A recent court case (Hoang, U.S. Court of Appeals, 11th Circuit, May 6, 2014) illustrates that if a taxpayer cannot substantiate cost of securities (stocks, bonds, etc.) sold, then the cost basis is zero. If a taxpayer works closely with his/her tax professional and uses the tax pro for tax planning services in addition to tax preparation services, the taxpayer can begin the process of substantiating the cost basis of securities sold to withstand an IRS challenge.
In Hoang, the taxpayer was found to owe the IRS $5.1 million based on his $14.8 million of capital gains. Hoang’s only support for his cost basis was a one-page Scottrade Composite Substitute 1099 Statement, and a one-page supplemental information statement from Scottrade showing a cost basis of $12.6 million. The court found the taxpayer’s these documents to be incomplete and unauthenticated. There was no itemization of what securities were in the lump-sum cost basis, nor any support as to what each security was sold for and what each security cost. The taxpayer’s documentation prevented the IRS from matching how much Hoang paid for each security sold. The court found that the documentation fell far short of providing cost basis evidence sufficient to rebut the presumption of correctness enjoyed by the IRS. Unfortunately, a bad case can be used by the IRS as precedent. Now whenever a taxpayer is found to lack proper documentation to support the tax basis of stock sold, the IRS agent will cite Hoang and propose that the entire sales proceeds be treated as gain.
If you want to learn more about your personal tax situation, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA officeto discuss your situation. You can also schedule a consultation at Click Here.
