Bond Premium Amortization Update

It is important that you advise your bond-holding clients to contact their brokers by the end of December to request that bond premiums be amortized on all taxable bonds for their 2015 information returns. A less advantageous compliance alternative would be to inform the broker that you do not wish to amortize premiums on any bonds. The 2014 Form 1099-INT instructions and temporary regulations under Section 1.6049-9T require brokers to make inconsistent assumptions for “noncovered” and “covered” bonds, which may result in inadvertent noncompliance. (In general, covered bonds are those that were acquired after 2013 and that are covered by the broker basis reporting rules as described in Reg. Section 1.6045-1(a)(15)(i)). In the past, few taxpayers elected to amortize taxable bond premiums under IRC Section 171 because the information for making the election was not readily available. New rules released in March generally require brokers to report taxable bond interest and the basis on covered taxable bonds as if the election had been made. Some brokers have implemented the rules earlier than required, which may cause some erroneous basis computations. Taxpayers and return preparers should carefully review the basis computations to ensure they reflect only amortization actually taken. While the amortization election is generally advantageous to taxpayers, it must apply to all taxable bonds, including any noncovered bonds in the taxpayer’s portfolio. This inconsistent 1099 treatment can cause a possible invalid election and mismatching of both interest income and basis reported on tax returns versus Forms 1099. TSCPA’s Federal Tax Policy Committee commented to the Treasury on this issue, but the comments were not heeded.

https://www.irs.gov/irb/2015-13_IRB/ar15.html