February 6, 1992
TO: TAX COMMITTEE NO. 4-92
ACCOUNTING/TREASURERS COMMITTEE NO. 7-92
OPERATIONS COMMITTEE NO. 4-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 6-92
RE: CORPORATE INFORMATION REPORTING SURVEY
__________________________________________________________
Introduction
Serious consideration is being given by Congress and the
Internal Revenue Service ("IRS") to requiring payors to report
certain tax information to corporate payees. One possible
proposal would limit such reporting to corporate payees with
assets of $10 million or less.
The Government Operations Committee of the U.S. House of
Representatives intends to hold hearings regarding corporate
information reporting this summer and has asked the IRS to
prepare, by June 1992, a detailed cost/benefit analysis of a
corporate document matching program. For the IRS to complete
this analysis, they will need data on the costs that such a
program would impose on the business community. These costs
would include both costs associated with (1) sending IRS Forms
1099-DIV, 1099-INT and 1099-B to corporate shareholders and (2)
receiving IRS Forms 1099-DIV, 1099-INT and 1099-B from entities
in which corporations invest.
Many have argued that the costs to the business community
of such a program would substantially outweigh any benefit that
might be derived, especially if the reporting requirement applied
to all corporate payees. To help determine the costs that such a
program might impose on the investment company industry, we have
developed the attached survey, which we ask you to return by
February 28, 1992.
Background
For several years, the House Government Operations
Committee and the General Accounting Office ("GAO") have been
urging the IRS to implement a program that requires reporting of
tax information to corporate payees and then "matches" the
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information provided to corporations with the information
included in their tax returns. The IRS has in the past resisted
efforts to establish such a program because, in IRS' view, the
amount of noncompliance among corporate payees is small compared
to the costs and complexities associated with such a program.
GAO believes, however, that the amount of noncompliance is much
larger.
Attached is a report prepared by the House Government
Operations Committee, entitled "The Feasibility of Initiating a
System for the Verification of Corporate Tax Returns Through an
Information and Document Matching Program at IRS". In the
report, the Committee recommends that IRS work with its
Information Reporting Program Advisory Committee ("IRPAC"), of
which I am a member, to develop a comprehensive cost-benefit
analysis of a prototype corporate document matching program. The
analysis is to include an estimate of the costs that such a
reporting and matching program would impose on the payor
community and the corporate recipients of these information
returns. The House Committee further recommends that a pilot
corporate matching program (limited initially to the reporting of
interest, dividends and rents) be implemented, with IRS receiving
information returns for the 1993 tax year and beginning to
"match" information returns with corporate tax returns in
calendar year 1995. If the pilot effort is successful, it is
recommended that IRS expand the program to collect capital gain
and royalty income information returns. Finally, the Committee
recommends that the IRS present to Congress the results of their
comprehensive cost/benefit analysis and their plans for the pilot
test no later than June 1992.
Possible Information Reporting System
The IRS is presently studying a possible information
reporting system that would have, among other things, the
following features:
(1) Forms 1099 for corporations would be different from
current calendar year Forms 1099 for individuals in
that, while reporting would still be done annually
following the calendar year-end, the reports sent
to corporate payees would include a month-by-month
breakdown of payments made, separately stating US-
source and foreign-source income. To facilitate
this new reporting scheme, the current Form 1099
would be expanded to allow for up to twelve
additional entries, one for each month in the
calendar year. Up to thirteen entries (a total-
amount entry and twelve monthly entries) could also
be needed to show any foreign-source income paid by
the fund. Monthly breakdowns of payments could be
needed under this system to permit reconciliation
of the information reported on calendar-year Forms
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1099 with the fiscal-year tax returns of many corporate payees.
Forms 1099-B would remain essentially the same, with information
reported on a transactional basis.
(2) Payors would be required to identify on the
information return the tax status of the entity
(e.g., individual, partnership, corporation, etc.)
to which they are providing the information.
(3) Payments of reportable income (such as interest,
dividends and capital gains) would be reported to
shareholders on the cash method of accounting (even
though many corporations report income on the
accrual method).
(4) Corporate income tax returns would separately state
interest and dividends (at the least) based upon
domestic or foreign source. This requirement would
be needed to match domestic-source interest and
dividend income (which would be reported by
domestic payors to domestic payees) with the amount
of such income included on the tax return.
(5) A new form similar to Schedule B of Form 1040 would
be needed so that corporations could list on their
tax returns each of the payors of certain types of
income, such as dividends and interest, that they
receive.
Survey Request
The attached survey is intended to assist the Institute and
the IRS Advisory Committee in preparing an analysis of the
burdens that a corporate reporting and document matching program
would impose upon the business community in general and the
investment company industry in particular. The first part of the
survey relates to information returns that would be sent by funds
to corporate shareholders. It is likely that most of the costs
arising under this part would be incurred at the transfer agent
level. The second part of the survey relates to information
returns that would be received by the funds on their portfolio
investments. It is likely that many of the costs associated with
receipt of Forms 1099 would be incurred at the fund accounting
level. Thus, it may be necessary to collect data from different
persons within each fund complex to complete this survey.
It is unclear whether any corporate reporting system would
be limited to certain corporate payees, such as those with assets
of less than $10 million, or whether reporting would be required
for all payees. For purposes of the attached survey, please
assume that such a reporting system would apply to all
corporations, regardless of asset size.
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To meet the short time frame set by the House Committee, we
ask each fund complex to complete one copy of the survey and
return it to me no later than Friday, February 28. If you have
any questions regarding this survey, please call me at 202/955-
3585.
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Attachments
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