Multiple Stock Transactions, and I mean multiple!

[Bees Knees]

For Bees - why does the format of a statement have to be exactly like the IRS statement to be a "similar format".? I could argue with a straight face that my format was similar as long as it was made of of consistent rows and columns.

Does the word consistent mean the same thing as similar?

Schedule D instructions, page 6:

You must enter the details of each trans-
action on a separate line of Schedule D. If
you have more than five transactions to
report on line 1 or line 8, you can report the
additional transactions on Schedule D-1.
Instead of reporting your transactions on
Schedules D and D-1, you can report them
on an attached statement containing all the
same information as Schedules D and D-1
and in a similar format. Use as many
Schedules D-1 or attached statements as
you need. Enter on Schedule D, lines 2 and
9, the combined totals from all your Sched-
ules D-1 or the attached statements. Do not
enter “available upon request” and sum-
mary totals in lieu of reporting the details of
each transaction on Schedules D and D-1 or
attached statements.

2 points:

1) The substitute statement must contain all the same information as a Schedule D
2) The substitute statement must be in a similar format.

The Schedule D has a set number of items that need to be reported, such as the description of the stock, date acquired, date sold, cost basis and sales price. The substitute statement must also contain all of this information.

The Schedule D also has a set order and format for reporting these items. The Schedule D-1, for example, has the same format as the Schedule D. The instructions say your substitute statement must be in a similar format. If the substitute reports all of the items required, but mixes up the order in which they appear on the statement, the substitute will have met the “same information” requirement but not the “similar format” requirement.

Why does the IRS instructions say your substitute statement must contain the same information AND be in a similar format, when any format containing the same information will do?

As to the penalty for failing to comply with IRS instructions, I don’t know what it is. I don’t want to find out the hard way. I would simply say to the client: “These are the rules. If you want me to prepare the return the correct way, your broker either has to provide you with a new statement that is formatted similar to the Schedule D, or you have to pay me to enter each transaction separately.”

No need to argue or say anything further. Those are the rules.

[Bees Knees]

Other instructions by IRS that use the phrase “similar format.”

Form 8873:

Format of tabular schedules. If a tabular schedule is attached to Form 8873, the schedule must:
• Be in spreadsheet or similar format,
• List your name and identifying number on each numbered page,
• Be formatted in columns that correspond to each line item of Form 8873, and
• Show totals in each column.

Form 4137:

Line 1. Complete a separate line for each employer. If you
had more than 5 employers in 2007, attach a statement that
contains all of the information (and in a similar format) as
required on Form 4137, line 1, or complete and attach line 1
of additional Form(s) 4137.

Schedule P (Form 1120-FSC)

Format of tabular schedules. If a
tabular schedule is attached to Schedule
P, the schedule must:

• Be in spreadsheet or similar format;
• List the taxpayer’s name and EIN on
each numbered page;
• Be formatted in columns that
correspond to items A, C, and each line
item in Parts I, II, and III of Schedule P;
and
• Show totals in each column.

In looking at these instructions, my impression of what it means to be a “similar format” is that the IRS wants it to look similar to the original, although it does not have to be identical. The problem with some broker statements is that they sometimes include too much information, such as the price per share. Or you have to look at two rows of information for one transaction. Or the sequence of the items listed are out of order. They also usually do not provide totals at the bottom of each page for each column. The Schedule D and D-1 has totals at the bottom of each page for each column.

[erchess]

TY Bees

Your points are all very well taken as usual.

However, we all know that a taxpayer may at any time make the argument that the IRS instructions are no more in compliance with the tax code than is an alternate reading which is better for the taxpayer. How do we as professionals help our clients decide when to at least threaten to make that argument? Does a great deal of money always have to be at stake? Does the taxpayer always have to have the money and the dedication to see the process through or is it a wise strategy to bluff from time to time?

