Cost Basis runaround?

[edlbym]

Thanks everyone let me clarify:
I had 5 or so mutual fund investments with firm A. Firm B including its mutual funds was sold to firm B. Then I transferred from B to online broker. So first point:

In December of 2013 I called firm B and they gave me the cost basis for all but one or two of the five investments (actually two merged so I guess all but one) and I did not need the cost basis for the others so I didn't worry about it at the time.

In 2015 firm B keeps claiming "ask your brokerage firm, they have it" which is wrong on two counts:

1) As the online broker has told me weeks ago, they don't keep anything before 2012...

2) But firm B's claim that "ah well we had that info but we stopped keeping it when it was transferred to your broker" is wrong not only because of 1) but also because the transfer was in 2008, so their claim is obviously false given that firm B had that info in Dec 2013 (even though the transfer was back in 2008).

So no, I'm not blaming the broker for the error of firm B. And I'm not even blaming the broker for not having all the cost basis. I was and am disappointed (which is one level less than blaming) that they don't have the value on the date of transfer (I don't know the number of shares on the date of transfer because of dividends reinvested....yes, I guess I can estimate, by ignoring that dividends were reinvested, and then using the estimated number of shares in 2008, I'd look up historical price and have the value on date transferred)

Now for anothe rmutual fund company Q that did get me the info, Scottrade automatically calculates the new cost basis from all the years of dividend reinvestments...so you'd think Scottrade could at least (do I don't have to add by hand from the last 7? years) tell me "45.637 shares were added from dividends reinvested" so I can subtract that from today's number of shares, and then I'd know the number of shares in 2008, look up the historical price etc..

But that's not the part that seems dishonest..it's company B, that in 2013 said, "no problem, here's the cost basis for these three funds that way back in 2008 you transferred to Scottrade" but in 2015 not only claims it doesn't have it for the last mutual funds, but claims that "of course" Scottrade is the one that's supposed to have that cost basis info...which is wrong on both counts 1) and 2) and even dishonest

Now that I've clarified what and who I'm unhappy with...let me restate my question to this board more precisely

I'd like to know what IRS requires. And secondly, what IRS's penalty size would be? It is a small amount I think 5,000 or not much more, so the penalty isn't going to be huge, what

a. what are the rules? (to the person who said "if the mutual fund doesn't have it, then IRS can't blame you for not having it"...well don't you wonder given then less than honest responses, maybe if IRS leaned on them they would feel the heat and discover that they do have it after all..then IRS would be asking me why I didn't have it...my word versus mutual fund)

b. what penalties? And even if panelty is financially small,

c. is it a blemish on one's record? I mean even a $1 penalty, if I'm put on some "fishy taxpayer" list by IRS, that's not great..

Any lawyer types here? Though this board seems to have a ton of people with expertise even if you're not a lawyer if you have info, I'd sure appreciate it.

Then I can sleep at night knowing I can estimate and it's not going to snowball into something like b. or even c. that's unpleasant..
Thx!

 

[braumeister]

I'd like to know what IRS requires.

IRS has always required that YOU keep track of this.

They changed the rules to make the brokerage keep track of it a few years ago, but for trades before that, it was just you who needed to keep records.

 

[ERD50]

Originally Posted by edlbym View Post
I'd like to know what IRS requires.

IRS has always required that YOU keep track of this.

They changed the rules to make the brokerage keep track of it a few years ago, but for trades before that, it was just you who needed to keep records.

Yep. OP has been told that several times - still fishing for an answer he likes?

If the date of death is a business day, the valuation is the average of the high and low attained on that date.

Well, like I said, I've seen that, and I've seen other methods (closing price), or just 'value' with no explanation of how.

Do you have a link from the IRS?

-ERD50

 

[Texas Proud]

Edlbym.....


First, you post seems to indicate that you plan to find out how many shares were transferred in 2008 and use the price at that time as the basis... this is wrong... when you transferred it makes no difference in the basis...

You need to determine WHEN you bought the shares from firm A.... and what you paid firm A for them.... since you did not way, that could be 20, 30 or 40 years ago.... this could be the problem... maybe firm A did not keep track when you first bought shares... they might had started to later and did so for 3 of your funds, but not the two...


