A Tax Court case that was recently affirmed by the United States Court of Appeals highlights the importance of keeping good records of the income tax basis of your assets. In the case of Hoang v. Commissioner, the taxpayer did not report any gains from securities sales on his 2006 income tax return. The IRS, however, received copies of 1099s issued in the taxpayer’s name by various brokerage firms. The IRS assessed tax based on a taxable gain equal to the total proceeds reported on the 1099s. In the Tax Court, the taxpayer was given the opportunity to provide evidence of his income tax basis in the securities sold, but he declined to do so. The Tax Court determined, and the Court of Appeals agreed, that the IRS was correct in determining the gain as the full amount of the proceeds received from the sales.
The mandatory broker reporting of tax basis will greatly alleviate these issues as to investments held in brokerage accounts. As to other asset classes, however, it is up to taxpayers to keep records of the adjusted income tax basis of their assets and to prove thebasis if called upon to do so in an audit.