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GreenTraderTax Blog
GreenTraderTax
November 20, 2012
Cost-Basis Reporting Problems and Solutions
By Robert A. Green, CPA
If you trade or invest in securities, you need to learn about “cost-basis reporting,” a new set of IRS rules for taxpayers starting with 2011 tax filings. Previously, taxpayers could simply enter their capital gains and losses (proceeds, cost basis and holding period) onto Schedule D of their individual income tax return. That’s no longer allowed, so 2011 and 2012 tax returns are proving to be a challenge.
Under the new cost-basis reporting regime, taxpayers must decipher broker-provided Form 1099-Bs. In tax years prior to 2011, taxpayers and their accountants could easily use a Form 1099-B to enter proceeds from each securities sale on their Schedule Ds. Taxpayers then entered their own record of cost-basis information and they were finished. Investors often looked up the original purchase price in an earlier brokerage statement and considered stock splits or other corporate actions, which are rare. Active traders generally used software like TradeLog, which downloaded all trade executions and provided an easy-to-use Schedule D-1 attachment.
You would think that when brokers entered the picture providing cost-basis information to taxpayers and the IRS on Form 1099-Bs, taxpayer compliance would be easier. You would be very wrong! (I explain this problem in an interview for MoneyShow.com: "Tax Flubs That Can Cost You Thousands“.)
Take one look at your 2011 Form 1099-B and you will see the problem. While stock proceeds may look the same as prior years, the new cost-basis information is extremely confusing. Some brokers mark cost information with quirky new codes like P (provided to the IRS), N (not provided to the IRS) and W (wash sales). Some brokers do not provide totals for the amounts they are reporting. Plus there are covered securities, non-covered securities and other. All individual trades must be entered on the new 2011 tax form 8949, which includes Parts A (proceeds and cost basis both reported to the IRS), B (proceeds reported to the IRS but not cost basis) and C (other or not reported on a 1099). Separate Form 8949s must be filed for short term and long term. Add it up: That’s up to six different categories on the Form 8949s instead of the single Schedule D required in the past. This is a huge burden and is very confusing for taxpayers.
That’s just a fraction of the problem. Many brokers are using back-office accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years, and some are omitting 2010 wash sale cost basis deferred into 2011. Also, most brokers rushed 1099-Bs to the printer before doing an end-of-January wash-sale calculation. In addition, the rules brokers are required to follow for 1099-B reporting are different from the rules for taxpayers: Most brokers report wash sales between “identical positions” (the same symbol only), whereas taxpayers are required to report wash sales between “substantially identical positions” (such as between stocks and options). How can the IRS ask brokers and taxpayers to report wash sales differently? Even if brokers get everything right, broker-provided wash sales would still be wrong because they only report wash sales in one account, whereas a taxpayer must report them across all taxable accounts, including IRAs.(For more details, see our March 20 blog.)
Using a 1099-B for wash sale reporting is a big mistake. IRS cost-basis reporting rules state that taxpayers should not rely on 1099-Bs for tax reporting purposes. What? (Read more about this concept on our Aug 16 12 blog - Why do forex forward dealers issue 1099s, yet retail spot forex brokers do not?)
Phasing in the rules seems to be part of the problem. While the IRS phased in the new rules for brokers, it did not do so for taxpayers. The IRS is giving taxpayers the difficult job of deciphering all the inevitable discrepancies between 1099-Bs and Form 8949 results.
What should you do?
We suggest reading our blogs on this saga to understand the new IRS rules, how 1099-Bs are constructed and how you should handle Form 8949. We recommend using software like TradeLog and filing an extension.
For the 2011 tax-filing season — which ended on the extension deadline of Oct. 15, 2012 — IRS relief never came, and most brokers were not able to sufficiently correct their 1099-Bs. We filed 2011 tax returns as explained in our blogs below, and attached a suggested footnote explanation.
