GainsKeeper Blog: Basis Reporting

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3/13/07

Hello, my name is Stevie Conlon and I am the new Tax Director for GainsKeeper.  I'm a tax attorney and CPA and I've written, spoken and been quoted on tax issues for nearly twenty years.  My focus is on tax issues relating to investment portfolios of stocks, securities and complex financial instruments such as options and derivatives.  I'm going to share my perspectives on these issues in bi-weekly blog postings on this site, and hope my perspectives are informative and worthwhile reading for you.  Just note that these postings are intended as general explanations of tax rules and none of my postings constitute tax advice—for that you need to consult your own tax advisor.

President's Basis Reporting Proposed Legislation Affects You

On February 5, 2007 the President's Budget for Fiscal 2008 was released.  The Budget includes a proposal to require brokers to report adjusted basis information to the IRS and taxpayers for publicly traded stocks, including mutual fund shares, and securities acquired after 12/31/2008.  Basis is generally the cost of a stock or security.  And adjusted basis is the original basis adjusted for a variety of corporate actions (such as stock splits and spin-offs—think AT&T or GM) and other special tax rules.  The IRS commissioner testified before Congressional hearings that it is one of the top four tax proposals in the Budget.  It is expected to raise $6.7 billion over ten years by making sure taxpayers properly report their adjusted basis of stocks and securities sold and the corresponding gains and losses recognized on their tax returns.  Because this proposal focuses on making sure individuals report their gains and losses correctly—it is considered part of the "tax gap" (the difference between the amount of taxes that should be paid and the amount of taxes actually reported and paid).

In June 2006, the General Accountability Office of Congress (GAO) released a report regarding the tax gap due to inaccurate reporting of gains and losses by taxpayers.  In a study of individual's tax returns for calendar 2001, the GAO noted that 38% of returns reporting stock and securities gains and losses were wrong (8.4 million taxpayers) and that approximately half of those errors were due to incorrect basis reporting.  This tax gap is driving the proposals for basis reporting.  Senator Bayh (Indiana) co-sponsored a basis reporting bill last year and this year even before the President's Budget was released, members of Congress held hearings and discussed the need for such a law.  The American Institute of Certified Public Accountants wrote a letter to Congress endorsing the proposal in January 2007.

If this legislation passes, individuals would likely receive more complicated Form 1099s that would show the adjusted basis of stocks and securities sold during the year.  Taxpayers will need to adapt and reconcile their records and tax return preparation with the information reported to them on the new forms.  Brokers, mutual funds and others will need to develop the computer systems to track adjusted basis and prepare these tax forms.  Taxpayers and the IRS will also need basis calculation tools so that they can review the basis information provided by brokers on the new forms to make sure they're correct.  And, now that the GAO has so starkly identified the magnitude of tax inaccuracies tied to tax basis, taxpayers should be concerned that it is possible that the IRS may more carefully scrutinize gain or loss computations on taxpayers returns filed for years before 2009.

This new focus on basis reporting means that investors and financial market participants must be prepared to accurately compute tax basis of stocks and securities.  To read more about this proposed legislation, please read my article on basis reporting. 

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.