Information reporting (1099) is becoming more complicated and the risks relating to non-compliance or inaccurate reporting are very high. The recent changes to FATCA, 1099 reporting, 1042 and 1042-S, foreign reporting and cost-basis reporting will affect your business, whether it’s a corporation, bank, trust department or wealth management firm.
The Small Business Jobs Act of 2010 enacted on September 27, 2010 includes provisions that significantly increase penalties for untimely, incorrect and intentional disregard of the rules for the filing and furnishing of information returns to the IRS and end customers. Beginning in 2011, failure to file or furnish correct information returns by the due date can result in stiff penalties, making compliance more critical than ever.
Maximum penalties can now reach $200 for each incorrect, untimely or incomplete 1099 filed or sent to a payee. The total maximum penalties can now reach $3 million. Furthermore, if the rules and regulations are intentionally disregarded, the maximum penalty has no limit.
In addition, there are other financial risks related to inaccurate reporting:
- Direct and indirect costs associated with reprocessing 1099 returns and end-customer 1040 returns.
- High potential for client dissatisfaction due to incorrect and reprocessed returns.
- Reputational risks for noncompliance or inaccurate reporting.
In addition, provisions in the Emergency Economic and Stabilization Act require brokers and custodians to report basis and holding period information for securities sold and reported on Form 1099-B beginning in 2011. The law requires wash sales to be taken into account when reporting and adjusting basis. Beginning in 2013, the law will require correct basis reporting for option activity as well as for bonds and other debt instruments including proper adjustments for amortization, OID and market discount.
The law is phased in over three years and generally depends on the type of security and the date it was acquired. Proposed Regulations were issued on December 16, 2009. Final Regulations were issued on October 12, 2010 and generally focus only on stocks, including regulated investment companies (RICS – that is, mutual funds). Future Regulations will address debt obligations, options and other financial instruments that will apply in 2013.
With all this uncertainty with the Regulations and increased penalties, banks, corporations and wealth management firms need to understand all of the risks associated with non-compliance.
Gain a better understanding of the ramifications of the end to the corporate exemption, new regulations regarding foreign payments, FATCA, 1042-S, cost-basis reporting and wash sales, 1099 reporting or changes to the 6050W, with an online webcast from Thomson Reuters.