Increased Reporting Requirements for Capital Transactions
Brokers and dealers have been required for several years to report to the IRS the selling price of investments sold by their clients.
In 2011, additional reporting requirements took effect that require broker-dealers to report the cost basis of "covered securities," which are stock purchased starting in 2011, mutual funds and dividend reinvestment plans starting in 2012, and financial instruments such as debt securities and options starting in 2013. Broker-dealers also must report to the IRS the acquisition date, amount of loss disallowed due to the wash sale rules, and whether gain or loss on the transaction is long-term or short-term.
The genesis of the new reporting requirements was in a study ordered by the U.S. Senate Finance Committee to identify the causes of the tax gap. The study concluded that the primary cause of the gap was incorrect reporting of basis and selling price in capital transactions. From this, Congress concluded that more revenue could be generated, without increasing tax rates, by increasing the accuracy of reporting of capital transactions.
In theory, these new reporting requirements were intended to reduce taxpayer's record-keeping burden, because brokers are now reporting the information required to properly report a transaction on the taxpayer's income tax return. In actuality, however,
it is more important than ever for taxpayers to keep excellent records of the purchase price and date for stock, real property, and other investments. This heightened record-keeping importance arises from three causes.
First, taxpayers are required to state on the tax return whether the basis reported by the broker-dealer is correct.
Second,the IRS uses data matching programs to automatically identify differences between information reported by broker-dealers and the information included on the taxpayer's return, so taxpayers would be wise to have concrete evidence to support any reporting differences.
Third, correct reporting of basis and selling price in capital transactions is a major compliance focus of Congress and of the IRS, and the IRS is likely to be quite aggressive in its efforts to enforce proper reporting.
For the 2011 tax year, brokers will report basis and transaction information of Form 1099-B, and taxpayers will report capital transactions on new Form 8949, the subtotals from which are carried over to a newly re-designed Schedule D to Form 1040.
If you have questions about the reporting requirements in general, or if you believe the information reported to you on Form 1099-B may be incorrect, please contact us as soon as possible so that we may assure that we prepare a complete and correct tax return for you.