Ways to avoid Form 8949
Business traders qualifying for trader tax status are entitled to elect Section 475 mark-to-market (MTM) accounting on a timely basis (by April 15, 2013 for the 2013 tax year). Section 475 business trades are reported on Form 4797 Part II (ordinary gain or loss) and not on Form 8949. Although Section 475 extricates traders from the compliance headaches of Form 8949, it does not change their preferred solution. Either way, traders should use TradeLog software to download their trades and calculate their required trade-by-trade gain or loss. Another way out of Form 8949 is to use an entity, which we recommend for business traders to reduce red flags on trader tax status. The IRS does not currently use Form 8949 on entity tax returns.
We recommend a Section 475 MTM election for business trading in securities only. We don’t recommend Section 475 MTM for Section 1256 contracts – which you are permitted to exclude from the Section 475 MTM election - so traders don't lose lower 60/40 tax rates (currently up to 12% less). Don’t worry, Section 475 MTM is not permissible on segregated investments, so traders can enjoy tax deferral at year-end, and also hold for 12 months to generate lower long-term capital gains rates (currently up to 15%). Section 475 MTM reports both realized and unrealized gains and losses at year-end.
Be prepared for similar problems for 2012 returns
More cost-basis reporting items will be phased in for 2012 returns. Per Fidelity’s “Frequently asked questions about cost basis”: "On January 1, 2012, the second phase of the cost basis tax reporting requirements goes into effect. This next phase impacts reporting of securities eligible for average cost including mutual funds, exchange-traded funds (ETFs) classified as registered investment companies, and dividend reinvestment plans (DRIPs)." We are working on mutual fund bifurcation tax issues, and we plan to publish a separate blog on that subject soon.
We expect some brokers to compound wash sale loss problems from 2011 into 2012. If brokers only report potential wash sales in 2011 and 2012, they may not connect the years and related wash sale loss reporting problems, although that reporting is basically useless to taxpayers. Conversely, if brokers report overstated 2011 wash sales as part of 2012 cost basis, it will lead to overstating cost-basis in 2012, which then will lead to understating taxable income. We won't know if this will happen until our CPAs start seeing 2012 Form 1099-Bs. Stay tuned.
An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings
By Robert A. Green, CPA
Many tax preparers and traders have put 2011 tax return filings on hold, awaiting corrected 1099-Bs from securities-broker clearing firms. Unfortunately, many clearing firms are struggling and they simply can’t provide a 1099-B that tax preparers can rely on. How should preparers and traders proceed, considering that 2011 extended tax returns are due Sept. 17 for pass-through entities and Oct. 15 for individuals?
Taxpayers can’t hold out for corrected 1099-Bs any longer; they probably will never come. By law, taxpayers are responsible for reporting their securities trading gains and losses correctly on Form 8949, no matter what shape their 1099-B is in. If the broker has botched the 1099-B, it may help a taxpayer seek abatement on late-filing and late-payment penalties, but it won’t excuse taxpayers from reporting their trading gains and losses and paying the taxes they owe, including interest if late.
When taxpayers receive an incorrect Schedule K-1, they can file a Form 8082 "Notice of Inconsistent Tax Treatment" when they report a different amount or different tax treatment. But Form 8082 is not necessary with botched 1099-Bs in connection with the new IRS cost-basis reporting rules.
Our firm ended the tax-filing bottleneck a month ago. It’s time to start filing 2011 tax returns and to go with the army you have. That means using TradeLog software for trade accounting and any available broker profit and loss reports if they are in good shape and they can help you double-check TradeLog.
We work with the most recent "corrected" Form 1099-B our clients received, but mostly just to reconcile the totals and explain the differences on Form 8949 and in our tax return footnote. We published an example tax return footnote for TradeLog accounting on our blog dated Aug. 17, 2012.
We know key departments of the IRS are aware of the cost-basis reporting problem, and the AICPA has asked the IRS not to issue tax notices and exams when Form 8949s and 1099-Bs don't match up. We asked the IRS for this same relief in our Petition to Congress. But we don’t know if it will honor this request. So, in the TradeLog tax return footnote, we explain that Form 8949 totals do reconcile with Form 1099-Bs after making the adjustments. That’s why we want the last corrected 1099-B available.
