Is It Common For The Irs To Audit Returns To Verify Cost Basis On Sch D?
November 24th, 2009 | 
Author: Since IRS does not receive cost basis data from mutual funds, do they often ask for documentation for cost basis? And do they often audit individuals for this purpose?
Posted in IRS Audit Representation | 
Tags: Audit, Basis, Basis Data, Common, Cost, Cost Basis, Documentation, Irs Audit, Irs Returns, Mutual Funds, Returns, Sch, Verify
Due to the tax returns volumne our district (13,000) does, we have a few audit returns each year. For the past 10 years, I’ve been assisting every now and then (as a tax professional).
Okay I will answer your questions first:
Is it common for the IRS to audit returns to verify cost basis on Sch D? Do they often ask for documentation for cost basis?
That will be no (for cost basis). They never ask for it.
And do they often audit individuals for this purpose?
No. Only when the clients fail to provide us with 1099B, we did not report the clients sales of stocks, mutual funds, etc. on the tax return.
Now, here is the serious issue:http://www.irs.gov/businesses/small/arti…
What is the burden of proof?
The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence.
As a financial advisor, it is not my responsibility to keep these record. Our financial institution do send statement to our clients. However, you pay us commission. We got to provide that for you. If your broker/dealer is an idiot and fail to provide you with cost basis, please tell your broker and do switch to another firm. In the mean time, you can call the mutual fund company themselves. They do keep a record of you. They want to have you forever.
Why do I request you provide cost basis? When you sale these next time, you would continue to have trouble filing your tax return. Without knowing, you may have capital losses (via cost averaging into the market/mutual fund).
It really depends on your income. If your income is relatively high for an individual you’re going to get audited at some point. Most millionaires are audited about 3 to 4 times in their lifetime. The reason is to make sure you’re not trying to hide money from them. It doesn’t matter where your money is they will need ALL and I do mean ALL info that pertains to your income/loss.
Now if your income isn’t very high, then it is a little unusual since they have bigger fish to fry so to speak.
I hope this helps.
That would depend. The IRS conducts two types of audits. The compliance audit is where they question the entire return. The other is based on a dip score. The returns that have a high score are then flagged for audit.
Make sure you have the purchase date for the mutual funds. They will use the average price on that date to determine basis.
No, it’s not common except in compliance audits where they ask you to prove almost everything. But it does happen — especially if they have other reasons to look at your return. For most people the chances of this are 1 in a thousand.
yes. to all your questions especially this year and next
Yes, and of course it should not be a problem for you to provide proof.