Taxing the Rich: What Is Fair?

Recently, Warren Buffett joined with the President to say the "rich" should pay their "fair share" of tax.  President Obama mentioned Buffett specifically, pointing out that he pays a lower rate than his secretary (never mind that he pays a factor MUCH higher).  To hear them tell it, the rich are dancing all over the backs of the "working class" while they alternately sip champagne and prune their money trees.  Ignorance helps their argument carry the day, but if we open our minds, we can see the totality of taxes paid by the rich.  Also, we might better understand the total economic impact of those so frequently demonized in the media.

The IRS has amassed a trove of information concerning taxes paid and who pays them.  Whether you look at total amount paid and by whom, or marginal rates vs. effective rates, or even statistical information compiled by groups that peruse the IRS data, the picture is clear; the "rich," or as I like to refer to them, the "producers" carry the overall tax burden by far.  In contrast, the lower 50% of wage earners pay little to no income tax whatsoever.  Moreover, the "earned income credit," a clever device used to create a refundable credit for certain low wage earners, effectively transfers back to them any withholding paid in AND gives back any amounts paid in as social security (Think: Withheld tax, $2,000; FICA, $1,800; total, $3,800; refund, $6000???) As a CPA and tax preparer, I've seen this over and over again. 

But I digress.  This is an article about the rich (producers) and whether or not they pay a "fair share."  By the way, what is fair?  Without a definition of what is fair, an amount, per se, nobody will ever be sure that all the rich folks pay their part.  In fact, even if they paid out 40% or even 50% of all of their income, someone would undoubtedly accuse them of not paying a "fair share." 

The figures readily available have something to say about how much the producers pay, in terms of income tax. That information is incontrovertible.  But have you ever stopped to think about the other taxes paid by these folks?  For instance, most rich people love to play when they are not working.  They buy Ferrari, Louis Vuitton, Gucci, Mooney airplanes, Rolex watches, and so on.  The amount of sales tax paid for these items is staggering.  In comparison, the average person buys items that sell for a fraction of the price of these luxury brands, paying little tax as a result.

Let's say the rich man buys a Rolex.  The tax is $700 for a $10,000 watch.  The "average citizen" goes to Walmart, buys a Timex for $50, and his tax is $3.50.  Rolex and Timex watches are very small, are assembled with metal, and are worn by a person so he can tell the time.  (Do some research on the process by which a Rolex is made; you will be impressed).  The government, in their infinite wisdom, created the sales tax during down economic times to fill their coffers for the public good.  Obviously, infrastructure is maintained by taking money from the citizens to pay for it all.  Does is seem equitable that the Rolex wearer should pay 200 times more in tax than the Timex wearer in order to fulfill the government mission?  Has he used any more resources than the other person?  Who has strained the infrastructure more?  Why did state governments continue to collect sales tax when economic times improved?   

Now, apply this reasoning to cars.  A Ferrari is $300,000, the Prius, $35,000.  Ten times the sales tax will be collected on the Ferrari.  By what reasoning will someone justify this scheme?  Both are cars that traverse our roads  and get us from point A to B.  One driver makes a statement about exclusivity, one-upmanship, and elitism as she brags about little carbon footprints and filling up once every month.   The other driver has people remarking, "I love your Ferrari!!!"  I'll have to admit, I'd love to race past a Prius in a F430 at full throttle with a tag that reads, "MPG LOL."

Now, let's extend our thinking to the property tax.  The rich guy pays a higher amount for that Ferrari when he buys a car tag.  It's called the Ad Valorem tax. That tax is based on value.  The mere ownership of that vehicle creates a much greater liability, in terms of tax, than does a Chevy Chevette.  And what about homes?  Much higher property taxes are paid on those, too.  In fact, the income tax, sales tax, and property tax collected from the producers dwarf what is paid in by the so called working class of working men and women.  The poor?  Forget about it, they have very little to no property tax liability.  And in the end, it is the poorest of us that use up much of what is collected by the government.  Yes, we all use the roads, we call 911, we petition the courts from time to time, but much of the money is spent on social programs, which are overwhelmingly used by those who, in many cases, have failed to position themselves for success.

So the hard work, perseverance, toil, and innovative spirit of a driven person, all of which may culminate in exorbitant wealth accumulating to him or her, is taken by force of law under the guise of fairness and allocated to pay for the misdeeds, mistakes, or simply the lack of resources of so many others.  Does this  seem equitable?  In America, the failure to carefully plan for one's future is met with the omnipresent hand of the government, who reassures those who lack wisdom that the fruits of the wise will be redistributed for their benefit.  Does that sound fair?

