CPAs Comment on Inconsistent Bond Premium Amortization Reporting

The Texas Society of Certified Public Accountants (TSCPA) is a nonprofit, voluntary professional organization representing more than 26,000 members. One of the expressed goals of the TSCPA is to speak on behalf of its members when such action is in the best interest of its constituency and serves the cause of CPAs in Texas, as well as the public interest. TSCPA has established a Federal Tax Policy Committee (FTP) to represent those interests on tax-related matters. The FTP has been authorized by TSCPA's Board of Directors to submit comments on such matters of interest to committee membership. The views expressed herein have not been approved by the Board of Directors or Executive Board and, therefore, should not be construed as representing the views or policies of the TSCPA.

We anticipate the Internal Revenue Service's (IRS) inconsistent instructions to brokers regarding the reporting of taxable bond premium amortization will cause major problems for taxpayers, tax return preparers and IRS enforcement. Specifically, the instructions and temporary regulation Section 1.6049-9T¹ require brokers to make inconsistent assumptions for "covered" and "noncovered" bonds, which may result in inadvertent noncompliance.

The instructions direct brokers preparing Forms 1099-INT for taxable bonds their clients purchased at a premium to assume the taxpayers made the irrevocable election to amortize the bond premium under Section 171 of the Internal Revenue Code (IRC) for covered bonds only. In reality, taxpayers rarely make this election. Another problem is that this mandate to brokers creates reporting inconsistencies for the much greater number of individuals who also hold taxable bonds they acquired at a premium before the effective date of the covered bond rules (i.e., noncovered taxable bonds).

For investors holding taxable bonds, the IRC Section 171 election is comprehensive in that it requires amortization of all taxable bond premiums, not just the covered bond premium. It stands to reason, with the unprecedented decline in interest rates since the recession, most if not all bonds issued before 2008 and acquired after that date required a premium payment. The instructions direct brokers to report the amortization only on the covered bonds while reporting the gross amount of interest on the noncovered bonds. In nearly all cases, a taxpayer holding both covered and noncovered bonds will unknowingly end up in violation of IRC Section 171 by reporting the taxable interest figures provided by the broker because Section 171 requires amortization of taxable bond premiums for all taxable bonds if the election is made.

Regulation Section 171-4(a)(1) provides that taxpayers electing to amortize bond premium on taxable bonds should attach an affirmative election statement to their tax returns. We are concerned that taxpayers may not be aware of this requirement and therefore may not have a proper election.

We appreciate that this election may be beneficial to taxpayers and taxpayers may be able to independently calculate the premium amortization on the noncovered bonds. Historically, however, the time and effort necessary to make the calculations have resulted in very few taxpayers making the election because it's simply not cost effective.

The IRS mandate to brokers has now forced these taxpayers into a dilemma. The taxpayer can make calculations that are not cost effective and that will result in reporting interest income on the tax return that conflicts with the amount the broker has reported to the IRS. The taxpayer in this scenario should, but may not, attach an explanation to his or her tax return in order to reconcile the difference between the amount reported for a bond on Form 1099-INT and the amount reported on the tax return. Another possibility is perhaps the most likely outcome. In this modern age where broker information can be directly downloaded into tax preparation software, many, if not most, taxpayers will be totally unaware that, in doing so, they will be submitting incorrect returns that violate the requirements of IRC Section 171.

We understand taxpayers could have notified their brokers before Dec. 31, 2014 not to report the taxable bond premium amortization on covered bonds. However, this notification was not widely publicized and the vast majority of taxpayers were, and still are, unaware the IRS is effectively compelling the amortization election on taxable bonds.

We respectfully ask the IRS to consider implementing the following seven recommendations:

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