• ‘Dirty little secret’ among advisers about flawed 1099-B forms
•  Paper differences can put taxpayer in auditors’ crosshairs

Excerpts:

Brokerage firms are sending tax statements to clients and the IRS with information that differs from the taxes investors ultimately owe, leading some filers to appear to owe tax on profits they never made.

The federal tax code contains two sets of IRS rules — one that defines what information on taxable gains and losses that brokerages must report to their clients and the IRS, and another that defines how individual taxpayers report those gains and losses on their returns.

Those conflicting rules mean that the brokerage statements — known as 1099-Bs — don’t always reflect all of an investor’s accounts or original costs. It’s caused some investors to inadvertently draw the attention of government auditors.

That the statements can cause problems for unwary investors “is a dirty little secret,” said Robert Green, an accountant and the chief executive officer of GreenTraderTax, an accounting and consulting firm in Ridgefield, Connecticut. “Brokers don’t want this publicized.”…

Software Solution

Big hedge funds routinely use third-party trade software from firms like TradeLog to reconcile brokerage statements and trading logs “because they know” the statements “are screwed up,” Green said. But individual investors and smaller funds typically don’t…