Finally, the producers (the "rich") make things happen every day by their habits. They innovate, change processes, rethink old patterns, and create jobs as a consequence.  It appears the desire of wise people to become rich is the driving force behind whatever success is generated, and this is what makes jobs after all, not government.  The hard work can pay off in millions of dollars, but your results may vary.  I think that's fair.

Ric Honsa, CPA

IRS - Beware Phishing Scam!

The IRS has issued a notice recently that warns of phishing scams that could cause some trouble for you.  Phishing is a scam where a low down thief uses an email or a website to obtain personal information from unsuspecting taxpayers.  The IRS does not send email communications to taxpayers to obtain information.  If you receive an email purporting to be from the IRS, report it to phishing@irs.gov immediately.  See the following link for more mind-numbing information straight from the IRS:  http://www.irs.gov/privacy/article/0,,id=179820,00.html

Have a great weekend, and watch some college football!!!

Ric Honsa, CPA, MTax

Important 2011 Tax Planning Information To Reduce Your Tax!

Dear Friends,

Our tax system for the most part remains firmly based upon the calendar year. At year end, a snapshot of your income, deductions and credits is taken. Based on that data, your tax liability for the year is computed. Year-end tax strategies implemented before your tax liability is "set in stone," can therefore make a significant difference in what you owe for the 2011 tax year now drawing to a close.

Tax planning for year-end 2011 should use both traditional year-end strategies as well as those that react to situations unique to this year. Particularly important at year-end 2011 is the impact of certain tax benefits scheduled to end with 2011; a look ahead at possible sea-changes in the tax laws starting in 2013; and attention to new opportunities and pitfalls created during the past year through court cases and IRS rulings.

Income/deduction shifting

The traditional year-end strategy of income shifting applies to year-end 2011 but with an extra twist. Under traditional strategy, you time your income and deductions so that your taxable income is about even for 2011 and 2012 so your tax bracket does not spike in either 2011 or 2012. If you anticipate a higher tax bracket for 2012, you may want to accelerate income into 2011 and defer deductions into 2012. If you anticipate a leaner 2012, income might be delayed through deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings.

The twist for year-end 2011 is the uncertain future for tax rates after 2012. Many political observers forecast that higher-income taxpayers will be asked to pay more, either through higher tax rates or more limited deductions. That may suggest a strategy in which income is not deferred but is recognized now at lower tax rates still available in 2011 and 2012. Our office will keep you posted on developments.

Roth conversions

If you converted an individual retirement account (IRA) to a Roth IRA in 2010, you were given an option: recognize all income in 2010 or defer that income, half into 2011 and half into 2012. If you elected to defer that income into 2011 and 2012, do not forget to figure that income into your year-end planning for 2011.

If you initiated a Roth conversion earlier in 2011 and that Roth account has declined in value since then, you should consider a “Roth reconversion.” Reconverting your Roth IRA back to a regular IRA before year-end will allow you to avoid paying income tax on an account balance at its higher value.

Finally, if you have not yet made a Roth conversion, doing so at year-end 2011 might be an opportunity worth serious consideration. Variables include your present income tax bracket, how close you are to retirement, and your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later. Our office can help you make the right decision.

AMT

Because the AMT was not indexed for inflation, and for other reasons, the AMT today encroaches on many moderate-income taxpayers, especially two-income married couples. With most of your income and deductions for 2011 more predictable as year-end approaches, now is a good time to compute whether you will be subject to the AMT for 2011 or 2012. Our office can explore whether certain deductions should be more evenly divided between 2011 and 2012 and which deductions will qualify, or will not be as valuable, for AMT purposes.

Gains and losses

Our office can also help you time the recognition of capital gains and losses at year-end to minimize your net capital gains tax and maximize deductible capital losses. Many investors have excess capital losses from recent stock market declines that they may now "carry over" to offset capital gains that would otherwise be taxable.

Also of concern is whether the maximum tax rate for capital gains will rise from 15 percent to 20 percent or higher after year-end 2012 because of the scheduled expiration of the Bush-era tax cuts. Since long-term capital gains are only available on stocks and other capital assets held for more than one year, a capital asset must be bought on or before December 30, 2011 in order to be sold in 2012 and guarantee qualifying under the lower capital gains rates. We can help you coordinate your year-end trades with these tax variables in mind.

