COST BASIS REPORTING

Last week over at ACCOUNTING TODAY Roger Russell stated the obvious - “Complexity of Cost Basis Reporting Requires Tax Expertise”.

Roger identified the problem –

“Every new piece of legislation meant to simplify certain tax areas generally adds complexity of one sort or another to the Code. {tax pros} often refer to new tax legislation as an ‘Accountants Full Employment Act.’

A case in point is the cost basis reporting requirement, in place during this past tax season. While complicated enough by itself, the situation is exacerbated by differences in the requirements for brokers and investors.”

As a tax professional, perhaps the biggest challenge, and time consumer, I faced during the past tax season was the new Schedule D/Form 8849 format.

Roger explained –

“Beginning on Jan. 1, 2011, it became mandatory for brokers and other financial intermediaries to report cost basis information on Form 1099-B to investors and to the IRS for equities acquired on or after that date. The new requirement, spelled out in the Emergency Economic Stabilization Act of 2008, also covers mutual funds acquired on or after Jan. 1, 2012, and will cover debt securities, options and private placements acquired after Jan. 1, 2014.”

And as I explained in my post “That Was The Tax Season That Was” –

“A new Form 8949 was added to report the individual short-term and long-term transactions in three separate categories – sales where the cost basis was reported to the IRS on Form 1099-B, sales where the cost basis was not reported to the IRS on Form 1099-B, and sales that were not reported on a Form 1099-B.  A separate Form 8949 was required for each of the three categories.  The Schedule D served as a summary of the 8949s.”

I went on to detail the biggest problem with this new requirement –

“The various brokerage and mutual fund houses all treated the new Form 1099-B portion of the year-end consolidated tax report differently. 

For the most part this new system required some additional time, but not additional agita.  In many cases the 1099-B reporting was excellently broken down into separate categories of short-term “covered” (transactions where cost basis was required), short-term “non-covered”, long-term, and undetermined term.  And a gain and loss analysis, with cost basis for all, or almost all, transactions provided, was also included in the report in the same format. 

In some the 1099-B received by the taxpayer included the cost basis for all transactions – although you often had to read the fine print to discover if the cost basis shown had actually been reported to the IRS.

The worst cost basis reporting formats came from Morgan Stanley Smith Barney and TD Ameritrade, with TD the bottom of the barrel.  The 1099-B for these brokerages was not broken down to list different categories of transactions (as described above).  Transactions were listed alphabetically, regardless of term or coverage, with cost basis information shown only where required. 

MSSB reports included a gain and loss analysis, but it was merely broken down by short and long term, as had been done in past years.  TD did not include a gain and loss analysis in its consolidated statement.  The client had to go online to generate the analysis, also still in the short or long only format.

The additional work required for clients of these brokerages was not so bad with only one or two pages of transactions.  But several had multiple (as many as 50) pages of transactions (can you say “churning”) – making proper reporting much more difficult and time consuming than in the past.”

Requiring brokerage and mutual fund houses to report cost basis is a good thing.  In tax seasons past the biggest challenge, and time consumer, was determining cost basis for investments sold by clueless clients.  Brokers and funds were often already providing profit and loss statements with much cost basis information, which was helpful, and when this was not automatically included in a Consolidated Year-End 1099 Statement, or some cost basis information was missing, I could in many cases get the information direct from a client’s individual broker. 

Making cost basis reporting mandatory will eventually save lots of time during tax season.  However, it will take a long time to fully phase in to maximum reporting.  By the time that comes I will be retired.

And I expect we will never have 100% cost basis reporting.  What about the stock that was inherited from a relative, or was received as a gift when the taxpayer was a child?  It is easy enough to determine the cost basis for inherited investments, assuming you know the date of death, and future regulations could require brokerages to determine cost basis based on date-of-death value at the point the investment is transferred into the account.  But determining the basis of a gifted investment can be almost impossible.

In the meantime to make things a little easier perhaps the IRS could establish a required pro-forma format for all Form 1099-Bs from all brokerage and fund houses, and all houses could come to an agreement that Profit and Loss statements included in the Consolidated Year-End 1099 Statement be done in the same pro-forma format (if industry-wide agreement is at all possible). 

