VERY VERY VERY VERY VERY VERY VERY IMPORTANT!

An incident during this past tax filing season caused me to compose an item to be included in my mid-year letter to 1040 clients.

Here is what I wrote -

“You must include in taxable income the gains from the sale of investments, and can deduct, within limits, losses from investment sales.  The gain or loss is determined by subtracting the purchase price of the investment and the costs of purchase and sale – i.e. commissions, fees and taxes - from the sale proceeds. 

As the result of past legislation, actually good legislation for once, brokerage houses are now required to provide clients with cost basis information for certain investment sales on Form 1099-B.  However, the longer you have held the investment the more likely the broker is not required to identify the cost.  Many brokerage houses will report cost basis information on the sale of all investments, whether or not required to by the law.  However occasionally the broker will report the gross proceeds with no cost basis information.

I cannot properly prepare your tax return without the cost basis information.  You must provide me with the cost basis information – date of purchase and purchase price – of all investments sold.  It is not my responsibility to determine the cost basis.  And during the tax filing season I do not have the time to waste trying to come up with the needed information. 

If the investment was acquired via mergers or spin-offs I may be able to do some basic research during the season, but even then I would need the cost basis information for the underlying investment.

If you receive a Form 1099-B from a brokerage house that does not include cost basis information for each and every investment sale do not just send it to me and expect me to pull numbers out of the air.  Contact your broker and have him or her provide you with the missing information.  If I get a Form 1099-B without cost basis information for all sales I will NOT begin work on the return until you provide me with all the missing information.

For your information, according to T.C. Memo 2003-259, if a taxpayer cannot provide proof of the cost basis of a stock or other investment sold it will be considered to have a "0" cost basis.  As a result, the entire gross proceeds will be fully taxable.

It is very important that you open and read all the tax documents you send me.  Don’t just put an envelope unopened or unread in the package you are sending to me.”

Insert “your tax professional” for “me” in the above.

TTFN