Tax preparers: We suggest you use TradeLog and our footnote, and consult with us if you have questions. Otherwise, you need to resign your account. It’s not fair to keep a client waiting, because they could be hit with large penalties, interest and tax bills that don’t make any sense. See our cost-basis reporting resources for more background information. August 17, 2012
Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules
By Robert A. Green, CPA
See "An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings"
Here is an example 2011 tax return footnote that we use for our TradeLog accounting clients. We use a modified version of this footnote for our tax preparation clients who use TradeLog software. For background information about the IRS cost-basis reporting issues and problems with 1099-Bs, see our Cost-Basis Reporting Web site page and related links to blog articles, Webinars, videos and more.
Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules
Taxpayer files a Form 8949, which accounts for new IRS cost-basis reporting rules required on securities-broker-issued Form 1099-Bs. As an active investor, taxpayer has hundreds if not thousands of securities trades and compliance with the cost-basis reporting rules is a major undertaking as detailed below. This footnote is intended to explain how taxpayer handled the compliance on Form 8949.
Accurate tax reporting is the responsibility of the taxpayer, not the broker
The IRS continues to place the burden of accurate tax reporting on the taxpayer, as is evident by the requirement for brokers to include a reminder to taxpayers that "taxpayers are ultimately responsible for the accuracy of their tax returns (Pub. 1179 4.3.2)." The Information Reporting Program Advisory Committee noted this problem in its 2009 report to the IRS, stating: "Since it is impractical to require that financial institutions be responsible for tracking all possible events and taxpayer-level elections that affect basis, financial institutions should be treated as passive repositories of basis information, rather than guarantors as to its accuracy" (IRS Notice 2009-17).
Taxpayer used TradeLog software, which calculates wash sales according to IRS Publication 550, whereas, brokers do not
Taxpayer used what is considered to be the most reliable securities trade accounting software program on the market, TradeLog by Armen Computing. TradeLog software generates a compliant IRS Form 8949. TradeLog properly accounts for trading activity with securities brokers and reports the activity on taxpayers' income tax returns. TradeLog imports the actual raw trade data of buys and sells from the brokers. TradeLog then accounts for trading gains and losses with short-term versus long-term capital gains holding periods, and it calculates wash sales in accordance with IRS law.
It's important to note that the IRS subjects securities brokers to different tax rules than taxpayers, so you can't prepare a tax return based on a Form 1099-B alone. For example, IRS rules for broker-issued Form 1099s call for wash sales to be calculated based on "identical positions," whereas the IRS requires taxpayers to use "substantially identical positions," which means wash sales between stocks and options, too. TradeLog is one of the only programs on the market that can handle substantially identical positions. Brokers don't have the means of calculating wash sales across different brokerage platforms, but the IRS requires taxpayers to do so.
Most brokers are issuing incorrect Form 1099-Bs
IRS cost-basis reporting rules are new for 2011, and many brokers are interpreting and applying them in different ways, some of which are incorrect as of this date. Some brokers incorrectly adjust the sale proceeds of some trades for wash sales instead of the proper cost basis adjustment. Some brokers include 2010 cost basis of securities, whereas most brokers only report the required 2011 cost basis of securities purchased in 2011. Other brokers don't exclude open short sales from proceeds, as is now required by the IRS. For more examples of Form 1099-B errors, see http://www.tradelogsoftware.com/tax-topics/1099b-problems/.
As stated above, the IRS has one set of rules for Form 1099-Bs (apples) and a different set of rules for taxpayers (oranges). TradeLog focuses on tax reporting for taxpayer's tax return filings and determining the correct taxable income or loss, whereas Form 1099-Bs focus on broker rules. Therefore, based on historical evidence we believe the TradeLog-generated Form 8949 is more complete and accurate than the broker provided Form 1099-B.
Adjustment displayed on Form 8949
Many taxpayers have been finding errors on their Form 1099-Bs and have been requesting their brokers to correct them. While many have received corrected Form 1099-Bs, some brokers have not provided corrections yet, as it might require a major adjustment to their tax-reporting and accounting systems.
