How far would YOU go?

[Snaggletooth]

Just thought I would throw out a scenario most of us have faced. I don't know how to do a poll, but would be interested in knowing how most of you would handle under the following situations. How far would you apply the principles of due digilence and accuracy before stopping?

SCENARIO: Tax client furnishes you a 1099-B from Value Line Mutual Funds for $100,000.

A. Taxpayer purchased the funds in 2001 for $93,000. You have been doing his taxes since then, and have records of all dividends and withdrawals since his purchase.

B. Taxpayer purchased the funds in 1990 for $52,000. He has been your client since 1998, and his returns have been retained in your records since 2000. He moved in 1998 and doubts he can find records going all the way to 1990. Literature might be available from Value Line which advertises the classic "If you had invested $10,000 in this fund 10 years ago, you would have $xx,xxx in your fund now", and Value Line might have this literature going back several years.

C. Taxpayer purchased the funds in 1964 for $10,000. Client has kept zero records except for perhaps the last 15 years, and Value Line cannot supply any information before 1982 or thereabouts since they were not required to track basis before 1986.

As a preparer it is YOUR job to report capital gains/loss. Where in this time-line does due diligence stop and common sense take over?

This is not a "stump the band" question in spelling-bee style. It is something almost all of us have faced, and I'm thinking there is no right-or-wrong answer. For those of you who have encountered this and are willing to take the time to share your thoughts, I'm listening!

[LawrenceGR]

Short answer

In all cases I would do the best I could to establish a basis. In case A if I had the info in my records I would go back and calculate the basis. In B I would use as many hard numbers as possible, then try to figure from the literature what the soft numbers would be. In C I think I would again use as many hard numbers as possible and do the best I could on the rest. I would also discuss with the client that this could be a little murky, but we have done our best hopefully this will not be called in question. How ever this would be handled it would be a ton of work. If time permits I really enjoy this type of puzzle. I only wish one could look in hte back of the book for the answer.

[DonPriebe]

An assumption leading to an easy answer

If he didn't reinvest the dividends I'd take his purchase recollections at face value and go from there.

You forgot case D: He hasn't the slightest idea of when he bought the fund and how much he paid for it.

[BOB W]

I had heard in past post on this board that if the T/P can't prove basis to the IRS then his basis would be calculated as ZERO by the IRS...... Is that true?

[Snaggletoof]

Yes this is true

Bob, just ask anyone who has received a letter from IRS saying taxpayer did not report the sale of a security. They will display a 1099-B from Merrill Lynch (or someone) and show an amount of $10,000.

Then they will calculate a tax liability on $10,000 of capital gains, as if the security had cost the taxpayer zero.

This is true even in the case of a bond, where a $10,000 bond is redeemed at zero gain or loss. In fact, since there is no gain or loss, often my clients do not even show me the 1099-B, thinking they are automatically off the hook. This leads to LOTS of letters in the summertime alleging taxpayer has not reported the sale.

All forms 1099-B are reportable, and failure to do so will gyrate a calculation of extra tax by the IRS, eminating from an assumption that basis is zero.

[taxxcpa]

Piecemeal purchases

I recently had a client sell stock in her employer's corporation after years of buying it every payday.

I looked it up on yahoo finance, go the monthly closing prices, exported to excel, added them then divided by the total number of months to get an average cost--which might not be exactly right, but would be based on a logical approach that would be just as likely to understate as to overstate the cost. I then asked the client if that was acceptable. If she had said, "NO" then I would ask her to come up with something more accurate--which would have been impossible.

[Burke]

.

Then they will calculate a tax liability on $10,000 of capital gains, as if the security had cost the taxpayer zero.

And they will calculate it at ordinary income rates. Just had one, letter from IRS asking for $23,000+ in taxes, interest and penalites for 3 unreported stock sales. HRB did tax return and left them off as the brokerage did not have basis on those 3, and were not on the realized gain/loss reconciliation. After redoing and calculating basis and LTCG, she owed $4,000+.

[Lion]

No one wants to pay me...

