Stock Transaction Problem

[S T]

I think I have "entered" into a very large issue on a tax return that I am working on - not completed and not filed yet, thank goodness!

It has been discovered that stock transactions reported on the year end statements from the brokerage house, in this case Royal Alliance/Pershing, as supplied to the taxpayer are incorrect, as on the supplemental statement for "realized gain/loss" provided do not account for any "wash sale transactions". The statements only provide what we would usually need to complete the Schedule D - Dates acquired/sold, shares, cost/sales price, net gain/loss.

You might ask why, this supposition - Knowledge would tell me based on client information, that the client was scared off the market in late November 2008 and the year end statements show the client sold the base of his portfolio 11/21/08 - then the year end statement shows that he entered back into the market during 12/1/08 to 12/4/08, Those transactions are indicating that the broker purchased much of the same stock as sold on 11/21/08. Thereby entering into the Wash Sale Rules

Question 1, would this be normal procedure for the statement NOT to reflect Wash Sale - I receive many varying brokerage statements from brokerage houses that DO contain this information - this client's statement does not reflect even a "hint" of Wash Sale.

Question 2, whose responsibility is it to track this information and report this information, i.e. broker, taxpayer or tax preparer?

Question 3 - Who would be the responsible party to the IRS, if the wrong informantion was reported on the Schedule D?

Question 4 - Should I as a tax preparer offer the services to track this information for reporting to report on the Schedule D? I probably don't have all of the information available, so that even seems like a huge task!

Don't brokerage house and investment brokers have a responsibility and obligation to the client to provide the taxpayer with this information?

The questions arise, as I am not talking as in a few "minor" wash sales- The account activity is very large due to what is referred to a managed advisory account or whatever the terminology is for those accounts that charge a % fee. As posted off of the realized gain/loss supplement on 3 accounts I have over 900+ transactions.

Thanks for your thoughts and comments

Sandy

[David1980]

1. Depends on the brokerage. I've seen some actually offer better statements to those who pay higher monthly fees, as a selling point. There's no requirement for them to report that a sale is a wash, and in fact the taxpayer could buy the same security through a different broker that the first had no awareness of, resulting in the lack of a wash sale on the statement that was still a wash sale. Which goes to 2,

2. The taxpayer is responsible to keep the financial information for taxes. The brokerage can't know of all possible wash sales as taxpayers often have more than one brokerage. If they sell XYZ at broker 1 and buy it 2 weeks later at broker 2, would you put responsibility for tracking on broker 1 or broker 2? Neither, only the taxpayer knows what they did.

3. Generally tax return mistakes are the responsibility of the taxpayer. They may be able to get off the penalties if they relied upon a taxpreparer but the tax ultimately is due by the taxpayer. Some tax preparation companies offer tax "insurance" which might reimburse the taxpayer for the taxes owed, assuming the original was incorrectly prepared.

The preparer should be knowledgeable of wash sales and know what questions to ask though. You can't preparer a tax return based exclusively off the tax reporting statements, there needs to be some transfer of knowledge from taxpayer to tax preparer for those items not reflected in tax reporting documents.

There are preparer penalties, but I think they're more for EIC due diligence and other high-fraud areas. I haven't heard of anyone getting penalized for failing to preparer wash sales correctly - but that doesn't mean it hasn't or can't happen.

4. What I do is get the taxpayer to provide the buy/sell statement from the broker. The first year or two for the taxpayer that starts to trade are the most annoying as they don't really know what information they need to keep so I'll get multiple years statements & tax returns if I can. Once they're a client of mine, it's pretty easy to just keep something in their folder tracking the disallowed wash sale losses and copies of financial records for basis information on future sales.

Primarily it's done for my convenience as it makes preparation of their tax return easier. Not tracking that information you would have to go through everything each year to find the correct basis, especially while adding disallowed losses from wash sales. So I don't charge specifically for the service because I wouldn't want them to opt-out to save money when it simply costs me and not them. I mean they couldn't care less as to whether I track the data or not, so long as I preparer the return correctly and it's far less time consuming to preparer the return when you have been tracking their wash sales. I do however charge a lot for schedule D trades. With all the trouble you have to go to in order to match up the buys & sells and get the taxpayer to obtain the financial records.

