Tuesday, June 26, 2012


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!



Unknown said...

There are some great software tools in the marketplace to not only help calculate accurate cost basis, but that also have wonderful tax optimization tools, an 8949 Verifier and the ability to populate, verify and export form 8949 to the revised Schedule D. Just plug in "cost basis calculator" to your search engine and you will find the best of them.

Unknown said...

There are some great tools in the marketplace to calculate an accurate cost basis with minimal information. The best one also has a tax methodology element to help you minimize capital gains. Finally, there is an 8949 Verifier that will populate, verify and export form 8949 to the revised Schedule D. Just plug in "cost basis calculator" in your search engine. Makes it so much easier to get the job done!