published Wednesday, April 4th, 2012

Personal Finance: Cost basis reporting causing angst on taxes

Thanks to the Emergency Economic Stabilization Act of 2008, custodians now are required to report information to the IRS regarding acquisition date and cost [hence gains and losses] for a wide variety of investments.

Reporting for stocks began in 2011, while fund transactions are being tracked starting this year. As most professional tax preparers know, implementation has not been without its complications.

Confronted with potential errors as well as inconsistencies in methodologies across different brokerage firms, many accountants are filing for routine extensions to allow sufficient time to resolve problems and request cleaned-up statements.

For some individuals struggling to prepare their own tax returns, the new rules present a perplexing complication, particularly if the brokerage statement does not match their personal records.

Custodians have a procedure for making corrections to inaccurate statements, but most would advise that any revisions to the form 1099-B would not be available until well after the filing deadline of April 17. What to do?

First, relax.

Asking for additional time actually is quite perfunctory. You may request an automatic six-month extension by submitting form 4868 to the IRS, postponing your filing deadline until Oct. 15.

You must still estimate your tax liability and submit payment with the application, but there is no penalty if your withholdings and payments prior to April 17 get you within 90 percent of the final tax liability. Meanwhile, take your time and get the records right.

Also, bear in mind what the reporting requirements actually mandate. Equity securities are deemed to be covered by the requirement only if they were acquired on or after Jan. 1, 2011.

Although most brokers are tracking cost basis data for all transactions for which they have data regardless of the purchase date, the information is not reported to the IRS if the stocks were bought before 2011.

Any erroneous cost information related to noncovered securities should be corrected for record-keeping purposes, but it remains the taxpayer's responsibility to track gains and losses for stocks purchased in 2010 or earlier.

Mutual fund, ETF, and direct reinvestment program reporting begins this year, so no cost-basis reporting to the IRS will occur for 2011 tax returns related to these investments, even if your 1099-B shows the information. Bonds and options are scheduled to be reported in 2013.

Another potential snag has been the reporting of wash sale transactions. Losses on sales of securities cannot be claimed if a "substantially identical" security is purchased within 30 days before or after the sale. Some investors are finding stock transfers from other accounts mischaracterized as purchases for wash sale purposes, invalidating legitimate deductions. Taxpayers should take the time to notify the broker of the error and delay filing their return if the loss is material.

How the cost basis requirement became part of the bank bailout bill is a discussion for another day. But if your records are inaccurate, now is the time to get your 1099 cleaned up, even if an extension is necessary.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfree press.com.

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