Finally, if you would like capital gains taxes at a zero percent rate, consider investing in "Section 1202" small business stock before year end. The 2010 Tax Relief Act allows the exclusion of 100 percent of the gain from the sale or exchange of qualified small business stock acquired by an individual after September 27, 2010, and before January 1, 2012, and held for more than five years. The window of opportunity to invest in stock that will yield 100 percent tax-free gain closes on December 31, 2011.

Payroll taxes

All wage earners and self-employed individuals will experience a tax increase in 2012 unless Congress extends the current employee-side payroll tax cut. For calendar year 2011, the employee-share of OASDI taxes is reduced from 6.2 percent to 4.2 percent up the Social Security wage base of $106,800 (self-employed individuals receive a comparable benefit). President Obama has proposed to extend and enhance the payroll tax cut. The fate of the payroll tax cut will likely be decided by Congress late in 2011.

Life changes

Marriage, divorce, the birth of a child, death, a change in job or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. If you have had a life change, please contact our office so we can review how that change will impact your federal tax liability. After December 31, 2011, it will be too late to alter most of your bottom-line tax liability for 2011.

Medical expenses

Effective January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) provides that over-the-counter medications and drugs can no longer be reimbursed from a health flexible spending arrangement (health FSA) unless a prescription is obtained. The rule also applies to health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs), an important consideration for employees who are required to make a decision by year-end 2011 on how much to fund their accounts in 2012.

Tax extenders

A number of tax extenders are scheduled to expire after December 31, 2011. They include:

·        the state and local sales tax deduction,

·        the higher education tuition deduction, and

·        the teacher’s classroom expense deduction.

Seniors age 70 1/2 and older should also consider making a charitable contribution directly from their IRAs up to $100,000 and paying no tax on the distribution. This tax break, especially advantageous to those who do not itemize deductions, is scheduled to end for distributions made in tax years beginning after December 31, 2011.

Casualty losses

Taxpayers in many states experienced natural disasters in 2011. A casualty loss can result from the damage, destruction or loss to your property from any sudden, unexpected or unusual event, such as a hurricane, earthquake, wildfire, or flood. Casualty losses are generally deductible in the year the casualty occurred, less ten percent of your adjusted gross income and a $100 per casualty deductible.

However, if you have a casualty loss from a federally declared disaster, you can elect to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. The election gives taxpayers the opportunity to maximize their tax savings in the year in which the savings will be greatest.

Energy tax incentives

If you are considering replacing your roof, HVAC system, or windows and doors, doing so using energy-efficient materials before January 1, 2012 may generate tax savings. Through the end of 2011, a number of residential energy-efficiency improvements qualify for a tax credit. These include qualified windows and doors, insulation products, HVAC systems, and roofing. The "lifetime"credit amount for 2011, however, is $500 and no more than $200 of the credit amount can be attributed to exterior windows and skylights. Please call our office for details.

Gift/estate tax

The current estate tax through 2012 is set at a maximum 35 percent rate and a $5 million exemption amount. Many experts predict after 2012 that Congress will lower the exclusion to $3.5 million and raise the top rate to 45 percent. In light of this possibility, lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan. The annual gift tax exclusion per donee on which no gift tax is due is $13,000 for 2011 (and, again, for 2012), with $26,000 allowed to each donee by married couples. Making a gift at year-end 2011 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.

If you have any questions about the tax provisions and year-end planning techniques described in this letter, please contact me at 678-227-8844.

Richard L. Honsa, CPA

Obama Proposes Taxing Municipal Bond Interest

Municipal bonds are bonds issued by city and county governments. Bondholders receive interest from the issuers, which is excluded from income by the federal government. Moreover, if a resident of Georgia owns bonds issued by a Georgia city, such as Gainesville, the interest income is excluded for state purposes, too. President Obama's Jobs Plan proposes to limit, and possibly completely disallow this important tax break for higher income earners, a proposal that could spell trouble for city and county governments across the nation as bond sales could stagnate.

Muni bonds receive tax favorable treatment in order to accomplish a civic goal. Because local government bonds pay a lower rate of interest, the exclusion of income for the interest helps promote the sale of these bonds, which benefits the local community. After all, the funds are used by local government for infrastructure. The community receives a big benefit, including those in the lower income stratum. In comparison, regular corporate bonds pay a higher rate of interest, but the income is taxable. The exclusion of income for the muni bonds is supposed to level the investment playing field.

