Tax professionals can earn additional revenue by helping their clients cope with the complex rules around cost basis reporting.
A new report from the research firm Celent finds that the new cost basis reporting requirements present an opportunity for tax preparers to offer specialized services and regain some of the market share lost to do-it-yourself tax preparation software.
The Emergency Economic Stabilization Act of 2008 mandated new requirements for cost basis reporting. Financial intermediaries such as broker dealers need to report adjusted cost basis information for covered securities to the Internal Revenue Service and to taxpayers. The legislation phased in the required reporting of securities over a period of three years. We have now passed Phase II of the requirements, and brokers should be currently tracking adjusted cost basis for stocks acquired after Jan. 1, 2011, and for mutual funds and dividend reinvestment plans acquired after Jan. 1, 2012.
The IRS and the Treasury Department recently delayed the proposed effective date for cost basis reporting for debt instruments and options until Jan. 1, 2014 (see IRS Delays Reporting for Debt Instruments and Options).
Celent estimates that there are approximately 25 million households holding investment accounts, and approximately 65 million total retail investors. Approximately 20 to 25 percent of all investor households will seek help by going to a CPA or a specialty tax firm for filing their taxes and for a consultation from a tax specialist, the firm estimates. This amounts to approximately 6 million households.
The study was sponsored by NetWorth Services, a company that provides cost basis reporting software, Netbasis.
“Tax professionals are not recognizing the opportunity in its entirety,” said NetWorth Services CEO Nico Willis. “We were just thrown back by how much of a potential there is. We knew anecdotally because we saw the amount of money that the brokerage industry was putting into their communications, saying that you must talk to your tax professional about these particular items that we call the top reporting gap issues. They were passing the golden baton to the tax professional. This report clearly identifies that there’s a tremendous opportunity with the tax reporting gap issue around that challenge.”
Celent noted that the new Schedule D forms and Form 8949s are increasing the reporting burden for retail investors. Investors are also finding various discrepancies between their tax forms and the 1099-Bs sent by the brokers. They frequently need the help of tax professionals to sort out the discrepancies, which can be attributed to differing reporting requirements between brokers and retail investors.
The report found that the new cost basis reporting regulations could provide as much as a $450 million a year market for tax firms and CPAs. The estimate combines the online and full-service channel and provides a low and high estimate. The high estimate of $330 million will reach close to $450 million by 2015; the low estimate of $270 million in 2012 will reach $370 million by 2015.
NetWorth Services is working with a number of large accounting firms to help with their cost basis work on behalf of clients, including CBIZ and Anchin, along with a number of smaller firms. “The tax professional community has always tried to find ways to annualize their relationship with their client, and find ways to engage the tax client and add value,” said Willis.