Cost-basis reporting, the new schedule D, and form 8949.

• Author: Yuskewich, J. Matthew

The 2011 tax filing season ushered in the first phase of new basis reporting rules stemming from the 2008 Emergency Economic Stabilization Acts P.L. 110-343. This legislation established a three-phase process for submitting cost-basis information to the IRS (Sec. 6045(b)(2)). The IRS will use this reporting mechanism to match information reported by taxpayers with that reported by third parties.

The first phase of the rules required custodians, broker-dealers, and others to report the cost basis for all equities purchased on or after January 1, 2011, on a new Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. For the 2012 tax year, brokers and others will be required to report cost-basis data for mutual funds, dividend reinvestment plans, and exchange-traded funds acquired on or after January 1, 2012 (Regs. Sec. 1.6045-l(a)(15)). This reporting will include mutual funds held by S corporations (Sec. 6045(g)(4)). In 2013, the reporting requirements will expand to include fixed income and options (Prop. Regs. Sec. 1.6045-l(a)(15) (i)). A result of this information-reporting requirement is a redesign of Schedule D, Capital Gains and Losses, and creation of a new Form 8949, Sales and Other Dispositions of Capital Assets. Form D-l is no longer in use; Form 8949 replaces it (2011 instructions for Schedule D (and Form 8949)).

The correct preparation of Schedule D and Form 8949 requires the taxpayer to separate transactions into six categories including short- and long-term transactions where broker basis is reported (1) on Form 1099-B and to the IRS, (2) on Form 1099-B and not to the IRS, and (3) not on a 1099-B at all The six categories are represented by designations "A," "B," and "C" in short- and long-term sections on Form 8949. Totals from sale price, cost basis, and adjustment columns on Form 8949 are carried to the appropriate columns and sections of Schedule D (2011 instructions for Schedule D (and Form 8949)).

Given the significant increase in the information being reported, the required reconciliations of broker statements to taxpayer's records, and the number of new forms that must be completed, it is surprising the IRS's estimate of average taxpayer burden in number of hours decreased for 2011 from 2010 by one hour.

Schedule D will continue to have lines for direct input of capital gain distributions and for certain gains and losses that cannot be reported directly on Form 1040, line 13--gains and applicable losses from...