There’s a reason that the stock market continues to make news: over half of Americans own individual stocks, mutual funds, or stocks in a 401(k) or IRA. According to a 2011 Gallup poll, 54% of Americans hold stocks in some form despite fears of a shaky market.

While reasons for investing in the stock market vary almost as much as the number of securities available, stocks have traditionally been valued as long term investments. Generally, when you purchase a share of stock, you’re buying a piece of a company. You, along with other shareholders, are banking on the fact that the company will continue to grow and that the value of your share will increase over time. In that regard, it’s a bit like legalized gambling.

Some stocks pay dividends, which are taxable in the year issued, but many do not. The real value of stock for many shareholders is growth. When the stock is sold, the difference between the sales price and basis is subject to capital gains tax.

Basis is, at its most simple, the cost that you pay for an asset together with any adjustments. With respect to stock, basis may be difficult to calculate since shareholders may hold stock over a period of many years; inherit or gift stock; or participate in a dividend reinvestment plan (DRP). Additionally, companies may split, merge or spin off their shares.

Remarkably, prior to this year, there were no statutory requirements for brokers or other financial service providers to identify basis for tax purposes; it was up to the individual taxpayer. That changed in 2011 as a result of the Emergency Economic Stabilization Act of 2008 (sometimes referred to the “bailout bill”). Brokers are now required to file an informational return with the IRS each year which reports gross proceeds from the sale of stock together with the taxpayer’s adjusted basis.

Beginning on January 1, 2011, brokers were required to report the basis of stocks purchased after that date. If the stock is in a mutual fund, exchange traded fund (ETF) or part of a DRP, the effective date for reporting is pushed off to January 1, 2012. The basis for debt securities, options and private placements must be reported after of January 1, 2013.

Brokers must not only report basis as the amount of cash paid or credited for the purchase of stock but must also reflect adjustments for commissions and fees as well as other events that affect basis, such as a stock split. Additionally, sales must be identified as short term or long term for capital gains purposes.

Of course, stock sales are rarely done in neat packages: shareholders don’t buy and sell the same number of shares each time. Selling less than an entire position in an account can cause confusion because it’s difficult to figure the cost basis for the shares which were sold compared to the shares which remain.

Under the new regulations, the basis for most stocks will be reported using the first-in, first-out (FIFO) method, meaning that shares which were acquired first will be considered sold first unless the customer specifically identifies the shares to be sold. The rules for mutual funds and DRP stock are a bit different: the adjusted basis of those shares will be reported according to the broker’s default method unless the customer says otherwise. To keep things simple, taxpayers may average the basis of stock held in a DRP; exceptions and special rules apply so ask your broker if you’re not sure whether your account qualifies for averaging.

For the most part, the burden to report the basis of stocks now falls squarely on the financial industry, making reporting capital gains and losses easier for taxpayers come tax time. Information about basis will be reported to taxpayers, as noted above, in a staggered fashion beginning this year on a form 1099-B, Proceeds from a Broker or Barter Exchange Transaction, or on a consolidated report. Those forms, showing those shares affected by the 2011 reporting requirements, should be popping up in your mailboxes now. If you don’t see yours, be patient: brokers have until February to get them to you.

However, this doesn’t mean that taxpayers should become complacent. Keeping excellent records is still a must, as is reviewing monthly statements and sale confirmations. You should also consider meeting with advisors on a regular basis rather than waiting until the end of the year to address any concerns about sales or tax consequences. Since taxpayers can choose a reporting method or identify specific shares for sale, planning opportunities for offsetting gains with losses abound. With some careful attention, the result of the new legislation could be a lower tax bill.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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Under growing pressure from other GOP candidates, GOP presidential hopeful and frontrunner Mitt Romney has released some limited information about his finances this week. It turns out *gasp* that Romney has done pretty well for himself over the years. But, really, we already knew that . While we don’t know the specifics, Romney’s net worth is estimated to be northwards of $250 million. He is thought to earn close to $10 million in income per year with some speculation that the number is closer to $40 million (it’s hard to tell exactly since Romney has not released income information even while serving as Governor).

As I predicted, Romney benefits from having a number of tax favorable long term investments. I suggested that would put him roughly in the same category as Warren Buffet with respect to tax rates with Romney paying an effective tax rate close to Buffet’s 11%. This week, Romney confirmed that his effective tax rate is “about 15%.”