TradeLog provides a feature to reconcile Form 1099-B totals (proceeds and purchases), although it does not provide the means to reconcile Form 1099-Bs on a line-by-line, trade-by-trade basis, and the latter is called for in Form 8949 instructions. Without line-by-line reconciliation, if the broker-provided Form 1099-B is incorrect or incomplete, Form 8949 cannot be fully reconciled with it, especially if the results are based on different IRS requirements for the taxpayer versus the broker supplying the Form 1099-B.
If TradeLog finds a difference with Form 1099-B cost-basis, it enters one or more line items for "Adjustment to reconcile difference between accounting software and broker-provided 1099-B" on Form 8949. July 11, 2012
Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences
By Robert A. Green, CPA
Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their "Webinar on July 17, 2012" (or watch the recording afterward) as they discuss the latest IRS cost-basis-reporting developments for securities traders. Green and Neuschwander will discuss the below FAQs, show tax return examples, explain our rationale, and show traders and professionals how best to proceed on this challenging issue.
The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The differences are sparking IRS tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong. See our recent Webinar on "“Botched 1099-Bs, Form 8949 Differences, Tax Prep Tips, Extensions & MTM Elections”" (Mar. 28, 2012).
Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn how to fix the errors and file amended tax returns to get refunds.
Wash sales are a big problem
1099-Bs grossly overstating wash sales seem to be the biggest culprit for errors — we saw this to the tune of millions of dollars on one taxpayer’s Form 8949. Oddly, many brokers inappropriately adjusted gross sales proceeds for wash sales adjustments, when they should have only adjusted cost basis. Many brokers reported "“potential” wash sales" in cost-basis, rather than actual wash sales, which are much lower.
FAQ this Webinar will address:
1. Question: Is it safe to file a 2011 individual income tax return/Form 8949 containing differences between your own trading profit and loss and amounts reported on Form 1099-Bs?
Answer: Instructions for Form 8949 ask for trade-by-trade reconciliations of proceeds and cost-basis, comparing your own accounting results with Form 1099-Bs. That’s almost impossible to do for active traders with botched 1099-Bs, which seems to be par for the course on 2011 tax filings.
The only good securities trade-accounting solution that we know of is TradeLog. While TradeLog can reconcile total proceeds and cost-basis from Form 8949 to Form 1099-B amounts, it does not have the capability to reconcile each line-by-line or trade-by-trade amount to Form 1099-B. TradeLog shows the total reconciliation difference for gross proceeds and cost-basis on Form 8949. It’s the “plug” number the IRS’s computerized 1099-B matching programs look for.
These Form 8949 unreconciled amounts vary greatly. Some are under $1,000 and others are in the millions, especially when potential wash sales versus actual wash sales are involved.
While we often have some good clues or ideas on what contributes to material unreconciled differences, we can’t be certain since it’s only a total difference rather than a line-by-line difference. It can take weeks of work to figure it out. Plus, it’s often a wild goose chase with no concrete results generated.
Rationale for our answer: Since Form 8949 instructions ask for a reconciliation of differences, we display them — no matter how big or small — on Form 8949. We use the reconciliation feature in TradeLog. Some clients and tax preparers may decide to skip the TradeLog step to avoid showing a huge reconciliation item on Form 8949, thinking that may reduce the chances of an IRS exam. We disagree, as the Form 8949 instructions ask for the reconciliation, and with that plug number, the Form 8949 will match the 1099-B when the IRS runs the computerized matching program. Not showing the reconciliation may indicate the preparer is unaware of the rules and that may cause the IRS to think the return is otherwise flawed, too.
We believe it’s a mistake to delete the plug number reconciliation difference from Form 8949. The IRS could construe it to mean a tax preparer is obstructing IRS oversight and disrespecting its new cost-basis reporting rules. That’s unwise. Bottom line, leaving in the reconciliation amount helps with matching and it complies with the rules.
2. Question: What happens if the IRS audits the trader over Form 8949?
Answer: If you’re examined by the IRS, plan to give the agent your TradeLog reports, brokerage statements, and Form 1099-B. Let the agent spend weeks comparing these documents. They will see TradeLog is correct and the 1099-Bs are sliced and diced with errors. This won’t cost the client much money or time, since the CPA does little work during the exam. The IRS can fool around on its dime and time.