If this proposal is written into law, local government bonds will no longer be attractive to investors. To stimulate the market for these bonds, cities will need to increase the interest rates to be competitive with typical corporate bonds. As a result, cities will pay more interest on the bonds that they manage to sell, the result of which will provide less money for infrastructure, not more. Local governments will have less funds with which to help the working class, which runs at cross purposes with the intent of the bill proposed.

Now, a counter-argument to this point will be that the revenues raised from the change to the rule will be used to help fund local projects. In other words, though local governments may have a shortage of willing investors, the federal government will make up for it with the new revenue by giving it to cities and counties to fund infrastructure. Historically speaking, the aforementioned scheme has never been very cost effective. Simply put, the federal government does not make the best use of tax dollars, a limited and precious resource.

Finally, this proposal would further centralize power in DC and likely infuse the process with inequality as those with the power to disseminate the funds could fall prey to favoritism, cronyism, or any other -ism you can think of.  Why not let the market continue a more effective and better utilization of limited resources without all of the federal intervention? At best, there will be less money at the local level with which to fund projects.  How will this provide for more jobs?

Guidance For Charitable Contributions

Many of you make charitable contributions throughout the year to various organizations.  Some give cash to a church or other religious organization.  Others of you may make donations to Goodwill or the Salvation Army, whether it be cash or household items.  Still yet, others of you make contributions to less recognized institutions.  When making these contributions, you'll want to be sure that the contribution is to an IRS recognized charitable organization. 

Now you might think to yourself, "How can I know for sure?"  Well, the IRS has a publication available to provide guidance in this area.  http://www.irs.gov/charities/article/0,,id=96136,00.html is a link to Publication 78, the definitive guide to recognized charitable organizations.  This online guide features a search function, and lists recognized, revoked, and suspended organizations.  Making a lawfully deductible contribution of cash or property to an organization has never been easier.

Fortunately, you don't have to wonder whether or not an organization is truly a recognized charity.  You can have certainty when you give money or property to an organization that the IRS will allow a tax deduction for that contribution.  Otherwise, you could lose your deduction and be subject to penalties and interest, even if your intentions were noble.

Tax Deduction v. Tax Credit: What's The Difference?

Most of you file a tax return every year.  If you file the 1040, you no doubt have come to know the terms "tax deduction" and "tax credit".  There is a distinction, of course, between the two.  One of these "tax benefits" is much more beneficial than the other, and sometimes you can get a greater benefit from both, if you know what you are doing.

The tax deduction comes in a two flavors, chocolate and butter pecan (are you awake now?)  Seriously folks, the deduction can be the "standard deduction" or you may take take "itemized deductions".  The standard deduction is a set amount, and is most commonly used by folks that don't own a home or give significant amounts to charity.  The itemized deduction option is commonly used by taxpayers that deduct their mortgage interest payments and money given to charity, as well as property tax payments and miscellaneous deductions, to name a few.

Whichever you choose, the deduction simply lowers the amount of your income subject to taxation.  If you earn $50,000 and have $20,000 in itemized deductions, you end up with $30,000 of taxable income (yes, we are already taking exemptions into account!)  Let's pretend you are in the 10% tax bracket (a man can fantasize, right?).  If you have $20,000 worth of deductions, you end up with $2,000 less in taxes (10% of $20,000 is $2,000).

A tax credit is an entirely different animal.  You see, the credit directly lowers your tax owed by a certain dollar amount.  For instance, a credit of $1,500 will lower your tax bill by, you  guessed it, $1,500.  So using our earlier example, let's pretend that the remaining $30,000 of income will be taxed at 10%.  The bill is $3,000 right?  Well, that bill will be lowered dollar for dollar by any tax credit that the taxpayer is eligible for.  So the $3,000 tax bill gets lowered by the $1,500 credit (we'll say it is the Hope Credit for college).  By the way, tax credits are calculated based upon money spent for certain expenses such as college, energy efficient items for the home, and more.  In tax terms, a credit gives you more bang for your buck.

So now you might be thinking, "I need an Advil, my head hurts!!"  It's OK, this kind of thinking hurts everyone to some degree or another.  The trick is, a dedicated tax professional knows how to utilize the tax code to maximize credits in relation to certain deductions. You see, some deductions can be taken "above the line," which may affect how a credit is calculated, in deference to taking a deduction "below the line."  How about that Advil?  Would you like two now?

