See our Cost-Basis Reporting area in our Trader Tax Center for more content.
Green’s Forbes blog version: IRS Can Really Cause Problems With New Cost-Basis 1099-Bs.
In addition to my Forbes blog “Beware Botched 1099-Bs, Form 8949 At Tax Time” and interview in the WSJ article “Dodging a ‘Cost Basis’ Crisis,” my partner Darren Neuschwander, CPA and I had a long interview Wednesday with Theresa Carey, contributor to Barron’s. Ms. Carey writes the important Electronic Investor column, and her “Annual Online Broker Review and Ratings” was Barron’s cover story this past week.
What can be done to help traders with this problem?
Our CPA firm and a leading accounting industry group want the IRS to hold off matching cost-basis reporting to 1099-Bs for securities for the 2011 tax year. That should alleviate the problem for many. If the IRS doesn’t honor this request, we expect it will mail hundreds of thousands of tax notices causing great alarm, distress and cost to taxpayers. That’s unfortunate, since most discrepancies are not worth auditing. We’re finding that trade accounting is usually correct and broker 1099-Bs are wrong.
There is precedent for this request: Neuschwander says this is very similar to the recent controversy over new 1099-K rules for reporting credit card transactions. After blow back from the credit card and retail industries, the IRS reversed course and said it would not match issued 1099-Ks to taxpayer income tax return filings. That was done to prevent an avalanche of inappropriate tax notices, alleging errors where none probably existed. Kudos to the IRS.
Can brokers and traders get similar relief from the IRS on cost-basis 1099-Bs?
Probably yes, but it will take significant cooperation; brokers need to fess up to this mess, too. At the moment, brokers are hunkered down dealing with a barrage of customers calling their support lines, asking questions, complaining about errors and demanding corrected 1099s. We hope brokers acknowledge the problems and work with the media and their customers to follow retailers’ success with the 1099-K issue.
We are sharing this story with our contacts in the media and we hope they educate the public and IRS about the severity of this problem. We also hope the media coverage helps brokers make the right decisions going forward. Together, we can get the IRS to not match cost-basis 1099-Bs. Brokers and the IRS care about their customers and they should do the right thing in this case.
It’s unfair to blame this cost-basis reporting mess on brokers alone.
The IRS was late in communicating its new cost-basis reporting detailed rules. Brokers and accounting industry groups didn’t realize the IRS would require a brand new complicated Form 8949 until it was too late to properly address it this tax season. Form 8949 with Parts A, B and C, for covered, non-covered and other was difficult for brokers to conceive. The IRS should have communicated it very early on and given brokers standards for reporting. It’s very clear this cost-basis reporting was poorly managed. The pressure of tax season deadlines was also a contributing factor.
There are two types of problems — one is unacceptable and the other one can be wiped away.
Many brokers botched wash sales loss deferrals. There are no excuses, except that wash sale rules are very complicated and poorly designed by the IRS. In some situations, leading brokers are reporting several hundred thousand dollar wash sales, when traders didn’t have more than one quarter of that amount to lose in the first place. It’s doesn’t make sense. The errors we are noticing are unacceptable. The IRS can’t fix that type of error. If taxpayers file wash sales reported by some brokers, many will significantly over pay their tax bills. Consult with our firm and use TradeLog software to help in this situation.
Even when brokers report wash sales as best they can, the figure still is not 100% correct, because wash sale analysis must be calculated across all your brokerage accounts, including IRAs. No one broker can do that now.
Form 8949 reconciliations don’t have to be a problem if the IRS looks the other way.
If the IRS turns off its (assumed) matching program for new cost-basis 1099-Bs, then we will be less concerned with this huge discrepancy problem. Again, we need the brokerage industry and media’s help in getting this relief for taxpayers from the IRS. If we blame brokers, they may go into their shells and not help us. Our goal is to turn off the IRS computers on this matching program to prevent it from sending out TP-2000 notices to potentially millions of taxpayers over 1099-B and Form 8949 matching errors. Those audits could be very painful and protracted.
File extensions and skip the dance.
Everyone agrees: File valid extensions and let the dust settle on this huge mess before filing actual tax returns with Form 8949. We expect brokers to issue corrected 1099s and we hope the IRS reverses course too.
You don’t want a refund that you later have to repay the IRS with interest and taxes. You also don’t want to pay taxes now that you don’t owe. Plus, you don’t want to do this crazy dance of reconciling with botched 1099-Bs when we expect brokers to fess up and fix this mess later on.