IRS and stock basis

[Unregistered]

I would like to know how the IRS determines stock basis or if they even investigate this until an audit. Not trying to do something deceitful, but just curious.

There is a new member on the board that said he was an auditor and I would like his opinion or the opinions of others in the know about this process.

Thanks,

Arkansas Beauty

[DaveO]

Welcome Arkansas Beauty

I haven't seen many audits over stock basis. I do know that it's an area the IRS is looking at very closely to close the tax gap. In a stakeholder meeting yesterday the IRS agent said that under reporting was estimated to be the source of around 75% of the tax gap.

I would expect that the schedule "D" will be modified in the future and more information required. I know they are going to require basis reporting by the brokerage houses n the future. Otherwise, short of an audit as you say, they are relying on honest taxpyers to correctly report their gains.

[dsi]

I recently attended a seminar on S-corps that was all about stock basis, debt basis , AAA, Distributions, and E&P. The presenter was the top dog for S-corp audits. He indicated that this is where they are concentrating their efforts. So beware, as he indicated that almost no accountant does the calculations correctly. They are going to be looking at theses items as well as loans to and from officers.

[sea-tax]

I have had two s-corp audits in the last two years and basis was a major portion of the audit. The auditor wanted copies and proof of all capital contributions and any shareholder loans(promissory notes).

In one case the s-corp was something like 10years old and the auditor wanted to see copies of the original capital contribution checks that the shareholders Made to the s-corp. I or the owners never kept these copies so to the bank we went . Two got them from the bank , one could not. The one who could had significant changes made to his capital acct because he couldn't document it through check or bank statement. I argued with the auditor that this was unreasonable to require the client to keep records that were 10 years old. Currently he has a tax attorney and they are working it out with the IRS.

The other case was a 2 year old corp and I had made copies of all checks of contributed capital and kept really good basis schedules so there was no issues.

To say the least me and my partners have instituted a strict policy of making copies of all loan doc's for sharehold loans, checks for contributed capital and anything else that would help establish that the shareholder did have basis.

Unfortunately this leads to the question of how long to keep records right. I mean they can only audit 3 years. I have come to the conclusion that when it comes to depreciation and basis the 3 year statue means nothing. I had on auditor that wanted invoices and checks for assets purchased for a sch c client that went back to 1985.

This is really scary and I think we will all be facing these issues in the near future.

[RLymanC]

Stock Basis

If you can come close to the basis, OK, then do as Jainen says, add the inflation rate to the cost basis and, viola, you may have a loss.

[Unregistered]

I
Unfortunately this leads to the question of how long to keep records right. I mean they can only audit 3 years. I have come to the conclusion that when it comes to depreciation and basis the 3 year statue means nothing. I had on auditor that wanted invoices and checks for assets purchased for a sch c client that went back to 1985.

The 3 years start with the return reporting disposition of an asset, not the return for the acquisition date. The IRS 800 answer has always been incomplete.

[Unregistered]

The S corp auditor told us at a recent seminar that unless YOU can prove the taxpayers basis, then their position is THEY

[Unregistered]

The S corp auditor told us at a recent seminar that unless YOU can prove the taxpayers basis, then their position is your client has no basis. Not only do you have to have the info to calculate basis, YOU MUST calculate it properly.