Also, you said two funds were merged... you still would need to know the basis of both funds prior to the merger.. add them together to get the basis of your 'new' shares...

 

[edlbym]

Also, you said two funds were merged... you still would need to know the basis of both funds prior to the merger.. add them together to get the basis of your 'new' shares...

Those merged are completely unrelated. I only mentioned that to explain why this is the only remaining one I don't know cost basis for. In other words funds 1,2,3,4,5, I but got merged to 1,2,3,X, and I asked for and got cost basis for 2,3,X in 2013, but in 2015 the mutual fund claims "we don't have cost basis for fund 1, because you transferred that in 2008" even though in 2013, they had the Cost Basis for all the others including the two that merged..

Edlbym.....
First, you post seems to indicate that you plan to find out how many shares were transferred in 2008 and use the price at that time as the basis... this is wrong... when you transferred it makes no difference in the basis...

Here too, I should have been clearer...I meant that the value on that date, is an upper bound for (that is safe to say in this case) what the cost basis was. In other words the cost basis will be less than that number...and more than the original investment (first deposit) which I think I can find, so I was thinking at least I'd have a range, and cost bassis lives somewhere between those two numbers.(I realize cost basis also has gone up by dividend reinvestment, but that too has been close to zero so I'm ignoring that)

In other words if it's worth 6,000 today but was worth 4,500 in 2008 it's a pretty safe bet that the original cost basis was less than 4,500 (despite increasing with tiny dividend reinvestment) and if I can find the original deposit amount in the 1990s, which might have been 2,000 let's say, then I have a range for the cost basis...it's more than 2,000 (because decades of dividend reinvstment) but almost certainly less than 4,500, if the dollar value was 4,500 in 2008 (which in this example we're assuming that was the value in 2008) because in 2008 the dollar value was still higher than the actual cost basis...so some number between those two.

Honestly, I don't want to bother folks with detailed calculations...

If I could get an answer to just my Tax Law quesetions a), b), c) above I'm a happy camper (then I can ask more fun questions in other forums like about moving overseas..)

 

[edlbym]

It's nice to see such an active board..and yikes, I didn't expect 28+ replies and I'm still catching up. Unfortunately in the extended thread a wee misunderstanding took place

IRS has always required that YOU keep track of this.

They changed the rules to make the brokerage keep track of it a few years ago, but for trades before that, it was just you who needed to keep records.

I know my post wasn't short but if you look further down in the very next paragraph, I tried to explainjust what I meant by "I want to know what the IRS requires" to mean, though I now see that I tripped up:

a. what are the rules? (to the person who said "if the mutual fund doesn't have it, then IRS can't blame you for not having it"...well don't you wonder given then less than honest responses, maybe if IRS leaned on them they would feel the heat and discover that they do have it after all..then IRS would be asking me why I didn't have it...my word versus mutual fund)

Where I see that by the time I closed the long parenthetical, the rest of my sentence was lost either in the copy and paste into the textbox here or in my brain (though had thought I had specified it in another comment) that I was referring to the rules about estimation, which someone else brought up..the idea that one is supposed to estimate. What are the rules for that, for that estimation, is what I was trying to ask.

So no I'm not "fishing for an answer I like" (thanks for the vote of confidence ERD50 but you have the personality backwards: the ones who "fish for answer they like" deliberately try to ignore bad possibilities, the opposite of those like me, who are the type who instead try to worry about exactly what possible negative consequences will be, to the third decimal place ) but was asking:

in the case we have at hand (in which the mutual fund keeps changing its tune from "sure, we have the Cost basis even today in 2013 for what you transferred to Scottrade back in 2008" to "we don't keep any of that info"),

That is to say, in the case where Cost Basis is something the taxpayer thinks they may not have, what does the IRS require the taxpayer who doesn't have it, to do, which is a question one might further elaborate to say:

This may include "good faith estimate" in which case the question, naturally, becomes, what types of estimations are those that would meet its (the IRS's) definition of "good faith estimate"? There have to be some rules about what a good faith estimate is, right?

