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Subject Author Date
If Brokerages Reported Cost Basis D.D. Pallmer 11-24-2006
Posted by D.D. Pallmer on November 24, 2006, 2:08 am
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 I read that one area where the IRS is looking to reduce
fraud and abuse is in cost basis. There is talk about having
brokerages report cost/basis just as they now report sale
proceeds.

I am wondering out loud how this might work? Because basis
is not as clear as sale price. Sometimes basis comes from
shares acquired at another brokerage, from an inheritance or
from a spin off of another company. I guess they would just
report what THEY have as the basis and the taxpayer would
then have to reconcile any changes as we now do if the sale
price reported has extenuating circumstances. I guess if I
were the IRS, I'd want this reporting, even if it's not
perfect. Because it would more definitively put the burden
of proving basis on the taxpayer...versus now where basis
can only be verified by audit.

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Posted by Don Priebe on November 24, 2006, 11:34 pm
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> I read that one area where the IRS is looking to reduce
> fraud and abuse is in cost basis. There is talk about having
> brokerages report cost/basis just as they now report sale
> proceeds.

<Problems with this proposal>

> I guess if I were the IRS, I'd want this reporting,
> even if it's not perfect.

Me too! The major problem I experience with determining
basis is the client who has just no idea! (As in "that was
a long time ago" or mutual funds with reinvested dividends.)

Don EA in Upstate NY

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Bill Brown on November 24, 2006, 11:34 pm
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D.D. Pallmer wrote:

> I read that one area where the IRS is looking to reduce
> fraud and abuse is in cost basis. There is talk about having
> brokerages report cost/basis just as they now report sale
> proceeds.
>
> I am wondering out loud how this might work? Because basis
> is not as clear as sale price. Sometimes basis comes from
> shares acquired at another brokerage, from an inheritance or
> from a spin off of another company. I guess they would just
> report what THEY have as the basis and the taxpayer would
> then have to reconcile any changes as we now do if the sale
> price reported has extenuating circumstances. I guess if I
> were the IRS, I'd want this reporting, even if it's not
> perfect. Because it would more definitively put the burden
> of proving basis on the taxpayer...versus now where basis
> can only be verified by audit.

First, upon audit, the burden is already on the taxpayer to
show basis was correctly reported. If the taxpayer cannot do
that, basis will be deemed to be zero by the auditor.

Second, the IRS is proposing to put a significant burden on
brokerage firms if they expect them to determine their
client's basis in shares obtained in some manner other than
purchase through the brokerage. I presume the IRS expects
more accurate reporting of basis (at lower amounts) than is
currently the case. They probably got that idea as a result
of taxpayer audits they've conducted over the years.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Barry Margolin on November 28, 2006, 9:03 pm
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> Second, the IRS is proposing to put a significant burden on
> brokerage firms if they expect them to determine their
> client's basis in shares obtained in some manner other than
> purchase through the brokerage.

Many brokerages and mutual fund companies already track this
information for shares purchased directly through them, and
report it on statements to customers for their convenience.
Perhaps the IRS will only require this in cases where the
firm was involved in the purchase. Or when shares are
transferred to them in some other way, they could require
the transferee or customer to provide the cost basis, so it
can be entered into the system.

I assume also that there would be a grandfather clause for
shares transferred before this rule goes into effect.

--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Herb Smith on November 26, 2006, 10:54 am
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Bill Brown wrote:

> First, upon audit, the burden is already on the taxpayer to
> show basis was correctly reported. If the taxpayer cannot do
> that, basis will be deemed to be zero by the auditor.

This conclusion is somewhat of an urban myth. If the
taxpayer makes a reasonable, good faith effort (even though
not perfect) to determine the cost basis, that would likely
be accepted by any auditor.

For example, if the TP believes (with some support from
check records) that he bought a particular stock in November
1978, but does not know the date. Historical market trading
data will give both the highest and lowest trading values
for the month. If the TP uses the lowest value as his cost
basis he probably will pass audit. Similarly, if only the
year is known, use the lowest trade price for the year.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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