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If Brokerages Reported Cost Basis

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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Reply to
D.D. Pallmer
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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

Reply to
Don Priebe

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.

Reply to
Bill Brown

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.
Reply to
Herb Smith

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, snipped-for-privacy@alum.mit.edu Arlington, MA

*** PLEASE don't copy me on replies, I'll read them in the group ***
Reply to
Barry Margolin

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