Mind you, "Heck if I know, go and read 200 pages of IRS code if you want such i's dotted and such t's crossed!" is an acceptable answer ;-) But I was sure I saw some legal expertise here some years back, so I figured it was worth a shot..

 

[utrecht]

You worry WAYYYYY too much. Just get as close as you can and stop worrying. Even if you get audited, and the odds are very low, the IRS is never going to spend even as much time as you already have trying to track down these numbers unless the amounts are huge. Save your sanity and find something else to worry about.

 

[ERD50]

You worry WAYYYYY too much. Just get as close as you can and stop worrying. Even if you get audited, and the odds are very low, the IRS is never going to spend even as much time as you already have trying to track down these numbers unless the amounts are huge. Save your sanity and find something else to worry about.

I agree with this. Make a reasonable, best guess (but not an actual guess of course, a documented strategy, that showed you were making a good faith and reasonable approach), and you should be fine, even in the off chance you get audited.

I've made plenty of trades entered on my Sched D, with 'various' as the 'date purchased' and a cost basis that wouldn't match any specific number (since it was a blend of dates/prices). Never was questioned, and I had data to back it up if it was. I sleep fine.


To the OP, I think where things went off the rails is that you spent a lot of time focusing on the broker(s) and the details of what they said and didn't say, and what you thought they should have, etc - when all along it was/is your responsibility. Forget the broker - it is your responsibility. Anything they tell you could be wrong, as they were not legally required to keep the data for you at that time. So it is still your responsibility.

....

This may include "good faith estimate" in which case the question, naturally, becomes, what types of estimations are those that would meet its (the IRS's) definition of "good faith estimate"? There have to be some rules about what a good faith estimate is, right?

Mind you, "Heck if I know, go and read 200 pages of IRS code if you want such i's dotted and such t's crossed!" is an acceptable answer ;-) But I was sure I saw some legal expertise here some years back, so I figured it was worth a shot..

This is the IRS/Congress. Unfortunately, no, there does not have to be 'some rules about what a good faith estimate is' (though there might be).

For example, is there a rule about what constitutes a 'substantially identical' mutual fund for determining if a wash sale applies? There should be, but the answer in that case is a definitive NO.

-ERD50

 

[pb4uski]

You worry WAYYYYY too much. Just get as close as you can and stop worrying. Even if you get audited, and the odds are very low, the IRS is never going to spend even as much time as you already have trying to track down these numbers unless the amounts are huge. Save your sanity and find something else to worry about.

+2 Your chance of getting audited are low and if you do get audited, if you can demonstrate that you made a reasonable effort at estimating the basis and it is backed up by facts then you'll be ok. Figure it this way, your worst case exposure of they advocate a basis of zero is 15% of whatever you come up with for cost basis and your likely exposure is that times the probability of getting audited (which is under 1%).

Only 0.9 percent of people making less than $200,000 were audited last year. That's the lowest rate since the IRS began publishing the statistic in 2006.

So if your basis is $100,000 then your worst case exposure is $15,000 (or zero if you are in the 15% bracket or lower) and your likely exposure is $150... not worth worrying about.

 

[gauss]

Thanks everyone let me clarify:


I'd like to know what IRS requires. And secondly, what IRS's penalty size would be? It is a small amount I think 5,000 or not much more, so the penalty isn't going to be huge, what

a. what are the rules? (to the person who said "if the mutual fund doesn't have it, then IRS can't blame you for not having it"...well don't you wonder given then less than honest responses, maybe if IRS leaned on them they would feel the heat and discover that they do have it after all..then IRS would be asking me why I didn't have it...my word versus mutual fund)

b. what penalties? And even if panelty is financially small,

c. is it a blemish on one's record? I mean even a $1 penalty, if I'm put on some "fishy taxpayer" list by IRS, that's not great..

If your overriding concern is (C) , which I have to admit that I have fallen into that way of thinking ("I never want to tarnish my reputation with the IRS, for I know not what it will bring going forward") the I would proceed as follows:

- low effort/research - assume $0 basis. You will be in compliance and if you have held the investment for many years then it may not be far off relatively speaking

- next step up - research the historical prices over the interval that you owned the investment. Yahoo Finance historical quotes is usually a good source for this. Assume that you purchased all shares on the day with the lowest price and based on the number of shares calculate the implied basis.

