina Olson and her associates with the National Taxpayer Advocate’s Office. Their office is finding that taxpayers are not receiving their mail timely or sometimes not at all due to this BMF address problem. They have named this as one of their “Critical Issues” for 2011.
We believe that the current BMF system is structurally inadequate for the task. There simply are not enough fields to report multiple address for one corporation based on departmental functions.