Thanks to the 2008 Emergency Economic Stabilization Act, at the start of 2011 many financial firms will be required to report the cost basis of publicly-traded securities to both taxpayers and the IRS. To comply, firms such as broker-dealers and fund custodians will need to update their systems.This new law was created by a serendipitous combination; the IRS was concerned that the cost-basis numbers investors put on their Schedule D’s were, perhaps, a little too high, while the Federal government increased an already-insatiable thirst for revenue. The IRS estimated that under-reporting was costing some $7 billion annually. Voila – tax cost basis reporting was born.
Many firms have been trying to figure out how they build their own system, or planning on letting their custodian handle it. Wrong and wronger. Others were waiting for detailed IRS regulations. Wrongest. The reality of tax lot accounting, corporate actions and wash sales has overwhelmed most in-house IT departments. In-house solutions are estimated to be running in the $3 million to $5 million range. Plus, the law clearly states that the broker dealers themselves will be ultimately responsible, not the custodians.
For those firms looking for purchased solutions (which include SunGard’s new Cost Basis Reporting Engine, Scivantage’s Maxit and WKFS’ Gainskeeper), they need to get busy selecting a vendor and testing it out. Ditto for those firms that are truly well along in building an in-house solution. But for firms that are late to the party and behind the curve, get out the check book and get ready to write a large check to either a vendor or to the IRS (up to $350,000 for unintentional errors, more for failure to comply).
Because on January 2, 2011, broker dealers better be tracking individual tax lot cost basis details. And in 2012 it will be mutual fund companies, with everyone else on the system by 2013. Happy New Years, y’all.
