Capital gain compliance.

In July 2005, members of the AICPA Tax Division's Individual Tax Technical Resource Panel met with Government Accounting Office (GAO) officials to discuss (1) steps the IRS could take to improve individual income tax compliance of publicly traded securities and (2) barriers to improving such compliance.

Improvements: The AICPA suggested improving information reporting. Currently, matching is only done on Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions, and 1099-S, Proceeds from Real Estate Transactions, but no matching is done for put-and-call stock option transactions conducted through a broker, because they are exempt from Form 1099-B reporting.

Although matching problems do not arise if gross proceeds reported on Form 1040 match the totals on Forms 1099-B and 1099-S, a compliance problem could still occur if basis is in error or transactions not reported on Forms 1099 are part of the totals. If Form 1099-B includes both gross proceeds and basis information and matching is done on an individual basis, the IRS could more easily monitor compliance on reporting the accurate amount of gains or losses. The GAO will follow up to see whether Form 1099-B matching procedures can be improved.

Barriers: One of the most significant barriers to improved compliance is the burden on third parties to track basis. Although many companies offer basis histories on their websites, and most brokerage houses now track basis for their clients, two complications remain: (1) when clients transfer assets into an account without telling their broker the basis; and (2) when clients and/or brokers change firms. AICPA members observed that, when clients move their accounts, some brokerage firms appear to be reluctant to supply historical data to the new firm. Recordkeeping is also difficult for taxpayers.

In discussing whether the complexity of capital gain law is an issue, members agreed that most software packages can compute the various rates and holding periods adequately. The complexity surrounding stock options, particularly the Sec. 83(b) election, was also discussed.

E-filing may be a barrier to compliance, because attachments are not permitted with e-filed returns.

The GAO raised the issue of the complexity of the specific identification method for selling some stockholdings when various blocks of the same stock are owned. It expressed concern that taxpayers may not be properly reporting and tracking these sales and, short of a labor-intensive audit, there is no simple way of enforcing compliance.