Petition: Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules

By Robert A. Green, CPA

Green's Forbes blog version:

.

Please read, sign and send our

posted on RallyCongress.com. To get relief from Congress and the IRS, we need your help. Please spread the word with all traders and investors.

New “cost-basis reporting” rules for 2011 are not functioning properly. Botched implementation is unfairly causing millions of taxpayers to significantly overpay their tax bills. The IRS should have issued the same set of rules for brokers and taxpayers, but did not. How can the IRS now send tax notices and audits to hundreds of thousands of taxpayers over 1099-Bs prepared under one set of rules, while holding taxpayers accountable to another set of rules? Taxpayers did not sign up to be deputy accountants for this mess!

Dear Congressman:

As an investor in securities, I need your help on my 2011 tax return. The IRS has phased in “cost-basis reporting” rules on broker-provided Form 1099-Bs, in accordance with Section 403 of “The Emergency Economic Stabilization Act of 2008” enacted by Congress on Oct. 3, 2008.

Implementation of the cost-basis reporting law has turned into a huge mess for honest taxpayers. Leading CPA firms for securities traders have reported that the new 1099-Bs are very hard for taxpayers and even CPAs to decipher.

I'm asking you to please direct the Treasury and IRS to:

• Not match 2011 individual tax return filings to flawed Form 8949s and botched 1099-Bs, prepared under a different set of rules than what taxpayers must follow;

• Reconcile cost-basis reporting rules for brokers and taxpayers;

• Waive tax notices for Form 8949 reconciliation differences with 1099-Bs for 2011 returns; and

• Grant valid extensions prepared in good faith dealing with these problems.

For example, many brokers incorrectly calculate wash sales on 1099-Bs by reporting “potential wash sales” rather than actual wash sales. Often a potential wash sale goes away when a trader eventually does not buy the position back at year-end or within a 30-day window, or absorbs the loss on subsequent profitable trades. With these error-prone 1099-Bs, many taxpayers are reporting nonexistent wash sale loss deferrals and that raises their tax bills considerably.

For 1099-B preparation, the rules are not the same for brokers and individuals, either. Brokers report wash sales based on “identical positions” (stocks only), whereas taxpayers must report wash sales based on “substantially identical positions,” which means between stocks and options, too. Tax year 2011 is the first that many brokers are making an attempt to report wash sales, and the IRS may be relying on 1099-Bs to match tax returns. The wash sale issue is extremely botched and worthy of hitting the reset button.

Look at a bunch of 2011 Form 1099-Bs and you will see the scope of this tax-reporting crisis. Brokers are adjusting cost-basis when they should adjust proceeds and vice versa. Congress and the IRS should have required “standardization” in application of the new rules and they should have also used the same rules for both brokers and taxpayers. It's not fair to blame the brokers completely, as they were under great pressure to deal with guidance which came late from the IRS. Wash sale analysis must be cut off on Jan. 31, so how can brokers issue Form 1099-Bs by Feb. 15? There isn't time. These rules need to be rethought.

Phasing in the rules for brokers but not for taxpayers has also made the tax compliance gap greater. Brokers only report cost-basis for purchases of securities in 2011, which leaves out wash sale losses deferred from 2010, again short-changing taxpayers who rely on 1099-Bs.

The new individual tax form 8949 is a nightmare for taxpayers and preparers. It has Parts A, B and C and covered vs. non-covered and reportable vs. non-reportable items. All brokers handle them differently. For example, ETFs that are Registered Investment Companies (RICs) are reportable, whereas commodities ETFs that are publically traded partnerships (

) are not. I imagine you can't even prepare your own tax return based on these rules.

I thought a 1099-B was a “tax information” statement to help me prepare my tax returns. Why does the cost-basis legislation state a taxpayer should not rely on a 1099-B?

I'm using reputable trade-accounting software, which downloads my transactions and calculates correct trading gains and losses, including wash sales across all my accounts. But, it's almost impossible to reconcile that correct trade accounting to the botched 1099-Bs and Form 8949. I am filing an extension, so I can wait until Oct. 15 for your help here.

For more background on the scope of this problem, I suggest visiting

Thank you for your cooperation and help.

Sincerely,