In recent years, the IRS has grown more technologically sophisticated. Practitioners may have noticed an increase in the number of notices that clients receive—many of which can be attributed to Form 1099 "matching." The experienced taxpayer knows that Forms 1099 do not always paint the entire picture. The Service is aware of this and has been taking steps to ensure more accurate reporting while simultaneously decreasing processing times—a result beneficial to taxpayers and the IRS alike, hopefully meaning fewer notices.
As part of this effort, taxpayers will be receiving additional information in 2016 relating to bond premiums on Forms 1099-INT, Interest Income, and 1099-OID, Original Issue Discount. One major change would be the addition of "Bond premium on Treasury obligations" to box 12 of the 2016 Form 1099-INT. Previously, box 12 was left blank.
The second noticeable change is the reporting of "Bond premium" in box 10 of the 2016 Form 1099-OID. In the past, box 10 was a "State" input. This has been pushed to box 11.
So why are these additional boxes helpful, and what are the various nuances that preparers should still be aware of?
Normally, brokers assume that taxpayers wish to amortize the amount of bond premium over its life. However, as stated in Regs. Sec. 1.6045-1(n)(5)(ii)(A), a taxpayer can notify a broker in writing that he or she does not want to amortize bond premiums. In this case, box 12 should be left blank. Taxpayers may not want to amortize bonds if the broker has not been tracking bonds, or if the security is not covered for reporting purposes, and they do not want to manually track the amortization.
Covered Securities Only
The bond premium amortization allocable to the interest paid during the tax year that is reported on Forms 1099-INT and 1099-OID will be for covered securities only. Covered securities are a class of securities with federally imposed exemptions from state restrictions and regulations. Rather than having individual companies register, file, and comply with regulations that differ based on jurisdiction, a standardized set of rules was created. Covered securities are reported to the IRS, while noncovered securities are not. Consequently, there may be additional bond amortization that is not reported on the forms.
Tax-Exempt Bonds Automatically Apply
According to Regs. Sec. 1.6049-9(b), the reporting "also applies to amortizable bond premium on a tax-exempt obligation, which is required to be amortized under section 171." However, the amortization cannot reduce income when it is tax-exempt.
Netting Box 3 on Form 1099-INT
If the broker has reduced the interest income from box 3, "Interest on U.S. Savings Bonds and Treas. Obligations," by the amount allocable to bond amortization, then box 12 should be blank.
A tax practitioner should find the additional reporting to be of assistance, but the aforementioned situations highlight that the new "Bond premium" boxes do not always accurately tell a given client's whole story. Becoming familiar with the new forms can help a practitioner properly and efficiently report a client's bond premiums and allow the practitioner to identify and appropriately respond to a client's notices.
Michael Koppel is a retired partner with Gray, Gray & Gray LLP in Canton, Mass.
For additional information about these items, contact Mr. Koppel at 781-407-0300 or firstname.lastname@example.org.
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