If you get this type of tax notice, contact us for help. We will try to get the exam “reconsidered” and point the IRS back in the direction of the broker, who it should examine instead of the trader. This only takes a few hours of our time, so it doesn’t cost much.
3. Question: How should I deal with these unreconciled differences throughout the tax return filing?
Answer: You should highlight the differences from Form 8949 vs. 1099-B footnotes, and perhaps supporting worksheets. There’s no reason to try and bury them. The taxpayer and tax preparer should clearly state what steps they took in: doing their securities trade accounting; how they prepared Form 8949; how they reconciled with the 1099-B; and what the unreconciled differences might be — as best as they can explain it. Accountants would be foolish to try and cover up a problem or not comply with these rules. We suggest that tax preparers obtain representation or acknowledgement letters from clients about this problem and process, too, so there are no misunderstandings about scope and outcome later on.
If the unreconciled difference is under $1,000, you can probably skip long-form footnote explanations; a simple note on how you used TradeLog or other software should suffice. (TradeLog offers a footnote to use as well, explaining what it does and does not do in this regard.)
4. Question: How do I e-file a tax return with a Form 8949?
Answer: If you e-file your individual income tax return, we generally paper file the Form 8949s with attachments of the TradeLog reports and related footnotes. The transmittal form is Form 8453.
E-filings for individuals currently don’t permit PDF attachments, making the separate Form 8453 filing necessary. Although we can import TradeLog files into our software, we choose not to because there are other complications that can arise.
5. Question: Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between Form 8949 and 1099-Bs? If yes, do they need to explain those differences on their tax return?
Answer: The IRS cost-basis rules call for taxpayers and tax preparers to “verify” Form 8949 to their 1099-Bs. But, verifying information like inaccurate wash sales perpetuates tax problems. The term “verify” indicates taxpayers and preparers should be sure the underlying trade information is correct, like comparing Form 8949 to actual trade confirmations. Unfortunately, 1099-Bs rarely agree with trade confirmations for 2011.
6. Question: Where do we find more information on known issues on Form 1099-Bs?
Answer: Both TradeLog and GreenTraderTax provide resources on known issues with various brokers on their 1099-Bs. "Click here". Do your best to explain as many difference in general that you can and include that in a few sentences in the footnote. We may show some examples on the Webinar.
7. Question: Do traders have to keep pressing their brokers to correct 1099-Bs?
Answer: No, but they should try their best to do so — that earns points with the IRS.
One of our clients spent 40 hours of his time finding every individual difference and he presented all the evidence to his online broker. He forced his broker to fix every error on the 1099-B. That client’s Form 8949 now has no differences.
Few clients have the time to do this. If you find some errors, try to get your broker to issue a corrected 1099-B to narrow the unreconciled differences. But, in the end, it could prove to be frustrating, time consuming, and the broker may not cooperate. Make an attempt and document it in your footnotes.
8. Question: How can I avoid this Form 8949 mess in the future?
Answer: Consider forming an entity for business trading and investing in securities. Currently, entities don’t file a Form 8949. See our recent Webinar on "“The Best Entities for Traders and Investment Management Businesses.”"
Individual business traders who elect Section 475 MTM file their trades on Form 4797, not on Form 8949. That solves the problem for business trades, but you still need Form 8949 for segregated investments. You can house both in an entity. Section 475 MTM is exempt from wash sale loss treatment. Caveat: It must be elected by April 15 of the current tax year. New taxpayers can elect it within 75 days of inception.
Or, trade futures and other Section 1256 contracts which are reported in summary fashion on Form 6781, rather than on Form 8949. Futures are not subject to wash sale treatment. See our recent Webinar on "“Tax Benefits from Trading Futures & Section 1256 Contracts.”"
Commentary
Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. It wouldn’t have needed to phase-in the rules, causing great additional confusion.
Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions — TradeLog and more — for this filing crisis. We are currently evaluating another software solution for finding differences and we should report on this soon.
Who should attend the Webinar?
If you trade securities, or have a client who does, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies isn’t the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants.