Though, I have heard of some preparers who simply require the taxpayer provide the information pre-formatted into D-1 layout, hoping the taxpayer is smart enough to figure out wash sales and has added dividends to basis, correctly figured amounts of stock options included in wages, etc. I figure that doing that work is one reason they come to me instead of doing it themself with the box - if the taxpayer could figure out all the rules and properly fill out the forms they wouldn't need my services in the first place.

Then again, some clients who have been trading for years are very aware of the record keeping requirements and can produce the Schedule D-1 information to simply be attached to the tax return with whatever the totals are for short-term and long-term reported on the Schedule D. It depends on the taxpayer.

[Lion]

Well Stated

I think David explained the situation well and thoroughly. The taxpayer is responsible for tracking his capital gains, including wash sales. No brokerage could be aware of what else the taxpayer purchased, inherited, has in his IRAs, etc. However, if the taxpayer is coming to us for tax prep help, then he's not able or willing or finding enough time to do the job himself. We have to ask enough questions to discover what he might be missing and to fill in the gaps. The IRS will look to the taxpayer, but the taxpayer will blame us!

[AuditorTurnedGood]

This might be a moot question, but if the account is an MAA-type that has an individual managing the performance of the funds and putting through transactions, might there be a report available directly from the account manager that would have additional detail? I know that has been true in a couple of instances with a few of my high-net worth clients. Just a thought. Best of luck - those long Schedule D's are a killer without dealing with any wash sales!

ATG

[snowbird]

Primarily it's done for my convenience as it makes preparation of their tax return easier. Not tracking that information you would have to go through everything each year to find the correct basis, especially while adding disallowed losses from wash sales. So I don't charge specifically for the service because I wouldn't want them to opt-out to save money when it simply costs me and not them. I mean they couldn't care less as to whether I track the data or not, so long as I preparer the return correctly and it's far less time consuming to preparer the return when you have been tracking their wash sales. I do however charge a lot for schedule D trades. With all the trouble you have to go to in order to match up the buys & sells and get the taxpayer to obtain the financial records.
.

Do you do the matchup manually (spreadsheet) or use a software solution such as Gainskeeper or Tradelog? 2008 was particularly bad since the market tanked. Many advisors sold client stock and then repurchased ... I guess they believed the market would come roaring back in 30 days.

[OtisMozzetti]

broker reporting of cost basis

One of the tax laws passed early during 2008 required that stock brokers will have to start reporting the basis of stocks purchased, starting in I forget which year.

One interesting aspect is that the new law explicitly states that those Schedule D transactions will be done on a per-broker basis; i.e. that transactions elsewhere won't affect the matching of lots nor wash sales.

I suppose that the brokers will have to calculate the inventory of stock bought through them starting on the date which this new reporting requirement begins.

[S T]

Thank you

Thanks David 1980 and Snowbird, such enlightening information.
I posted as I was so frustrated with the client and with the Stock Broker, however, such good information came from the post.
As it turns out, the client turned the corner, realized that the Stock Broker was not doing his job and realized it was NOT my Job to gather the correct information. The Stock Broker is paid a LOT more than I am! And a matter that the client did not want to pay extra money, when he is already paying the Broker.
So some reports are in progress, which hopefully will enable me to complete this return, which as of now has over 900+ transactions on the Schedule D.

Does anyone have an excel spreadsheet that you use for tracking that they would willing to share?

Snowbird, thanks for the info on the Gainskeeper and Tradelog - not sure why this Broker is not utilizing these reports, as it would seem it would provide the info for the Client, the Broker and myself as the Tax Preparer. So I have "dropped" the hint.

OtisM, you make a valid point on the new upcoming reporting, are we still as preparer's really going to know what is actually going on on the reporting, altho, maybe more is better than nothing at all. I do have a couple of clients that use multiple brokerage houses, and so far that has been okay, the client purchases that "block" and sells that "block" through the same Brokerage House.

On the clinet that I posted on - this was an interesting fact - part of the problem was that the Broker was moving from a Brokerage (Royal Alliance) which just so happened to be affiliated or under AIG - So that Brokerage house has not been responsive in providing a lot of information that took place late 2008. I wonder why!

Thank you!

Sandy