In closing, the government's scheme is quite complex, and the ability to figure out the best way to comply with that scheme is often less straightforward than what a canned software package would suggest.  Credits and deductions are but two benefits in the code.  Though quite different from one another, they can be used to minimize your tax bill, and that's a welcome notion these days.

IRS Issues Important Statement Concerning Filing Your Tax Return

The IRS released a statement indicating that taxpayers who file itemized deductions may file their tax returns on February 15, 2011 and thereafter.  You can go ahead and prepare your returns, if you like, but you will need to wait until 2/15/11 to file.  Of course, you can send your information to me and I can prepare your return, if you like.  Have a great weekend!

Contact me at ric@honsacpa.com if you have any questions.

Itemizers, You Need To Wait

That's right, if you file a return and you itemize your deductions, you have to wait, according to the IRS.  I've copied and pasted information directly from their site.  Happy reading!

"For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.
Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:

• Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
• Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100 percent expensing and a two-percent payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.
The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at http://www.irs.gov/.
For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.
Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14. Additional details about e-file and Free File will be announced later this month."

Top 10 Tax Time Tips

Top 10 Tax Time Tips 

It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.

1. Start gathering your records Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.
2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.
3. Use Free File: Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
4. Try IRS e-file: After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.
5. Consider other filing options There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.
6. Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check. 
7. Visit the IRS website again and again The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
8. Remember this number: 17 Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
9. Review! Review! Review!Don’t rush. We all make mistakes when we rush.Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.
10. Don’t panic! If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040.

New Basis Reporting Rule For Stock Transactions

The IRS will now receive information from brokerage houses that gives more details concerning the trading activities of investors.  In the past, the IRS received 1099 information returns that reported the sales prices of stocks in investors' accounts.  Basically, the IRS would receive a report on the sales price only of a stock.  The investor, however, would usually receive a report that was much more detailed, to include the purchase price of the stock. 

A very critical component of any stock sale is the basis, or typically the purchase price.  The basis is sometimes adjusted subsequent to certain events (splits, etc.)  The basis is the portion for which a taxpayer will not pay tax.  Hence, sales price minus the basis is the taxable gain.  Let's look at an example of how a taxpayer has potentially underpaid tax on a transaction. 

Jimmy Hofstra buys a share of stock for $50.  The share price goes up to $150.  Jimmy sells the stock, and reports the transaction on his tax return.  Only, Jimmy decides to "fudge" the basis number and puts "$100" for the basis amount.  Now Jimmy will be reporting a gain of $50 instead of a gain of $100.  Obviously, he will pay less tax.  And herein is a component of the "tax gap." 

Taxpayers have reported incorrect basis amounts for as long as the Treasury Department has required reporting of the transactions.  Some have been mere oversight, while many have been intentional.  I'll share another example.  Someone may every now and then report capital losses of around $3,000.  We know that capital losses are limited to $3,000 unless capital gains are greater.  But in the absence of capital gains, one may only deduct $3,000 of capital loss against ordinary income, such as wages.  Nevertheless, this someone reports the loss and pays less tax.  The only trouble is, there is no transaction.  That's right, the "transaction" is totally fabricated.

Now, this fellow knows that this amount flies under the radar screen.  The IRS typically goes after transactions that they figure will net them $2,500 or better in tax under audit, so an audit is unlikely.  Hence, this guy is playing a lottery of sorts.  The odds of the IRS ever discovering these transactions are in his favor.  If the IRS ever inquires, which is typically by letter, he can simply pay the tax.  By the way, this is just one area in which fraud is easily perpetrated against the government.

So what is an old three letter, alphabet soup agency supposed to do?  Use a new provision that forces brokers to report basis amounts.  Jimmy Hofstra will now be boxed in.  But the person in my second example may evade taxation still, if he reports a transaction other than a brokered stock sale.  Whatever the case, stocks purchased during 2010 and thereafter will have a basis amount and sales price reported to the IRS upon the sale of the shares.  So when a taxpayer reports a "sales price" and a "purchase price" of shares of stock on Schedule D of the 1040, the IRS will match that information with what is received from the brokerage house. 

The take away is the IRS can now verify that you have indeed reported the correct basis in your stock, so mistakes and outright evasion will now be caught in an efficient manner.  All of this, however, creates more work for your broker, the costs of which will be surely passed to you.