Please sign our petition
We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted rules. We’ll suggest that the IRS ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years and the IRS has consumed it properly. This is a very simple data dump, and we don’t need the extra cost and confusion. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people — middle men accountants and rule makers — out of it.
We asked Congress for IRS relief in our last Petition "“Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”" on RallyCongress.com and through other initiatives. Please sign it today. The IRS recognizes only a fraction of the problem, and it provided fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules and start over right. Is this why our tax code is an abomination of complexity?
Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: "Tax Flubs That Can Cost You Thousands".
Consultations
If you have further questions or need our help in addressing your personal situation, consider a consultation with us. We have a summer promotion on "consultations" and "entity formation services".
TradeLog Accounting Services
We offer "TradeLog accounting services" which include preparation of your Form 8949, dealing with the unreconciled differences as best we can in short order, and preparation of your related footnotes. If you have a local CPA, engage us to handle this difficult part of your tax return — your local CPA will really appreciate it.
Bottom line
Don’t file an incorrect tax return and over pay your taxes by thousands of dollars, due to botched wash sale reporting, or other 1099-B errors. And, don’t cause yourself an unnecessary IRS exam, either. Get informed, use the right software solutions, and get help from trader tax experts who understand the nuances of cost-basis reporting. June 28, 2012
Form 8949: What To Do About Tax Problems For Reporting Securities Trades
By Robert A. Green, CPA
P.S. We expanded on this blog to include Questions and Answers for our upcoming Webinar on this subject. See our blog dated July 11, 2012.
This is an important update on the cost-basis reporting crisis, Form 8949 and dealing with botched 1099-Bs.
Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their Webinar on July 17, 2012. (or watch the recording afterward) as they discuss the latest developments and solutions for the continuing IRS cost-basis-reporting filing crisis.
The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing material unreconciled differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The IRS is very keen on these differences and it can cause tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong.
Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn what’s wrong and file amended tax returns to get refunds.
1099-Bs grossly overstating wash sales seems to be the biggest culprit for errors — we’ve seen this to the tune of millions of dollars. We may have found a tax law inconsistency in regulations versus code; the cost-basis regulations require wash sale reporting, but the Internal Revenue Code 6045(g) does not don’t require wash sale reporting, only to adjust basis for wash sales. It’s better for brokers to skip wash sales entirely, rather than report them grossly wrong on 1099-Bs. Only taxpayers have access to all of their brokerage accounts and know their own elections, which are required to calculate wash sales correctly.
Questions this Webinar will address
Is it safe to file a 2011 individual income tax return containing material unreconciled differences in cost-basis reporting? How should you present those differences on Form 8949? Should you highlight the differences with good tax return footnotes and supporting worksheet explanations, or should you try to bury the differences in the return? How should you comprise those footnotes and supporting worksheets?
Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between 1099-Bs and Form 8949 and explain them on the tax return? The IRS cost-basis rules call for taxpayers and tax preparers to verify Form 8949 to their 1099-Bs. But, doesn’t verifying information like inaccurate wash sales perpetuate tax problems? Shouldn’t the term “verify” indicate taxpayers and preparers need to be sure the underlying information is correct, like comparing it to actual trade confirmations?
Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. They wouldn’t have needed to phase-in the rules, causing great additional confusion.
Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions for this filing crisis. It’s TradeLog for preparing Form 8949 and some other solutions for finding and explaining 1099-B differences.
If you trade securities, or have a client who does as a tax preparer, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short-changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies is not the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants. Yes, we have an excellent business in fixing these problems, but we wish we didn’t have to.
We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted regulations and rules. We’ll suggest to the IRS that they just ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years, and the IRS has consumed it properly. This is a very simple data dump, and we don’t need all the mis-aggregation, confusion, red tape and extra cost. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people —middle men accountants and rule makers — out of it.
We asked Congress for IRS relief in our last Petition "“Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”" on RallyCongress.com and through other initiatives. The IRS recognizes only a fraction of the problem, and it provided very fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules, see the flaws, recall the rules and start over right. Is this why our tax code is an abomination of complexity?
Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: Tax Flubs That Can Cost You Thousands.