IRS issues proposed rules on payment card transactions and broker basis reporting

The IRS has released proposed rules on two new information reporting requirements: payment card transactions and sales of securities by brokers. Congress imposed the new information reporting requirements to help close the tax gap, the estimated $300 billion difference between what taxpayers owe and what they actually pay.

Information reporting

IRS studies have shown that tax compliance is high when third party reporting is involved. For example, employers already report an employee's earnings to the IRS. The IRS uses this information to match the taxpayer's reported information on his or her return.

The success of information reporting by employers encouraged Congress to extend it to other areas. In recent years, Congress imposed information reporting on payment card transactions and sales of securities by brokers.

Payment cards

The IRS's proposed rules on reporting for merchant transactions cover how to implement new information reporting requirements for payment card transactions starting in 2011. The proposed rules include examples and describe how banks and other entities must report payments to payees in settlement of a payment card transaction, as well as transactions settled through third-party payment networks.

The reporting requirement is effective for transactions in calendar years after December 31, 2010. The IRS is also preparing to post a draft version of Form 1099-K, Merchant Card and Third-Party Payments, on its website at www.irs.gov.

Broker reporting

The IRS also issued proposed on reporting sales of securities by brokers and determining the basis of securities. For example, the proposed rules discuss the requirement that brokers show the gross proceeds of a covered security as well as information about the customer's adjusted basis in the security and whether any gain or loss is long-term or short-term. Covered securities include stocks, bonds, notes, and other debt instruments, as well as certain commodities and other financial instruments.

The proposed rules also address how a broker determines the basis required to be reported. The proposed regulations also provide guidance with respect to various reporting obligations including wash sales, short sales, sales by S corporations, among others.

The proposed regulations generally will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The IRS issued a draft version of new version of Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions." The expanded Form 1099-B, to be first used for calendar-year 2011 sales, must be filed with the IRS and furnished to investors in early 2012.

For more information on your potential obligations under these proposed regulations, contact our office.

IR-2009-106, IR-2009-118