Both of these methods should be completely acceptable to the IRS IMHO in that you are being conservative and you are "showing your work" as opposed to guessing.

If you wanted a more detailed estimate, pull your last 10 years of tax transcripts - income (1099,w2,5498) and back out how your shares changed each year. pull historical records of dates dividends were paid and reinvested (or ignore dividend reinvestment - that would be a conservative simplification). For years prior to the last 10 years use one of the estimates based above ($0 or lowest price day over investment holding period not including last 10 years).

I am not an IRS auditor or anything but I am a detailed guy who can be a stickler for the rules. Any of the approaches above would satisfy me if you did the math correctly.


(B) penalty question
If you use some other method and are caught not being able to justify your basis to their satisfaction, then the IRS may reduce it from your stated basis in a worse case all the way down to 0. Your financial liability would be:

- The difference in tax due to the new basis calculation

- Interest on the additional tax due from Apr 15 of the year that you filed taxes that included the sale. Interest is currently a trivial 3% / year

- Failure-to-Pay pentaly on the additional tax due from Apr 15 of the year that you filed taxes that included the sale. The failure to pay penalty is about 6% per year (actually 1/2% per month) on the amount of additional tax due.

The IRS generally has a 3 year limitation to audit returns and make corrections. So assume 3 years for the calculations above worse case.

This assumes that your "unreported" income is less than 25% of the total for that year. If this is not the case they may be able to audit out to, I believe, 7 years and if fraud is suspected, then the audit time frame is unlimited.

(A) Rules

You are responsible to determine your basis. If you are unable to determine your basis then the IRS will use $0 basis. I have given you at least one alternative above to create a non-zero basis.

Please let me know if you have any questions on this.

I have tried to give you a practical approach (and several choices depending upon your appetite for research and calculation) to address your problem.

I am not sure if the IRS has documentation on what is a satisfactory method to determine basis, but anything based on third party records (which I have offered) should be acceptable, IMHO.

If you have not already read the following publications (and I have not recently) there may be additional information at:
Publ 551 Basis of Assets
Publ 544 Sales and other Dispositions of Assets
Form/inst 8949 Sales and other Dispositions of Capital Assets

Good Luck

-gauss

 

[imoldernu]

Thank you for the post and the subject.
Not a major concern for me, but only because the $$$ are low.. under 15K, and that will be the very last part of my fortune that I'll let the lawyer figure out after my demise.
Still, ignorance is no excuse. It began when I withdrew my retirement funds from my employer to begin my own business in 1986. I can't even remember how it all came down, but I cashed in some and the balance came to me in paper stocks. I declined the transfer to electronic in 1995, but in the interim, received some other company stocks, from a split . Since then, all kinds of splits. I just accept the few hundred dollara a year in dividends, and life goes on.

I have no idea about the when's, what happened, or how to cash out these paper stocks, but the original base paper value is about $3500. At a recent senior fair, I asked one of the finance persons at a booth how I could cash the stocks out. Eyes rolled back into his head, and he mumbled something about investigating the cost basis, then excused himself to retreat to another customer.

Not really looking for help here... but thought the tax info mentioned by pb4uski sounded interesting. We have some to give. Anyway, my son who is our executor isn't concerned, so we'll continue to collect the $200 yr dividends and go on to happier things, like repairing the seawall, up at the lake.

 

[jim584672]

They will give you a $0 basis if you can't prove otherwise. Make a best guess and hope you don't get audited.

 

[gauss]

Here is another solution. Donate the entire holding that you do not have readily available basis for to charity. A Donor Advised Fund such as Fidelity Charitable might be especially good for this in that you could have potentially until the rest of your life to determine which non-profit 501c(3) will actually get distributions (which can be as low as $50 each-- think monthly contribution to church if that applies).

- You will not have to calculate the basis if you have not actually sold the asset yet

- You will get a charitable deduction on Schedule A for the FMV of the asset on the day of the donation.

