WSJ - New rules for investors

[BHoffman]

http://online.wsj.com/article/SB10001424052702303339504575566171935567144.html?mod=WSJ_hpp_sections_personalfinance

I was especially interested in the paragraphs below:

"What does my broker need from me now?

You must decide whether to put in a standing order on which shares to sell first, or specify on a case-by-case basis. Examples of standing orders: FIFO (first-in, first-out), LIFO (last-in, first-out) or HIFO (highest-basis-in, first-out). You also may give the broker or another agent full or limited power to choose shares for you. You may change your mind anytime up till the settlement date, Ms. Conlon says.

If you identify shares on a case-by-case basis, you have to specify which were sold by the trade's settlement date. Many taxpayers have flouted existing rules by identifying which shares were sold much later, when they do their taxes.

If you don't tell your provider what to do, the law will choose for you—usually FIFO."

[Jiggers]

Our clients will have no clue

Our clients will have no clue as to what they do, what they did, or why they will do it a certain way.

And the brokers will try to give tax advice and they will usually be wrong.

Similar to brokers giving tax advice on how to title property to avoid probate and that screws up the stepped-up basis if it isn't titled properly.

And we always find out that our clients did it wrong, after-the-fact, and usually too late to correct.

[newbie]

Really, you have the same choices now, you can choose specific shares to sell and if not the FIFO method must be used.

Personally I am looking forward to the new reporting requirements of the basis and sale price being reported on the 1099B.

[Bees Knees]

Personally I am looking forward to the new reporting requirements of the basis and sale price being reported on the 1099B.

Most brokers already report cost basis info on their end of year statements.

[outwest]

Which works well if ..

the entire position is sold. However, if it's a partial disposition, especially if accumulated over several earlier purchases, how is the broker to know which lot is sold?

In that context, I can understand the notice about additional information for the broker to properly report the basis.

[S T]

And Then

Wash Sales is another issue

One of my clients had all of the cost basis and bought and sold dates - but their brokerage house did not provide the Wash Sale Info.

Client had to have the Broker to hire an outside service to provide that information.

Yes, if it were me I would have "fired" the broker!

Sandy

[FEDUKE404]

Some more details

I was just discussing these issues with a stockbroker last week.

For the "new" rules, they will track all purchases (including DRIP shares) after the start of 2011. Same goes for splits/spin-offs/etc.

For "old" shares they will neither honor nor use my data for what they report to the IRS. (How do they know what I paid for XYZ company 20 years ago?) As an example, assume I sell the XYZ shares next summer: They will report "cost basis unknown" or something similar even though their gain/loss statements may show calculations. I think this approach is a modified brokerage attempt at CYA? I did not specifically ask what would be reported if I had bought some shares of ABC through their firm two years ago and sell them during 2011.

Most of the larger firms have been tracking cost basis for years, including what the client "told" them the basis was for older shares. For client profit/loss reports, I assume such tracking will continue.

FIFO was stated to be the method the firm would, by default, use to establish sales of some portion of the total lots. That is fairly consistent with the IRS rules of yore - but how many people have you ever encountered who properly "instructed" their broker to sell a specific lot of shares vs "we can work that out at tax time" ?

All in all these new rules will help tax folks greatly - but in no way will solve the blank stare issues when you ask Client Joe how much his grandmother paid for the shares she gave him around 1975 and he sold during 2011.

FE

[Snaggletooth]

Fifo

FIFO has long been the default designation by IRS upon audit, unless the taxpayer could establish some other convention.

I believe the root of all this trouble is the difficulty the IRS has with the taxpayer being able to insert any value whatsoever as his "basis" when reporting a Schedule D transaction. I wouldn't doubt they send out as many as one million CP2000s for unreported stock transactions every year. The CP2000 assumes zero basis, therefore resulting in assessing the taxpayer with several thousand dollars in taxes.

And of course, preparers like you and I respond by assuring the horrified taxpayer that providing the basis will bail him out of most of the liability (if not all).

For aggressive revenue enhancement people in the Treasury, this has to irk them. The fact that taxpayers can put whatever number they want on a Schedule B in the basis column. This is a loophole they intend to close -- and since going after the taxpayer's records would be an all-time futile effort, they are going after the stockbroker and registered agents who issue the 1099-Bs.

[Burke]

Which might be just great for anything bought from 2011 forward. But it will be years and years before all the old stuff is disposed of, and we will still be dealing with basis for those purchases. Which makes me wonder about all those DRIPS where you show "various" for purchase dates. I can just see the CP2000's now. I find reported 1099B errors on basis all the time.

[joanmcq]

If a transaction is really being audited, rather than just a CP notice, the auditor does require proof of basis.

I think the new laws will help the consumer as much as the IRS. Just think; the CP computer will know the basis and the report will be accurate (although we won't get the chance to look like heroes when we get that initial $50,000 bill down to a refund since all the sales were a loss, lol). The new forms report when they are wash sales, accqusition dates, all the info you need to do the return. A lot of brokers have been providing basis, but for example, Charles Schwab provides a supplementary schedule with purchases for the year. I've had to go back multiple years (I keep all the schedules) to determine basis. Now CS will have to put it all in one easy to access place.

[taxxcpa]

Proof of basis

If a transaction is really being audited, rather than just a CP notice, the auditor does require proof of basis.

One of my clients got audited and they disallowed depreciation on a mobile home she was renting. She could not find the papers to prove her cost basis.

[FEDUKE404]

Tracking and verifying cost basis

Which might be just great for anything bought from 2011 forward. But it will be years and years before all the old stuff is disposed of, and we will still be dealing with basis for those purchases. Which makes me wonder about all those DRIPS where you show "various" for purchase dates. I can just see the CP2000's now. I find reported 1099B errors on basis all the time.

One would think "various" would still be allowable to show the purchase dates for sale of positions with multiple purchases involved (but separating ST/LG capital gain issues), such as monthly reinvested mutual funds and the like. OTOH, I have always shown every "sale" made as an individual transaction.

It is likely that a preparer could also attach any voluminous sale statements using a method similiar to the current one existing for efiling and then mailing the supporting properly-formatted brokerage documents.

Also, I have never (yet) seen a Form 1099-B with a cost basis shown on it. Perhaps some supporting documents to assist the taxpayer, but never on the actual IRS tax document itself.

Re the errors you have found: Are you keeping track of all client stock purchases/stock splits/spin-offs/reorganizations/prior sales and the like for each and every stock? Absent a zero ("not available") cost basis, that would seem to me to be the only way you could routinely determine any "errors" to be present. There are not enough hours in the day for me to ever consider doing such routine background work for my investor clients. Wow!!!

FE

[JohnH]

It's fascinating how creative some brokers can be in highlighting the gains with charts & graphs, but in the past the reports often managed to confuse clients about the losses. Can't wait to see how they will try to bury the truth under the new reporting rules.

[joanmcq]

FEDUKE, there has been no cost basis info on a 1099-B. It has always been on supporting statements, if given.

Look at the new one. Its on the IRS website.

[FEDUKE404]

Huh?

FEDUKE, there has been no cost basis info on a 1099-B. It has always been on supporting statements, if given.

Isn't that exactly what I said previously ???

(Although, for some transactions for some people that will apparently change beginning in calendar year 2011.)

FE