Ideally, all 1099-Bs (and P+L statements) would be “broken down into separate categories of short-term “covered” (transactions where cost basis was required), short-term “non-covered”, long-term, and undetermined term.” 

And, while I am as happy as a pig in reality tv transferring broker-provided profit and loss statements to Form 8849 (and in the past Schedule D) as is, how do I really know that the information provided by the broker is correct.  And what is my responsibility as a tax pro to make sure the information is correct? 

The alternative is to have all clients keep detailed, contemporaneous, and ongoing records of all investment purchases.

Oh well, I can dream, can’t I!

TTFN    

FINALLY!

I just wanted to report on some breaking news that occurred during the last days of the tax filing season.

On April 14th I received an email from Beanna Whitlock, Executive Director of the NCPE Fellowship (a membership organization for tax professionals). Here is what it reported -

“The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 was signed into law today by President Obama.

1. It repeals the requirement for rental property owners to issue Forms 1099 starting with 2011 payments. Landlords will not be required to issue 1099's.

2. It repeals the requirement for businesses to issue Forms 1099 for products beginning with the 2012 payments.

3. The requirement for businesses to issue Forms 1099 to corporations beginning with 2012 payments is also repealed.”

This is obviously great news – and removes a great anticipated burden on small business owners and landlords.

The idiots in Congress were finally able to accomplish something that both Parties have wanted to do, and made several unsuccessful attempts to accomplish, for over a year now – ever since they realized what they had passed in the health care “reform” bill – a bill that they had not bothered to read in full before voting on it.

TTFN

MORE WHILE I WAS OUT

It appears that two items of tax importance happened during my recent GDE “hiatus” about which I did not comment.

1) The IRS has decided not to send out 1040 or 1040A packages (instructions and forms) to any taxpayers anymore. Period.

In the beginning every taxpayer who filed a tax return in the previous year would get in the mail in January a tax form and instruction booklet based on what forms and schedules they filed in the prior year. The booklet would be addressed for mailing via a “peel and stick” label that contained the taxpayer(s)’s name(s) and Social Security number(s). This label would be attached to the top of the paper 1040 or 1040A that was filed.

As a point of information, I believed that certain historical information was “buried” somewhere in code on this label – and would not use the IRS label on the taxpayer’s return if the taxpayer, or spouse, had experienced problems with the IRS in the past.

At some point in time the IRS realized that it was not a good idea to include the taxpayer(s)’s Social Security numbers on the address label for the whole world to see and steal – so these numbers were removed from the label. And eventually the label was placed inside the booklet and not used as the actual address for mailing.

And many years ago now, I forget when, the IRS decided to stop sending 1040 and 1040A booklets to taxpayers who had used a paid tax preparer in the previous tax year – or at least for those taxpayers whose prior year return was signed by a paid preparer. It was now up to me, as preparer, to acquire the necessary forms and schedules. By this time computer generated returns were becoming more the “norm” for professional tax preparers (except for me and my mentor) – and the software package would generate the appropriate forms. However, taxpayers who “self-prepared” continued to receive the appropriate booklet in the mail each year.

At the beginning of my career, when I was a true “apprentice” (in the early 1970s), my boss would send me with an empty suitcase to a government warehouse in Newark that was chock-a-block full of all tax forms and schedules and I would return to the office with a full suitcase.

Once I went out on my own, while I did rely on the forms and schedules in the booklets received by clients, I would also make frequent runs to the local IRS office to grab handfuls of forms and schedules (when the IRS clerks were not looking) and also stock up on 1040s, 1040As, and Schedule A/Bs from what was left out for the public at local Post Offices. I have continued to make my IRS and PO runs frequently during each tax season – and hope I will be able to do so again in the upcoming tax filing season.

I sincerely hope that the new IRS policy of not sending out tax form and instruction booklets to individual “self-filing” taxpayers does not carry over to affect the policy of making forms available at Post Offices and IRS offices.

2) The IRS has “issued final regulations under a law change that will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The reporting will be to investors and the IRS.” (note – the highlights are mine)

Beginning with the 2011 Form 1099-B, which will be mailed to taxpayers during the first three months of 2012, will indicate the date of purchase and cost basis on all investment sales.

This is a wonderful new rule – one that will eventually save a lot of time for tax professionals during the filing season, when time is most precious.