[JohnH]

I think the answer to the question lies in deciding who gets the short straw of the IRS doesn't accept the format used on the return. At penalty time, the client and the broker will contend that the preparer should have known (irrespective of what they said at the time the return was prepared). Everybody in the process will have convenient memory lapses, and none of them will step up to the plate when the penalty notice arrives.

For me that settles it. If I prepare the return, all the data is going to be entered in the format my software provides and the charge will reflect the entry time. If the client can't live with that, it's time for them to do it themselves or find another preparer.

[erchess]

Very Revealing Conversation Here

First of all I would have guessed that if the broker, the client, and the preparer all pointed fingers and yelled loudly at each other, each would have reasonable doubt and no one would have to pay the penalty. I'm hearing John say that the penalty falls on the preparer with perhaps the faint possibility of getting someone else to reimburse him. That actually makes sense to me since it is the preparer who should be most aware of what the IRS Requires and whether they actually have the legal right to require it.

Second, I would have guessed that the penalty for one return would be trivial. I wonder if anyone knows what it would be in such a case as this? It would be worth something to thumb my nose at the taxing agencies which are actually the only people I dislike more than I dislike Microsoft.

[JohnH]

I really haven't given much thought to what type of penalty might be assessed or how much it would be. It could be as simple a matter as a letter from the IRS just saying the info isn't in proper format and you have 10 days to get it right. Unfortunately these types of letters have a way of arriving the day before you're leaving on a cruise. On the other hand, there might be one of several potential penalties out there, which would be assessed as a part of an examination of the return.

I was thinking more along the lines that any penalty would fall on the client, but they will be looking for someone else to pay it. After all, they are alreadly looking around for someone (anyone) to say it's OK to prepare the return on the cheap, so I wouldn't expect them to behave any differently at penalty time. The broker isn't going to accept any responsibility of any type (they almost never do), so the problem finds its way back to the preparer's desk. Refusing to pay it almost certainly means losing the client, so if that's the way it has to be then why not just go ahead & get that out of the way at the outset?

[S T]

Transaction Fees

Erchess,

At least on my clients, on the stock trade fees (transaction fees are included on each stock trade), however, most of my t/p have changed to a "Managed Account" or "Financial Advisory Account" some term like that.

So if you look at the quater reports or year end report on these types of account, you will see a "financial advisory fee" or management fee" on the account.

In the one I posted previously the "fees" amounted to about $8,000 on the regular trading accounts (3) and almost $10,000 on the IRA account (which were not a tax deduction as they were deducted from the account balance). So for this particular t/p he paid very close to $20,000 in fees, plus the trade transaction fees.

See my prior post on actually spending the time to follow the Schedule3 D format. If I had not, I would have not performed the best for my t/p client. The realized gain/loss report was inaccurate (the report that IS NOT sent to the IRS) , and I had to spend time to analyze the actual report for the stock transactions. (The one SENT to the IRS).

I would have never questionned or found the discrepancy if I simply entered the bottom line short term gain/loss or long term/gain loss from the brokerage statement.

Sandy

[Burke]

For anyone - I thought brokerages normally included the transaction fees in the prices they give as bought for and sold for. Is that not correct?

You will find that investment advisors who "manage" accounts and do scores of trades, charge a percentage of the value of the portfolio each quarter, rather than a charge for each sale or trade. It is sometimes more economical for the client, who would not stand for the fees normally charged per stock trade. And more profitable for the advisor too. Sometimes these are individual stock accounts. Most of the time these are mutual funds. The client does not realize that the brokerage house (Fidelity, etc) with whom these funds are held, is making money off the buy/sell spread too. I often find this results in lots of churning, and not very much gains, even in a bull market. Sometimes the fees equal or exceed any gains. It is beyond me why clients continue to do this, but I guess they are so unfamiliar with what they have and how to invest it, they don't want to think about it. They don't think about the amount of the fees, because they can "deduct" them. I think it would be fairer if the advisors charged a percentage of the net gains they realize for the year.

