An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings

August 29, 2012 | 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.