Rogeridentified the problem –
“Every new piece of legislation meant tosimplify certain tax areas generally adds complexity of one sort or another tothe Code. {tax pros} often refer tonew tax legislation as an ‘Accountants Full Employment Act.’
A case in point is thecost basis reporting requirement, in place during this past tax season. Whilecomplicated enough by itself, the situation is exacerbated by differences inthe requirements for brokers and investors.”
Asa tax professional, perhaps the biggest challenge, and time consumer, I facedduring the past tax season was the new Schedule D/Form 8849 format.
Rogerexplained –
“Beginning on Jan. 1, 2011, it becamemandatory for brokers and other financial intermediaries to report cost basisinformation on Form 1099-B to investors and to the IRS for equities acquired onor after that date. The new requirement, spelled out in the Emergency EconomicStabilization Act of 2008, also covers mutual funds acquired on or after Jan.1, 2012, and will cover debt securities, options and private placementsacquired after Jan. 1, 2014.”
Andas I explained in my post “That Was The Tax Season That Was” –
“A new Form 8949 was added to report theindividual short-term and long-term transactions in three separate categories –sales where the cost basis was reported to the IRS on Form 1099-B, sales wherethe cost basis was not reported to the IRS on Form 1099-B, and sales that werenot reported on a Form 1099-B. Aseparate Form 8949 was required for each of the three categories. The Schedule D served as a summary of the8949s.”
Iwent on to detail the biggest problem with this new requirement –
“The various brokerage and mutual fund housesall treated the new Form 1099-B portion of the year-end consolidated tax reportdifferently.
For the most part thisnew system required some additional time, but not additional agita. In many cases the 1099-B reporting wasexcellently broken down into separate categories of short-term “covered”(transactions where cost basis was required), short-term “non-covered”,long-term, and undetermined term. And again and loss analysis, with cost basis for all, or almost all, transactionsprovided, was also included in the report in the same format.
In some the 1099-Breceived by the taxpayer included the cost basis for all transactions –although you often had to read the fine print to discover if the cost basisshown had actually been reported to the IRS.
The worst cost basisreporting formats came from Morgan Stanley Smith Barney and TD Ameritrade, withTD the bottom of the barrel. The 1099-Bfor these brokerages was not broken down to list different categories oftransactions (as described above). Transactions were listed alphabetically, regardless of term or coverage,with cost basis information shown only where required.
MSSB reports includeda gain and loss analysis, but it was merely broken down by short and long term,as had been done in past years. TD didnot include a gain and loss analysis in its consolidated statement. The client had to go online to generate theanalysis, also still in the short or long only format.
The additional workrequired for clients of these brokerages was not so bad with only one or twopages of transactions. But several hadmultiple (as many as 50) pages of transactions (can you say “churning”) – makingproper reporting much more difficult and time consuming than in the past.”
Requiringbrokerage and mutual fund houses to report cost basis is a good thing. In tax seasons past the biggest challenge,and time consumer, was determining cost basis for investments sold by cluelessclients. Brokers and funds were oftenalready providing profit and loss statements with much cost basis information,which was helpful, and when this was not automatically included in a ConsolidatedYear-End 1099 Statement, or some cost basis information was missing, I could inmany cases get the information direct from a client’s individual broker.
Makingcost basis reporting mandatory will eventually save lots of time during taxseason. However, it will take a longtime to fully phase in to maximum reporting. By the time that comes I will be retired.
AndI expect we will never have 100% cost basis reporting. What about the stock that was inherited froma relative, or was received as a gift when the taxpayer was a child? It is easy enough to determine the cost basisfor inherited investments, assuming you know the date of death, and futureregulations could require brokerages to determine cost basis based on date-of-deathvalue at the point the investment is transferred into the account. But determining the basis of a giftedinvestment can be almost impossible.
Inthe meantime to make things a little easier perhaps the IRS could establish arequired pro-forma format for all Form 1099-Bs from all brokerage and fundhouses, and all houses could come to an agreement that Profit and Lossstatements included in the Consolidated Year-End 1099 Statement be done in thesame pro-forma format (if industry-wide agreement is at all possible).
Ideally,all 1099-Bs (and P+L statements)would be “broken down into separatecategories of short-term “covered” (transactions where cost basis wasrequired), short-term “non-covered”, long-term, and undetermined term.”
And, while I am as happy as a pig in reality tv transferring broker-provided profit and loss statements to Form 8849 (and in the past Schedule D) as is, how do I really know that the information provided by the broker is correct. And what is my responsibility as a tax pro to make sure the information is correct?
The alternative is to have all clients keep detailed, contemporaneous, and ongoing records of all investment purchases.
Ohwell, I can dream, can’t I!
TTFN
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