April 25th, 2012 by Stephanie Erickson
One of the many new regulations put into place this tax season was a law requiring brokers to report what their clients paid for stocks to the IRS – called cost basis reporting. Although the reporting requirement applied only to stocks bought and sold in 2011, it still provided many complexities for taxpayers, brokers, and accountants this tax season. Alan Straus, a certified public accountant in New York said, “It’s a pain in the neck. It just adds a tremendous amount of pages to the tax return.”
This cost basis requirement was included in a law passed by Congress in 2008, which authorized the Troubled Asset Relief Program. Both Congress and the IRS are hoping (as they are with many new tax requirements), that it will lower the tax gap. Ideally, they’re hoping taxpayers won’t underreport their gains or overreport their losses. The Joint Committee on Taxation estimates the requirements will raise $6.7 billion over a decade.
“The rules are meant to eventually simplify and standardize basis reporting,” says Stevie Conlon, senior director and tax counsel at Wolters Kluwer Financial Services. For now though, the requirements will become increasingly more complicated as additional types of assets are included over the next two years. In 2012, mutual funds and exchange-traded funds will be added; in 2013 requirements will include fixed income instruments and options.
Brokerage companies must adjust to these changes, and at a cost. Arsalan Shahid, program director at the Financial Information Forum (a group that represents broker-dealers) said companies are spending an estimated $528 million implementing changes to meet requirements. For example, Charles Schwab Corporation had to send about 1.8 million clients redesigned 1099-B forms with cost basis information this tax season.
There are also certain cases which make it especially complicated for accountants – called “wash sales”. This is when taxpayers sell shares at a loss and then buy within 30 days on either side of the transaction. The loss is typically added to the cost basis of repurchased shares. Steve Rosenthal, visiting fellow at the Tax Policy Center in Washington explained, “For me to try to verify that [brokers] had calculated [the adjustments for wash sales] correctly, I couldn’t do it without the help of another tax expert.” Additional complexities arise from having to combine multiple reports from brokers onto tax forms that are new to accountants.
Brokers were required to file cost basis reporting on Form 1099-B by February 15, but some filed for extensions. With these delays, many taxpayers most likely filed for extensions as well. Taxpayers who file electronically, however, avoided many of the complications as they had their information imported automatically. Convey too has software solutions to solve your tax headaches.
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