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On Big Brother Expands Reach
Q
Regarding your article on financial institutions now being required to report bondholders’ tax-exempt interest to the IRS: What’s the reasoning behind this move? If the interest isn’t taxable, this doesn’t make sense to me. Can we withhold this information on our tax forms, since providing it appears to serve no purpose?
A
James A. Klotz responds:
The expanded tax-free income reporting requirements to which you refer were passed into law by Congress. Withholding this information, as you suggest, is illegal and can have serious consequences, particularly since broker/dealers will be required to furnish the IRS with municipal bondholders’ information with respect to payments of tax-free interest.
Incidentally, there is a method to this madness. Although the interest is not taxable, certain levels of tax-free income can reduce other benefits you receive, such as Social Security.
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