Tax-exempt interest, including exempt-interest dividends from mutual funds, is now subject to tax reporting to both individuals and the Internal Revenue Service (IRS) on Form 1099-INT.
Furthermore, the amount that could be subject to the alternative minimum tax (AMT) is now reported on line 9 of Form 1099-INT.
If a tax-exempt fund pays a taxable dividend, such as a short-term or long-term capital gain, the income will be reported on Form 1099-DIV, Dividends and Distributions. Individuals may receive two forms: Form 1099-INT, reporting any tax-exempt interest, including exempt-interest dividends, and Form 1099-DIV, reporting any taxable dividends.
Tax-exempt interest is now subject to the 28% rate of federal income tax backup withholding if a taxpayer has failed to certify the taxpayer identification number on file for the account. Any tax-exempt backup withholding will be reported to individuals and the IRS on Form 1099-INT.
For more information regarding reporting tax-exempt interest, see Notice 2006-93 at the IRS Website.