US Senate Report Argues For Basis Reporting

by Mike Godfrey, Tax-News.com, Washington

31 May 2007

The US Senate Finance Committee has released a bipartisan staff proposal on basis reporting of securities transactions, for the purpose of public discussion.

The staff discussion draft deals with information reporting by brokers of customer basis in securities transactions. Taxpayers are to determine their capital gain or loss on an asset for tax purposes by subtracting the basis amount, generally the cost of an asset, from the gross proceeds when selling the asset.

A substantial number of securities transactions are reported incorrectly to the IRS because the basis amounts in the securities are either understated or overstated. The Internal Revenue Service estimates that in 2001, the tax gap associated with all capital gains was about $11 billion. The staff discussion draft targets the portion of the capital gains tax gap that relates to publicly traded securities.

The Government Accountability Office testified before the Finance Committee in 2006 that as many as 7 million individual taxpayers who sold securities in 2001 may have misreported capital gains or losses, and around half of those taxpayers did so because they misreported their basis. In addition, the GAO found that of those who misreported their capital gains or losses from securities transactions, about 64% underreported their income, and 33% over-reported their income.

The staff discussion draft intends to address concerns regarding the extent of capital gains and losses that are misreported, and to reduce the incidence of misreporting. It requires brokers to report to their customers the basis amount of the securities that are sold, as they are already required to report the gross sales proceeds. The information would also be reported to the Internal Revenue Service. Basis reporting has been recommended by the Administration, the GAO, the Joint Committee on Taxation and others as a way to reduce taxpayer burden and to improve the rate of voluntary tax compliance.

“Getting this policy right is important for tax fairness,” Senators Max Baucus (D - Mon.) and Chuck Grassley (R - Iowa) said in a joint statement. “We look forward to receiving comments on this staff proposal and continuing an even-handed review of this issue.”

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