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April 21, 1989
TO: TAX COMMITTEE NO. 5-89
OPERATIONS COMMITTEE NO. 7-89
TRANSFER AGENT SHAREHOLDER ADVISORY COMMITTEE NO. 10-89
CLOSED-END FUND COMMITTEE NO. 11-89
UNIT INVESTMENT TRUST COMMITTEE NO. 19-89
RE: INSTITUTE STATEMENT ON INFORMATION REPORTING PENALTIES
__________________________________________________________
Attached is the Institute's statement to the House Ways and
Means Subcommittee on Oversight concerning the Internal Revenue
Code's civil penalty provisions. The Subcommittee is currently
conducting a comprehensive review of present-law civil penalties
and plans to provide a report with recommendations to the full
Ways and Means Committee upon completion of its review.
The Institute has numerous concerns with the existing due
diligence and backup withholding regulations. Two principal
concerns are highlighted in the statement. First, the due
diligence standard for post-1983 accounts has been defined to
force investment companies to make one of two choices in order to
avoid the section 6676(b) penalty: either refuse to open or,
subsequently, close the accounts of shareholders who do not
certify their TINs. The statement emphasizes that this
requirement puts investment companies at a competitive
disadvantage and is untenable. Second, an investment company in
a complex may not treat as certified a TIN provided by a broker
for a shareholder who invested in another investment company in
the same complex and wishes to transfer money from the first,
broker-introduced, account to a new account without the
assistance of the broker; this requirement is too inflexible
because the first investment company is generally entitled to
treat the TIN as certified and no policy reason supports
requiring a shareholder to use a broker to switch accounts within
a single complex.
The Institute's statement indicates that the industry
supports reasonable efforts to enhance tax compliance; the
Institute supports imposing backup withholding on shareholders
and taking other measures to ensure that shareholders either
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provide correct, certified TINs or pay the appropriate tax on
their investment company earnings. For this reason, the
Institute has, for the past 6 years, worked with the Treasury and
the Internal Revenue Service in an effort to develop a reasonable
definition of due diligence that effectively accomplishes the
goals of the Interest and Dividend Tax Compliance Act of 1983.
However, because the Institute's efforts to develop such a
standard have been unsuccessful, the Institute believes that
legislation is necessary.
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachment