No. of Recommendations: 39
A tale of two years

The Emergency Economic Stabilization Act of 2008 included new reporting requirements for financial institutions. Starting in tax year 2011, brokerages reported to the IRS the cost basis for securities purchased in 2011. Securities purchased before 2011 were grandfathered and did not have their cost basis reported. The implementation from brokerages was problematical in 2011. Every active investor I spoke with had discrepancies between what the brokerage reported to the IRS and what the facts were. This was compounded by the fact that brokerages kept re-issuing 1099’s and the new 8949 Form that contained cost basis. I am aware of several cases where the documents were issued a total of 5 times. If you filed your taxes based on revisions 1 through 4, they were by definition inaccurate.

Yoda personally found discrepancies in dividends, interest, cost basis, royalty trust income and missing transactions in 2011.

I have been thinking about how the IRS would handle all of the discrepancies. Here is the meeting I envision at IRS headquarters:

Head of IT department to IRS boss: We ran the discrepancy report last night that compares inputs we receive versus what the tax returns contain. In normal years, we have about 1 million returns with differences. Most common are incorrect social security numbers, birth dates, missing W2 info etc.

In 2011, we have 10 million returns with discrepancies. The extra 9 million are due to differences in investment information reported from financial institutions. How do we proceed?

IRS boss: Let’s review the facts:

a) We have 9 million new discrepancies.
b) We are under budget constraints and have inadequate staffing levels
c) We are now under sequester budget constraints
d) If we send out 9 million paper audit notices asking for more information, Congress will haul me down and beat me up for being overly aggressive towards taxpayers.
e) Our best hope is to rank them by some method, most likely by the largest dollar discrepancy and send out audit notices asking for an explanation. We can probably send out 100k of these.
f) The other 9.9 million discrepancies, we will just put on the back burner of future tasks.


More items were added to the reporting list for financial institutions starting in 2012 Mutual funds and dividend reinvestment plan shares purchased from January 1st, 2012 on had to be reported.

In talking to many active investors, they are all reporting discrepancies for 2012 data. This is consistent with what I am seeing. Once again, dividends, interest, cost basis, MISSING transactions are occurring. Once again, brokerages are sending out revised documents. The most I have seen so far is some documents are on the third revision.


1) Wait until the last minute to file your return, even if you finish it earlier. You do not want to be in the position of having filed your return and then receiving revised information from a brokerage.

2) Within economic reason, make your return match the brokerage reported data. Particularly if it is small dollars. OTOH, if the discrepancy is say $10,000 you have to report the correct data.

I am actually very sympathetic to the IRS. They do NOT make or change the tax laws. How would you like to have the tax laws change on January 1st 2013 for tax year 2012? Then you have to revise many forms and algorithms used to compute taxes. They are put in a NO-WIN position. The scenario I outlined is a 100% guess as to how the IRS handles the situation. I might be wrong. I am NOT encouraging anyone to cheat on your taxes. The challenges I describe are cases where the taxpayers are attempting to be 100% accurate on their returns. They are just finding it difficult to implement.

Good luck and hope you make by April 15th. Sadly, several trees gave their lives for all of the paper that has come into the Yoda cave.

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