Unfortunately it will take many years before the 1099-B will truly be able to report the cost basis information for all investment sales for the year. The law requires tax basis information to be stored and recorded beginning with 2011 purchases. So if a taxpayer sells a stock he purchased in 2009, or 1983, on his 2012, or 2020, Schedule D the information will very probably not be included on the 1099B, and the brokerage house will not have the information in its system.

Currently, and thankfully, many brokerage houses already provide a profit and loss analysis in the Consolidated Form 1099 reporting package – although this information is currently not sent to the IRS. For the most part, this information is only complete if the purchase was made through the reporting brokerage house, and will not include purchases made while the taxpayer was a client of a different house – unless the broker has brought the client with him from his former employer to his new one and has provided the information to the new employer.

And what about cost basis for inherited or gifted stock – which the taxpayer did not actually purchase?

As I have only 10 years left before I retire (the current plan) I expect that I will still need to chase down cost basis for some sales as long as I am in business.

TTFN

MY WANDERING MIND

I have been thinking about the new 1099 reporting requirements that will take effect in 2012.

I am not worried about anything yet. As I said, they do not take effect until calendar year 2012, for Form 1099s issued in January of 2013. And, considering recent developments, for all we know Congress will either repeal or revise these requirements before then.

I have no problem with issuing 1099s to corporations, which is new. And, although I am not thrilled about having to issue a Form 1099 to those who are paid $600 or more for the purchase of “property” (i.e. supplies and equipment, raw materials and merchandise), also new, it does not bother me. It means more work at year-end and in January – but also more billable hours.

Commissioner Shulman appears to be doing us a favor by exempting payments made by credit or debit card from the 1099 reporting requirements, as these payments will already be reported to the IRS by the banks and credit card companies. While this may actually result in additional work for some small businesses it is not an issue for me.

I use a general ledger software (no longer in available) to record cash disbursements for the very few businesses I do on a year-round basis. I enter payments made via check by vendor name, so the software can easily prepare a report of all payments made during the year to each individual vendor, which I would use to type my 1099s.

Checks to pay for credit card charges are entered using the credit card company (i.e. American Express) as the vendor. I do not record credit card payments by individual vendor name – but thanks to Doug I would not need to do so. Debit card payments are treated as if they were checks written and use the individual vendor name – but DEBIT is entered in the system as the check number, so these payments are easily identifiable on the vendor print-out. Payments made from “petty cash” are also treated the same as checks (with petty cash treated as a separate “checking account” in the system) and include a vendor name when available.

While my general ledger software program is out of print, I expect that most all GL programs operate in basically the same manner. So I do not see a problem for businesses that keep their books using GL software. Those who keep their books by hand, especially very small part-time and sideline businesses, will be the ones who will have an increased burden.

{Hey, just because I do not use tax preparation software to prepare tax returns, and at this point expect that I never will, does not mean that I do not take advantage of general ledger and payroll software – that is something altogether different.}

The only problem I anticipate in my particular situation is in getting the Employer Identification Numbers of each and every vendor that is used by my clients. The best practice is to get the numbers up front early in the year and not wait until December to see who is paid $600 or more and chase after the numbers.

If Congress is sincere about keeping the new requirements in place the easiest thing to do is to require by federal law all businesses to clearly identify their EIN on all invoices and statements beginning in January of 2012, if such a law is at all possible.

These new requirements will change the current situation regarding EINs for sole proprietorships and one-person LLCs that do not have employees. Under current law these businesses do not require an EIN – they can use their Social Security number. However with the need to give the majority of customers and clients a number for potential 1099 filings every one-person business will need to get an EIN.

I expect that I will prepare a standard form letter to vendors requesting their Employer Identification Number that I will send out with the first check payment of the year. The letter will state that subsequent payments for invoices will be delayed until a valid EIN has been provided. I have no intention of dealing with “back-up” withholding on payments to vendors - especially if I am not yet certain I will need to issue a Form 1099.

So, while I do hope that Congress will either repeal or ease the requirements, if they do not – so be it.

My final comment on the issue is a repeat. The fact that Congress now wants to repeal these new requirements is a sad but clear indication of the fact that the cafones in Washington either (1) do not take into consideration, or care about, the added burdens that specific legislation will put on affected parties, or (2) do not actually read the legislation they are voting on. I expect it is a little of both.

TTFN