Form 8949: What To Do About Tax Problems For Reporting Securities Trades

June 28, 2012 | 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 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.