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Beware of 2011 Income Taxes



March 05, 2012 – Comments (4)

Board: Real Estate Inv. Trusts: REITs

Author: yodaorange

If you have not completed your 2011 federal income tax return, I suggest you budget additional time this year. 2011 is the first year where brokerages were required to submit cost basis information to the IRS. Previously, the Service depended on the taxpayer to properly input the cost basis and date of purchase.

For tax year 2011, the brokerages are submitting cost basis info in addition to sell info on Form 1099B.

The taxpayer has a new form, 8949 "Sales and Disposition of Capital Assets" where all of the capital gain data is entered.

Without going into details, I am seeing many discrepancies between what the information that the brokerage supplies and the correct information. Notice that I did NOT say "what I think the information should be.” There can certainly be grey areas where you choose FIFO or LIFO or average cost, whereas the brokerage house assumes something different. The discrepancies I am talking about are very black or white.

The amount of discrepancy ranges from 5 cents to >$100,000. If all of the errors were in the 5 cent range, I would reluctantly ignore them. But IMO, this is an indication that something is systematically wrong. (Being anal, my normal standard is that all accounts must be balanced to zero cent discrepancies.)

On a related note, be aware that the brokerages do NOT take into account pre-paid interest paid on bond purchases when reporting interest income to the Service. Pre-paid interest is the norm when you purchase individual bonds/cds on the secondary market. If this was the only discrepancy, it would be understandable. However, the discrepancies I am seeing are also on the cost basis which affects the capital gain/loss you report.

I should note that the brokerage house is one of the largest, well known, widely respected firms. It is NOT from the MF Global school of accounting. Hopefully you will NOT experience these issues on your tax return. The discrepancies are NOT on every line item, but the magnitude is worth noting IMO.
In theory you can report these discrepancies to the brokerage house and get them to re-issue the 1099B information to the IRS. Alternately, you can report the correct information on your tax return and include a note to the IRS that explains the discrepancy. This is NOT very conducive to helping the IRS computers match your return with the brokerage house supplied information.

BOTTOM LINE is that you should check your 2011 brokerage info carefully to insure you don’t cause a discrepancy for the IRS computers. Even if you are correct, it can take a lot of time and energy to resolve these problems with the IRS. And yes, unfortunately I speak from experience . . .
My expectation is that IRS computer matching is going to be a royal pain for 2011 taxes. Pity the poor IRS employees that have to work through this mess.

Good luck,


4 Comments – Post Your Own

#1) On March 05, 2012 at 9:32 PM, griderX (97.12) wrote:

I agree...this is going to be a nightmare for IRS employees!

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#2) On March 05, 2012 at 10:39 PM, zCreator (93.23) wrote:

So the question is... are brokerage firms fooling around with our money?

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#3) On March 06, 2012 at 8:37 AM, StoneyTerp12 (< 20) wrote:

If you run into a situation like this, I'd advise paper filing your return.  In order for the IRS to catch this, a person will have to go line up the numbers rather than a computer.  You have a much better chance of not having to deal with the hassle of proving yourself to the IRS.  Efiling your return in this situation will have you flagged immediately, even when your return is correct.  Its why the IRS loves to push eFiling.  It has nothing to do with your refund being processed more quickly.....

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#4) On March 06, 2012 at 4:49 PM, leohaas (30.11) wrote:

"In theory you can report these discrepancies to the brokerage house and get them to re-issue the 1099B information to the IRS."

Other than praying that the discrepancies don't get caught by the IRS, this is the only way to go. Always go to the source if a document pertaining to your tax situation is incorrect, and get the source to reissue it (both to you and the IRS). If you don't go this route, expect trouble. You might prevail eventually, but not until after you have spent significant resources to get the issue resolved.

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