August 9th, 2012 by Angela Offerman
New cost basis reporting requirements that began in 2011 have not gone as planned, and all parties involved are making their frustrations known. The law has been referred to as “a pain in the neck” and the “most challenging reporting rule since the IRS began requiring employers to inform the government of each employee’s wages” by tax preparers struggling to comply. And they are not alone in their confusion. Broker reporting has also been “all over the map” this past year with many errors and inconsistency in reporting methods.
Among the many complexities, a major frustration lies in the fact that investors and their accountants now have to decipher and attempt to reconcile broker-provided 1099-B forms, which were previously completed by the investors themselves. Heightening this frustration is the fact that taxpayers and brokers have been given different reporting rules for Form 1099-B. Moreover, broker reporting requirements have proven to be extremely confusing leading to “large variations” in how brokers have reported 2011 tax year transactions on capital gains/loss statements and Form 1099-B.
These new cost basis requirements were created in 2008 as part of the Troubled Asset Relief Program to ensure that taxpayers don’t overstate their cost basis and thus underreport taxable profits. This takes aim at investors holding different lots of the same stock, each with a different cost basis, deciding after the fact which stock was sold depending on what would be most advantageous to their tax situation.
The new legislation establishes a three-phase process for submitting cost-basis information to the IRS, with the first phase requiring broker-dealers to report the cost basis for all equities purchased on or after January 1, 2011 effective last year. Although the new rules only applied to stocks and bonds sold in 2011, it clearly brought many troubles to brokerage firms and custodial banks of all sizes. This led to a delay in the third phase of cost basis reporting earlier this year, and now we may see more delays coming.
The American Institute of CPAs wrote a letter to the Internal Revenue Service last week recommending that the IRS delay the matching of basis reporting information. “If the IRS initiates a matching program for 2011, we believe it will result in a waste of time, money and resources for the IRS, taxpayers, and the tax preparer community,” Patricia Thompson, who chairs AICPA’s Tax Executive Committee, stated. “We believe that cost basis matching should be delayed until such time as there is more consistency and reliability in the process.”
Among the institute’s other recommendations include a better utilization of summary totals, stronger communication and standardization of data and formatting requirements reported by taxpayers, tax preparers and the brokerage community, and the review and possible revision of Forms 8949 and 1099-B for tax year 2012.
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