Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would Improve Compliance if Related Challenges Are Addressed
GAO-06-603
Published: Jun 13, 2006. Publicly Released: Jun 13, 2006.
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Highlights
For tax year 2001, the Internal Revenue Service (IRS) estimated a tax gap of at least $11 billion from individual taxpayers misreporting income from capital assets (generally those owned for investment or personal purposes). IRS did not estimate the portion of this gap from securities (e.g., stocks, bonds, and mutual fund capital gains distributions). GAO was asked for information on (1) the extent and types of noncompliance for individual taxpayers that misreport securities capital gains, (2) actions IRS takes to reduce the securities tax gap, and (3) options with the potential to improve taxpayer voluntary compliance and IRS's ability to address noncompliant taxpayers. For estimates of noncompliance, GAO analyzed a probability sample of examination cases for tax year 2001 from the most recent IRS study of individual tax compliance.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| In order to reduce the capital gains tax gap for securities, Congress may wish to consider requiring brokers to report to both taxpayers and IRS the adjusted basis of securities that taxpayers sell and ensuring that IRS has sufficient regulatory authority to implement the requirement. |
Closed – Implemented
|
Congress included a provision requiring brokers to report basis information to IRS and taxpayers in the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343). The provision generally takes effect on January 1, 2011, and is expected to raise $6.7 billion in revenue through 2018, according to the Joint Committee on Taxation. |
| Either in connection with requiring basis reporting or separately, Congress may wish to require brokers to report to taxpayers and IRS whether the securities sold were short-term or long-term holdings. |
Closed – Implemented
|
Congress included a provision requiring brokers to report basis information to IRS and taxpayers in the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343). The law also requires brokers to report whether a gain or loss from the sale of a security is short-term or long-term. These provisions take effect on January 1, 2011, and are expected to raise $6.7 billion in revenue through 2018, according to the Joint Committee on Taxation. |
| Congress may wish to direct IRS to work with brokers and related parties to develop rules that seek to mitigate some of the challenges associated with requiring basis reporting. |
Closed – Implemented
|
Congress included a provision requiring brokers to report basis information to IRS and taxpayers in the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343). IRS developed proposed regulations and received comments from brokers in preparing the regulations. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | To assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D the Commissioner of Internal Revenue should clarify the appropriate use of capital losses to offset capital gains or other income. |
Closed – Implemented
IRS's instructions to Schedule D of the individual tax return for 2007 contain a new section that clarifies the appropriate use of capital losses to offset capital gains or other income.
|
| Internal Revenue Service | To assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D the Commissioner of Internal Revenue should provide guidance on resources available to taxpayers to determine their basis. |
Closed – Implemented
IRS's instructions to Schedule D of the individual tax return for 2007 contain a new section explaining that IRS partners with companies that offer accounting software that can help taxpayers track their adjusted basis in securities, and directs taxpayers to IRS's web site for more information.
|
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Topics
Capital gains or lossesNoncompliancePersonal income taxesSecuritiesTaxpayersVoluntary complianceTax gapIndividual taxpayersCapital gains tax gapRegulatory noncompliance