The process of tax information reporting is often viewed as a necessary evil for brokerage firms and their system providers. There is a minimum level of service that is required to satisfy the regulatory requirements. Often satisfying this is considered acceptable. It is a common belief that superior tax information reporting does not help win new customers. However, most industry professionals will acknowledge that poor tax information reporting can result in lost customers. The official 1099 document and supplemental tax information is a customer contact document.

The FIS Tax Information Reporting Suite believes that superior tax information documents can and will build customer loyalty and create a competitive advantage. There is little room for creativity on the official 1099 document or substitute statement since the content and to a large degree appearance is dictated by regulation. There is, however, the ability to include supplemental information that is useful to the taxpayer for the completion of his tax return.

It is used to calculate OID income, market discount, acquisition premiums adjusted cost basis and realized gains and losses on fixed income securities. If your portfolio includes REMICs, corporate bonds, federal strips, municipal bonds or certificates of deposit securities, this calculator is what you need. You can also use the OID Calculator to create an original issue discount lifetime accrual schedule for those same securities. Since it is a subscription-based service a user password is required.

Data flow for the process begins with the weekly identification of securities by FIS. The user provides daily inputs of transactions, elections and security information in accordance process preferences and choices. In response to those files, FIS returns files of income and cost basis adjustment for each tax lot. A generic view of these data exchanges is shown below.

(REITs) are pass through vehicles for tax reporting purposes. As such, the tax character of distributions made by these investments is more likely to change at the conclusion of the year than, for example, an equity that pays dividends from current or retained earnings. Additionally, mutual funds must determine the amount of gross-ups for foreign withholding. There could also be allocations of interest and short-term gain specific to non-U.S. shareholders that impact NRA withholding. FIS Tax Information Reporting Suite (FIS TIRS) maintains a database of all RICs and REITs and actively solicits the issuers to identify instances of income reallocations (post payment changes to the tax character) or to confirm that the income character is unchanged. As part of this process FIS TIRS collects factors for foreign source income, the portion of the distribution derived from US Treasury obligations, dividend received deduction percentages and the allocations percentage, by state, of tax-exempt income. FIS TIRS also screens equity securities to identify situations where dividend payments are likely to be characterized as a return of capital and contacts the company for a determination of the tax character of the distribution. The information collected is tested and standardized so that it may be utilized and, in its original format, is viewable on the FIS TIRS web site.

The Income Reallocation service is offered in three ways: A Data Browser via the World Wide Web, a Database and a Transaction Processing service. Regardless of the service level subscribed to, you identify your holdings at the outset of the process and daily reports are available on FIS TIRS's web site that document the progress of collecting the data that is relevant to your firm.

Monthly CUSIP files are provided as a tool for Nominees to update their security master, ensure cash payments are classified correctly and as a solicitation of transaction activity. Demographic and transaction activity is edit tested and balanced with on-line error reports. Nominee account numbers are masked with an FIS TIRS account number as a safeguard to Nominee Customer information. Both Nominees and Partnerships are given web access to view the data should any K-1 questions arise.

The service encompasses two process modules:

• Structured MBS Module
  
This process module covers mainly the Real Estate Mortgage Investment Conduits (REMIC) and the Collateralized Debt Obligations (CDO). This service identifies the collateralized debt obligations and REMICs held, and provides your firm with the calculation of the 1099 reportable income, additional written statement and the calculation of secondary market adjustment information, (premium and discount information), for investor level tax reporting. Monthly CUSIP files are provided as a tool for your firm to update your security master, ensure cash payments are classified correctly and as a solicitation of transaction activity that FIS Tax Information Reporting Suite (FIS TIRS) utilizes to perform income calculations. Income calculations are performed once annually in March to meet your March 15th 1099 reporting obligation.

REMICs are subject to accelerated repayment of principal. Issuers are required to adjust income accruals based on the actual prepayment history relative to the prepayment history projected at the time of issue. For this reason, the tax factors must be collected from issuers and are only available periodically. Certain REMICs (Combinables) are constructed as combinations of other underlying REMICs. FIS TIRS maintains a database of these issues and since, data is only available on the underlying classes, unwinds Combinables into their underlying components for processing. FIS TIRS also provides daily on-line management reports covering the progress of the data collection process so clients can optimize the decision of when to process their 1099s.