-gauss
"thinking outside the box"

 

[eytonxav]

We inherited some stocks and mutual funds from DW's deceased aunt. I have been wondering about what sort of 1098 we'll get next year since we recently sold everything. No way for us to know cost basis unless Ameritrade kept good records.

 

[gauss]

We inherited some stocks and mutual funds from DW's deceased aunt. I have been wondering about what sort of 1098 we'll get next year since we recently sold everything. No way for us to know cost basis unless Ameritrade kept good records.

Basis of inherited assets are usually stepped up to the FMV on the date of death.

Higher basis (generally) and less research - woot woot!

-gauss

 

[ERD50]

Thank you for the post and the subject.
Not a major concern for me, but only because the $$$ are low.. under 15K, and that will be the very last part of my fortune that I'll let the lawyer figure out after my demise.

.... Anyway, my son who is our executor isn't concerned, so we'll continue to collect the $200 yr dividends and go on to happier things, like repairing the seawall, up at the lake.

And if you expect to never sell the stocks, your son will be fine. As gauss points out (quoted below), the value is stepped up at the owners passing.

But here is a STRONG recommendation, based on recent experience:

Get the stocks; paper, held at a transfer agent, different brokerage accounts,whatever... get them converted to a holding in a single brokerage account. Do it now while you are still in good health and sound mind. It is a relatively complex, cumbersome process to deal with after death.

I assume you have revocable trusts? Getting the stocks to a brokerage account that is titled in the name of the trust will simplify everything. It's all one account then, one change to make after passing. FIL had a dozen small stocks held in every possible way imaginable. It took a fair amount of research to find out how to get each one converted and moved to a brokerage.

Fidelity was a HUGE help with this, but it was still a lot of upfront work on my part. Two different transfer agents with their own set of rules, etc. Then the paper stocks (which the Fidelity rep had never seen before, but found out how to handle from the main office). The first refs I found on-line talked about mailing the stocks in, insuring for replacement value (2% of face?), and all sorts of hoops. Fidelity was able to handle it in the office (after I did the upfront work of getting the transfer agent stocks re-titled to the EIN).

In case you didn't get the message... please do this now - for your son.

-ERD50

Basis of inherited assets are usually stepped up to the FMV on the date of death.

Higher basis (generally) and less research - woot woot!

-gauss

 

[pb4uski]

+1 get it sorted out now as advice from someone who had to go through this process recently for my grandmother and great-aunt. Plus, if it is under $15k you could probably just sell it, do a zero or lowball estimate of the basis and still pay no tax if with the gain you are in the 15% tax bracket. Or if you donate it as gauss mentioned there is also no need to ascertain what the basis is.

 

[edlbym]

utrecht - thanks for your note. I did volunteer the fact I can worry too much (though there was one time I worried too little, a "face" that everyone I spoke to including financial folks told me about IRAs, is false in some cases...) but I will probably take the "don't worry so much" route here - or a variation as in my note to Gauss.

Gauss - thank you for your extensive list of suggestions - I have saved and will review them all.

Everyone else - thanks and even being semi retired I may not be able to keep up but I have bookmarked and may revisit thread in future weeks or months and glean some more wisdom

(everyone else can stop reading here)

To the fellow with 14,000+ posts, with all due respect, you're wrong. Or rather, to use your underline style, you're wrong, or since I tend to be more polite, and don't like to say "wrong", then make it: you're inaccurate, on several counts.

First, this is mistaken: "To the OP, I think where things went off the rails is that you spent a lot of time focusing on the broker(s) and the details of what they said and didn't say, and what you thought they should have, etc"

It was not the broker (Scottrade), and I have no complaints against Scottrade at all (it would be nice if the law started in 2002 rather than 2012 but that's not Scottrade's fault nor do I have any issues with them on this count) Not the broker Scottrade, but the mutual fund B I was focusing on. They were not playing straight.

Second, saying the law puts the responsibility on the taxpayer is the truth, but not the whole truth. Fact of the matter is, de facto, mutual funds were keeping track of it.

Fact of the matter is, in 2013, when I called them and asked about the Cost Basis for the other funds I had with them and which (back in 2008) I had moved under the roof of Scottrade for convenience, they didn't say "we don't have it"

They also didn't say, "give us a week to research into this"

Nope. They said, hold on a minute...and right away, looked it up and gave it to me over the phone after 20 or at most 60 seconds. They had it at their fingertips.

