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Do NOT not report anything anyone reports to the IRS. Their scanners will pick it up and nail you for it.

Okay - your double negative is a little unclear. To be clear - anything that is reported to you on a 1099 (B, DIV, INT, MISC, etc.) also goes to the IRS, so it's 'reported to the IRS'. In addition the basis of an investment may, or may not, be reported to the IRS. Even if the basis is reported to the IRS, you are still allowed to make corrections to the basis, documenting the correction by using a code

Instead, report 'payment of principal' as 'income received' whose basis is the same as the income received, which zeros things out, so no phantom gains are taxed, because they're aren't any when it's principal that is being returned.

Sorry, this is incorrect. When you receive "Nondividend distributions" (formerly known as "Return of Capital") you need to adjust the basis in your asset. If you ever reach the point where you have zeroed out your basis, then any additional "Nondividend distribution" gets reported and taxed as a capital gain. However, only the taxable part of the "Non-dividend distribution" should be reported on your return, via a form 8949. From the Form 8949 instructions

Nondividend distributions. Distributions from a corporation that are a return of your cost (or other basis) aren't taxed until you recover your cost (or other basis). Reduce your cost (or other basis) by these distributions, but not below zero. After you have recovered your entire cost (or other basis), any later nondividend distribution is taxable as a capital gain. Enter the name of the payer of any taxable nondividend distributions in column (a) on a Part I with box C checked or Part II with box F checked (depending on how long you held the stock). Enter the taxable part of the distribution in columns (d) and (h). Each payer of a nondividend distribution should send you a Form 1099-DIV showing the amount of the distribution in box 3.

If you are using tax software, you should enter the information from your 1099-DIV box 3 into your tax software, but unless you tell the tax software that your returns have exceeded the basis, the information won't actually make it onto your return.

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