Kayaking enthusiasts revel in spending time on what they call big water, the major rivers and waterways that offer arresting mountain beauty, rapids, and if they are lucky, crystal clear views of flora and fauna on the river bed.

The new cost basis reporting rules, which got under way in January, remind this blogger of her big water excursions -- scanty as they were -- mainly because of the potentially heart-racing chops that lie ahead for advisors and clients. There are several new reporting forms to help investors and their brokers conform to the new cost-basis reporting rules, but they are complex and did not come with instructions.

Form W-9 came out in January, and asks the investor to specify whether a C or S corporation issued a particular security. The Schedule D and Form 8949 reconcile numbers from clients with figures that the broker-dealer reports. Also a revised 1099-B form came out in April.

It was the result of about three drafts, which the broker or other financial intermediary gives to the client to complete and return to the IRS, said Dan Mayo, a principal of Financial Services Tax at KPMG, said during a presentation last Thursday.

Scivantage, of Jersey City, N.J., which provides back-office solutions for independent brokerages, and Celent, a Boston-based research and technology consulting firm, sponsored the gathering to update the industry on how it has managed to adapt to the new cost basis rules to date.

Yet another form, the 8737, is used to identify corporate actions such as mergers and acquisitions.

Further, if a client’s broker defaults to an average cost method for cost basis calculations, and the client wants out of that, then action is required. The client has two options: opt out one year from the date the broker clarified its method, or the security was first sold, whichever is earlier. Those could make recordkeeping choppy business.

“This begs for a communication effort on the broker’s part,” Mayo said. In this blogger’s opinion, the briefing begs for some communication between financial intermediaries and the IRS, because some critical questions have been unanswered. 

Why would the IRS present a new set of complex forms to the industry with no instructions on how to complete them? Particularly now? The industry has entered the first phase of new cost basis reporting, which applied to all stock acquired on or after Jan. 1, 2011. Reporting for mutual funds and dividend reinvestment plan stocks begins in January 2012, and fixed-income, options, and other covered securities come under the new rules in 2013.

Other industry professionals, including Isabella Fonseca, a research director of wealth management for Celent, and Cameron Routh, a senior vice president of strategic products for Scivantage, also spoke at the event. The number items that need to be reported, and their complexity, pose some challenges for broker dealers, including changes to the new Form 1099-B, according to Fonseca. The 1099-B will demand new information for adjusted cost basis. One example of is whether a gain or loss is a short-or long-term one. It also asks for the amount of any loss disallowed under wash sale rules.

Tax lot and sub lot identification and reconciliation are another potential issue, according to some of Fonseca’s presentation materials. If different shares of the same security were bought at different times and prices, the transactions create separate tax lots, each with its own cost basis.

The potential for turbulence seems endless. Like the inconsistency with how exchange-traded funds are classified. Some companies treat them like stocks and others like mutual funds. That point is open to interpretation across the industry, hinging on a particular legal department’s present persuasion.

In the run-up to the new cost basis reporting rules, asset custodians and other intermediaries made time to help financial advisors understand how they could reconcile their versions of reports with that of their clients during tax season. The big educational push included seminars, white papers and Webcasts, among other efforts.

This is all great, and it seems that financial intermediary firms, in turn are eager to help clients through the process. Indeed, a Celent recently surveyed industry participants and found that prime brokers, custodians and mutual fund firms make customer support a top priority when handling the client decision-making process.

This blogger thinks financial advisory firms and their back-office agents should repay themselves the favor. In the same way they extended what they knew to advisors, they ought to demand clear and consistent guidelines for reporting, before they feel the unequivocal pain of customer backlash.


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