[Burke]

See my prior post on actually spending the time to follow the Schedule3 D format. If I had not, I would have not performed the best for my t/p client. The realized gain/loss report was inaccurate (the report that IS NOT sent to the IRS) , and I had to spend time to analyze the actual report for the stock transactions. (The one SENT to the IRS). I would have never questionned or found the discrepancy if I simply entered the bottom line short term gain/loss or long term/gain loss from the brokerage statement. Sandy

Sometimes, the investment advisor uses a different method to calculate the gain/loss than the brokerage does. So the two gain/loss statements will not match (except for gross proceeds.) It depends on whether they use LIFO/FIFO, etc.

[Corduroy Frog]

Substitute Forms

In the field that asks for a description of the property, put the phrase "see Substitute Schedule D."

I've got the attitude that says it is I preparing the return, and not various information providers, or clients who would prefer short cuts. There is a general feeling that the big banks, custodial financial entities, with a NY or MA address are going to be more knowledgeable than some small-town corner tax shop (i.e. ME).

I have a long list of substitute forms and information returns from these elite entities with horror stories in their formats and out-of-balance information.

I have an IRA statement (substitute Form 5498) from a bank, without the name of the bank.
I have 1099-Bs with substitute Schedule Ds that don't balance and have no basis or purchase dates. I have 1099-INTs for Savings Bond interest that are not identified as such on their "substitute" form.

"My broker says I need to do [blah blah blah] on my tax return", implying that this broker knows more than I do. Ironically enough, almost all these documents say "consult your tax professional for more information."

My vote on the "poll" is to list every transaction. For 200 entries I wouldn't charge full-up rates for simple transposition and data entry, but I do charge enough to cover my trouble.

[JohnH]

I agree with you that it is puzzling why so many people put up with this account churning (done legally, with al the proper signatures, so it sidesteps the technical definition of churning, but it's essentially the same thing). I believe most of them put up with this stuff because it makes them feel good to converse at dinner parties and church socials about how "my broker" did this or that. It's really fun to brag about the home runs, and even if the broker does a sorry job I think it makes them feel more wealthy to boast about what they can afford to lose. It has little to do with intelligent investing and much to do with trying to impress others in some shallow fashion.

I remain convinced that someone who doesn't have a strong handle on what their broker is actually doing would be much better off to just invest the equity portion of their portfolio in the Total Stock Market Index, knowing that with absolute certainty they will match the market average (minus a small transaction charge), and will be guaranteed to outperfom 90% or so of all mutual funds out there, but that's just not exciting enough for them. If you don't believe it, just try explaining the supreme logic of buying the entire stock market to them and watch their eyes glaze over. You can't even get them to have an intelligent, thoughtful discussion about this sort of thing after they tell you their broker just lost them 10-20% of their nest egg. - they're already talking about how they expect him to make it back for them, gonna hold his feet to the fire, etc. As if their displeasure will somehow make him smarter or wiser.

[Lion]

Reconcile to 1099B

When I do type in a summary and attach a spreadsheet or broker's statement, I don't take my summary numbers from the broker; I run my own total to compare with the 1099B that's reported to the IRS.

[FEDUKE404]

Sometimes NO brokerage fees exist

For anyone - I thought brokerages normally included the transaction fees in the prices they give as bought for and sold for. Is that not correct?

You have to be a bit careful on this issue. Many full-service brokers are now charging a separate fee that essentially replaces any "transaction fees." In most cases these are asset-based account fees, and are frequently assessed each quarter.

If the client has such an arrangement, for all intents and purposes there are no meaningful fees paid with a stock purchase/sale, and in the meantime the separately paid fees are generally deductible (with the usual limitations) on Schedule A.

Whether or not the client comes out ahead is questionable, especially since I've seen clients with quarterly account charges exceeding $6k. I'm sure it is a positive for a client having many transactions in small share quantities, and of course there are other "bells & whistles" included in the fees.

The real issue for a tax person is that absent looking through the client's stock statements, the deductible fees could easily be overlooked!

FE