I tracked down 18 years of Fidelity Magellan dividends for my son's tax return, imputing some years where my ex-husband was not forthcoming with old returns. But, clients don't want to pay me for my time; and I seldom have the time during tax season. Sometimes, they go home and find their records and actually calculate their basis. Often, they have their various brokers from over the years fax me many, many pages of information they expect me to add up for free. I usually do and usually get some extra charge in their bill. Sometimes, they call me with a number that I have them write on their 1099-B or annual statement or fax me; and I just use what they said. It's not my job to call them a liar when I have no better knowledge of that security. The hardest are the young people who received the securities as a gift from grandma (now passed away) when they were born. Sometimes the parents remember it being worth $5,000, but that's when it became their child's and not the grandparents' basis. By the time the grandchild cashes it in to buy a house, the grandparents are gone and their broker and sometimes their parents. I give them choices, such as go on extension and pay me to research it this summer, you research it now, use zero as your basis,...

[veritas]

I have one I'm working on now

Bought shares of Templeton fund in 1988. Client has no records. I asked the rep to get information I need.

We will see.

[Davc]

I recently had a client sell stock in her employer's corporation after years of buying it every payday.

I looked it up on yahoo finance, go the monthly closing prices, exported to excel, added them then divided by the total number of months to get an average cost--which might not be exactly right, but would be based on a logical approach that would be just as likely to understate as to overstate the cost.

Not true. That is most likely to overstate the cost. When people buy stock through PR deduction they usually have the same dollar figure used each payday. Therefore, there would be more shares purchased when the value was lower.

[BOB W]

Bob, just ask anyone who has received a letter from IRS saying taxpayer did not report the sale of a security. They will display a 1099-B from Merrill Lynch (or someone) and show an amount of $10,000.

Then they will calculate a tax liability on $10,000 of capital gains, as if the security had cost the taxpayer zero.

This is true even in the case of a bond, where a $10,000 bond is redeemed at zero gain or loss. In fact, since there is no gain or loss, often my clients do not even show me the 1099-B, thinking they are automatically off the hook. This leads to LOTS of letters in the summertime alleging taxpayer has not reported the sale.

All forms 1099-B are reportable, and failure to do so will gyrate a calculation of extra tax by the IRS, eminating from an assumption that basis is zero.

Snag> I agree that the first contact letter will show a zero basis, but if a client said to the IRS they don't know what they paid for the stock what would the IRS tell them?

[JohnH]

At least the CP-2000 provides one type of "basis". It shows the taxpayer in concrete terms what they will need to pay the IRS if they don't want to pay you to calculate cost basis for them.

If they sold $20K or so in securities, suddenly a fee of $300 - $1000 to research the basis isn't such a bad deal since they will be saving $3K - $5K in Fed & state taxes (sometimes even more). Given the performance of some securities & mutual funds over the past few years, more & more of them are showing slight gains or even losses (especially if the securities were in a DRP).

[joanmcq]

I had a horrible case at my job where it was an elderly lady whose husband was playing the market. He had Altzheimers by the time the CP2000 came, and hadn't included most of the trades on the return. The notice had some $86000 of tax due if no basis. The stocks were all bought fairly recently through Ameriprise, and the broker was no help whatsoever to her. Just told her to go online and get the basis. She didn't have the password, husband did, or had. She finally hired someone else to research all of it, or maybe strongarm Ameriprise. I even talked to the broker, and they were no help. I will never do business with them because of it.

[BOB W]

I had a horrible case at my job where it was an elderly lady whose husband was playing the market. He had Altzheimers by the time the CP2000 came, and hadn't included most of the trades on the return. The notice had some $86000 of tax due if no basis. The stocks were all bought fairly recently through Ameriprise, and the broker was no help whatsoever to her. Just told her to go online and get the basis. She didn't have the password, husband did, or had. She finally hired someone else to research all of it, or maybe strongarm Ameriprise. I even talked to the broker, and they were no help. I will never do business with them because of it.

I strongly dislike Ameriprise. The agents, and I use agents because they are mostly trainees, have no sense of what it good for their clients. Their first and foremost concern is COMMISSIONS.

Had 2 clients this year that they created major tax problems. One was they forced an IRA distribution ( age 44) to do a ROLLOVER TO A non-ira investment. In this case the distribution was 19,900 but created almost 9,500 in taxes. The other one was liquidating all old brokerage accounts to get them into the new broker's account. That was a 185,000 1099B. T/P had no idea of original investment 20 years ago. The point is not a basis issue but one of blind selling before they know the tax impact.

Almost every broker uses the word "ROLLOVER" without knowing what they are talking about. This is at the T/P expense.

I have seen this from other brokers also and I will put this in a newsletter at the end of the year warning clients of the trap.