They had the Cost Basis at their fingertips: no research and get back to you a week later deal. So you doth protest too much about "taxpayers: it's your responsibility" repeatedly. We know that. We know that.

Fact is, at least one mutual fund in the universe, namely this one, had it at their fingertips.

But guess what? I'm not upset about that either

It's this third point: That they lie in 2015 about what happened in 2013. Then when I find the name (my handwritten notes) of the person I spoke with, they confess (after I call back later that day) that yes, that person did work for them. Not for Scottrade, not for Mutual Fund A whom B got these index and growth and other individual mutual funds from, not from Scottrade, but finally they admit that yes, a former employee of theirs had (in 2013) the Cost Basis for my other funds (which had 5 years earlier been transferred to Scottrade, recall).

Then caught at that lie, they go back to "ummm, we did you try asking Scottrade?"

Then when pointed out that yes I did, and that yes I had told them several times that I had, they go back to:

"Ummm, we never really had that info, as soon as you transferred in 2008, we gave all the info we had to Scottrade and stopped having that info"

Me pointing out that, firstly, no your fund didn't give the cost basis to Scottrade in 2008 (because the law didn't require and Scottrade said even forbid them from having any such official Basis) and secondly, it's also false that you the fund 'stopped having this info on file as soon as you transferred out in 2008' because you DID have it in 2013"

to which the response was "umm...you really should try Scottrade..ummm.wait you told us you did, umm, let us research and come back to you. Oh what? Linda did research it after you called last week, and she called you back, and left a voicemail saying she has info for you? And then you called? and then we told you we have no idea where Linda's note is?" and on and on.

This is why I'm upset. If they had just been HONEST (and competent) but just be HONEST and say, "it's true, we did have the info on file in 2013, for all the other mutual fund investments other than this one, when you called. We did have that in 2013, even though you transferred out in 2008. We're not sure why we don't seem to have the info for this last fund you need cost basis for. We're sorry about that. As you know it's the taxpayer's responsibility, but we did try, and we're happy we could help you in 2013 with Cost Basis for all those funds you transferred out in 2008 but we don't have it for some reason my boss won't let me divulge, I mean we can't seem to find it, so we're sorry. You might just do a good faith estimate. Hope this helps"

Or anything other than lying to me that "we never had that information after 2008" when clearly in 2013 they had the info for my Growth fund with them (transferred out in 2008) and in 2013 they had the info for my Global fund with them (transferred out in 2008) but they lied and went in circles...

So no, Mutual fund B is not playing straight, and another 14,000 posts saying it's all about "your" will not change my mind about that.

They did not play straight, and I hold them responsible for being both incompetent and (since it can't be an honest mistake after all the reminders) also being dishonest. So I'm not going to change my mind about panning them ("sorry, not sorry") that mutual fund is no good.

To everyone else on this thread: thanks again, and still some time for evening nature walk so I'm outta here

 

[harley]

And if you expect to never sell the stocks, your son will be fine. As gauss points out (quoted below), the value is stepped up at the owners passing.

But here is a STRONG recommendation, based on recent experience:

Get the stocks; paper, held at a transfer agent, different brokerage accounts,whatever... get them converted to a holding in a single brokerage account. Do it now while you are still in good health and sound mind. It is a relatively complex, cumbersome process to deal with after death.
<snip>
In case you didn't get the message... please do this now - for your son.

+1, big time! I just finished this with my Mom's estate. She had around $10K in individual stocks with Computershare, and it was a royal PITA to get them transferred to the estate so I could sell them to get the cash into the estate. She had a lot of old physical certificates, and changing the address and getting the Medallion stamps and notary stamps and sending them all in was almost more problem than they were worth.

 

[ERD50]

...

Second, saying the law puts the responsibility on the taxpayer is the truth, but not the whole truth. Fact of the matter is, de facto, mutual funds were keeping track of it.
...

It's all the truth that matters. It really makes no difference if anyone else was tracking it for you or not, they are not legally responsible, you are.

-ERD50