Tax Flubs That Can Cost You Thousands

07/31/2012 10:26 am EST

Focus: STRATEGIES

Robert Green, CPA

CEO, GreenTraderTax.com

Complex new trader tax legislation is already creating havoc among brokers, and for taxpayers, misinterpreting the rules could mean overpaying by thousands, warns Robert Green.

In the past year or so there have been quite a few problems when it comes to cost-basis accounting, and we’re going to be talking about that today with our guest, Robert Green.  Robert, tell us what you’re seeing out there. 

The IRS is forcing brokers to report cost basis and a lot more information than they did in the past, starting in 2011.  They sent the rules to the brokers late.  The brokers never saw the final Form 8949. So they did the best they could to interpret the IRS’ wishes, and they botched it, but of no fault of their own.  They should have gotten the information sooner. We isolated the real problem.  Brokers have one set of rules from the IRS—apples. Tax payers have a different set of rules from the IRS—oranges.  Makes no sense.  You would think that a 1099-B, a tax information statement, would be what you input to your tax return, but no, botched 1099s are leading taxpayers astray to the tune of overpaying their taxes by thousands and thousands of dollars.  For example, on incorrect wash-sale reporting.

You just mentioned the wash-sale reporting, what are some of the other differences?  Why are these botched returns occurring?

Brokers report identical positions, just between stocks, on wash sales.  If you buy something 30 days before or after and there’s a loss, you have to defer the loss to the next year. Taxpayers have to also factor in options—Apple stock, Apple options.  Here’s the big issue; potential wash sales.  Brokers report a potential wash sale and put it on the 1099.  A lot of active traders have $1 million of potential wash sales, but most of them have no wash sales, or only $10,000 of actual wash sales.  So, what good is a 1099 going to the IRS saying $1 million wash sale, and the taxpayer has no wash sales.  They’re going to get audited by the IRS, and we want the IRS to recall these poorly-conceived rules, sloppy execution—I think its government malpractice—and not audit taxpayers on this issue.  People should sign our petition at RallyCongress.com to make it happen.  It’s a filing crisis.

Any other problems that you’re seeing with some of these returns?

Well, brokers are phasing in the rules, and are only reporting cost basis from 2011, not 2010.  So, taxpayers are very confused, and the brokers are all applying the rules differently.  So, they’re going from 35% reporting to 50% reporting.  What about the other 50%?  It’s left out, and they’re phasing it in each year?  So, the problems are going to compound.  Now, we were successful in backing the IRS off the 013 changes on options and debt for one year to 2014, but that’s it.  We need relief now.  So, I have put the word out that if you’re a CPA signing a tax return, and you don’t get to the bottom of this, it could be malpractice.  This is a very serious issue, and we’re still at a stalemate.  So, stay tuned with us for what to do next. 

Robert, just to wrap up today, if investors or traders believe there might be some problem on their return, what should they do?

Well, first and foremost, use a good trade accounting software like TradeLog, which we sell throughout our site.  We added the tax knowledge to it.  It will do the accounting right.  It gets the raw data.  The brokers take the raw data, and they slice and dice it to make the apples in a very messy way.  We don’t want any of that, because we want the oranges in the raw data.  So, we import that into the program and we do it right, but then there’s a big difference on the 8949 form.  We explain it in the footnotes, so come to our site.  We have the footnotes, the examples, the software.  We will help you through this crisis, including you accountants out there.

Thank you so much.  Great advice today, Robert.

Thank you.

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