• Pass Through MBS Module
  
This process module covers the mortgage-backed securities that are classified as Widely Held Mortgage Trusts (WHMTs), a subset of Widely Held Fixed Investment Trusts (WHFIT). There are three major WHMTs issuers, Freddie Mac, Fannie Mae, and Ginnie Mae. The service collects the tax factor files from these issuers and applies the information to your firm's transactions and payment activities to create comprehensive schedules of gross income, expense, and other required information indicated under the WHFIT regulation. Because the tax factor files are only available once a year, the security identification file can only be updated and distributed annually. However, the securities can be identified based on certain criteria.

The output of this module is offered in three versions:

• Data Files: Data files are returned giving payment by payment detail of income, expense, proceeds, withholding, principal factor, market discount fraction, and income adjustment. Separate records are supplied summarizing the above elements for the tax year.
• Supplemental Schedule Print Image: For each holding a print image is returned showing the summary and detail. This is to be used as an additional schedule for client reporting.
• Full Statement Image and IRS Filing: This option returns a complete print image of the statement to be delivered to the investor. Also, a 1099 filing is made with the IRS on behalf of the subscriber.

New inventions of financial engineering have introduced to the market many structured product instruments whose payment events have grown in complexity, requiring additional information, which, in some cases changes from year to year. To assist brokerage firms in capturing all the reporting events correctly, WSC FIS Tax Information Reporting Suite (FIS TIRS) provides various tax related information and consolidated reports via the TEFRA Glossary service. Among the areas covered by the service are:

• Identification of Fixed Rate Capital Securities and the characterization of their income as partnership distribution, interest, OID or miscellaneous income.
• Identification of securities requiring payment allocations such as reverse convertible securities and the percentage allocation of payments among interest, option premium, contract fees and other distribution categories.
• Identification of contingent payment obligations, their payment schedules and differences with actual payments made.
• Identification of issues with deemed payments and tax credits that must be reported based on record date holdings rather even in the absence of an actual cash transaction.
• Identification of implicit redemptions of debt bundled in reverse convertible issues.
• Identification of broad-based option contracts that are subject to Section 1256 reporting.

This includes an on line browser, periodic delivery of database files and coverage expanded to additional asset classes. WSC FIS TIRS specializes in the identification, collection, standardization and processing of data to facilitate the production of Forms 1099 and K-1, as well as preparation of individual tax returns.

Unit Investment Trust (UIT) Transaction Processing is performed quite like transaction processing for bond OID accruals and mutual fund income reallocation. That is, clients receive a solicitation file from FIS Tax Information Reporting Suite (FIS TIRS) that identifies all UITs known to us. Using that list of trusts, clients extract all transactions for the year that are related to those security identifiers. After receiving the extract file from the client, FIS TIRS loads the original UIT transactions received from the client into a database, performs a series of edits on the data, resolves any serious problems with the client, and awaits the arrival of the end-of-year data from the trustee. After year-end accrual and gross up rates arrive, are posted and edited, the year-end UIT adjustments are performed - in batches as the trustee data is posted.

For OID accruals, a preliminary step computes holding periods for trusts with OID data. "Calculation periods" (periods for which the accrual rate and the units held are constant) are defined for the year by OID accrual period end dates or acquisition or disposal transaction dates.

Other support services are provided by FIS TIRS to help clients review and manage this activity. First, the loading edit report is made available to help resolve possible problems in the input data. After the data is corrected and approved to be loaded, and after the yearend processes have been run, the client can view original and adjusting transactions for a selected holding (account code + security identifier) using a password-protected display on our web site. For spot checking purposes, there are links to a display of the accrual and gross up factors for the selected trust, and there are daily web based management reports identifying UITs processed and UITs waiting for data with statistics on holders counts for each and summary statistics about the progress of the UIT adjustment process. These services are almost identical to those provided to FIS TIR's Income Reallocation customers and some of the calculations for these trusts are quite similar.