Let the skewering begin.

Or maybe not.

The fact is that Romney is doing exactly the same thing that you and I do: he’s taking advantage of existing Tax Code. You wouldn’t expect him to volunteer to pay at a higher rate “just because” anymore than you would volunteer to give up your own mortgage interest deduction or offer to drop a personal exemption. There is absolutely nothing in the Tax Code that requires you to legally pay more taxes than you have to.

The thing is, I want my President – no matter who it is – to either know enough about fiscal and tax policy to make smart decisions or to surround himself (or herself) with people who can make those smart decisions. Having someone who consistently makes poor decisions about their own taxes directing tax policy seems like, I don’t know, asking Newt Gingrich for relationship advice.

So if there’s anger to be had, let’s make sure it’s pointed in the right direction. It isn’t that we should be angry at Romney for taking advantage of the Tax Code as written. We should be angry at Congress for letting it to happen. Tax reform should be the clamor, not torching the wealthy.

And let’s face it: historically, we’ve tended to elect wealthy presidents from Jefferson to Kennedy to Bush. And many of those attempting to throw stones right now (yes, I’m talking to you, other GOP candidates who are clearly in the 1%) are doing so in an attempt to paint success as elitist, as if that’s something terrible. It’s very reminiscent of the 2008 presidential nomination race when the Democrats did the same thing, causing Jon Stewart to remark: Not only do I want an elite president, I want someone who’s embarrassingly superior to me.

Agreed. There’s a reason that we tend to vote in the Clintons and the Bushes of the world and not the equivalent of Larry the Cable Guy. Being smart and successful isn’t a bad thing.

All of that said, I’m not going to give Romney a free pass altogether. As a GOP presidential candidate, Romney, like many others favors tax policies that would benefit taxpayers like him. If there’s a criticism to be had here, it shouldn’t be that he’s benefited from the existing system but that he’s not suggesting meaningful reform. And that’s where this discussion should really be focused, isn’t it?

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Quick, close your eyes.

Now open them. You know, cause you can’t read the blog with your eyes closed. But remember how it looked. It was dark, right? Unfortunately, due to technical issues, I can’t actually make the site go dark for SOPA (the Stop Online Piracy Act). But I want you to get the idea.

The Stop Online Piracy Act (SOPA), also known as H.R. 3261 (downloads as a pdf), is a bill that was introduced “To promote prosperity, creativity, entrepreneurship, and innovation by combating the theft of U.S. property, and for other purposes.” That sounds like a good thing, right?

But not so much. The way the bill is written, the judicial process is basically circumvented, allowing websites to be shut down based on accusations of theft of intellectual property alone without so much as ever stepping foot inside a courtroom. And as an attorney at a firm that represents both web sites and ISPs, that’s a scary prospect. Protection of property and private enterprise is important but it should be thoughtful and settled, not reactionary and over broad.

I get it. We don’t want people stealing stuff. As a writer, I don’t want people stealing my stuff. And they do it all of the time (trust me, my content is reprinted all over the internet without attribution or permission). And I want it to stop. But I don’t want it to stop at the the cost of thwarting the judicial process. We have courts and laws to protect our rights, not to circumvent them.

Its companion piece, PIPA (Protect Intellectual Property Act), also known as S. 968 (downloads as pdf), isn’t much better.

SOPA and PIPA have the potential to criminalize behavior that might not be criminal. The bills, taken together, are an overreaching attempt to govern. The result is the potential for government censorship of the internet. And that isn’t okay.

So close your eyes again and for the rest of the day, remember what that looks like.

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So I’m going to let you in on a little secret: I don’t prepare my own tax returns. Completely true. It is how I stay married.

You see, I used to prepare my own returns for my business and for my household. And I did just fine for a bit. But then I had three kids (and a dog). Those darn kids insisted on stuff like eating every day and having clean laundry and occasionally snuggling on the sofa. Add that to managing my business, writing my blog and occasionally running a few miles and I didn’t have a whole lot of time left over. Oddly enough, my husband felt that I shouldn’t spend the rest of it sorting out our taxes. And – much to his surprise – I agreed.

As much as I’m a control freak, I firmly believe that there’s no shame in hiring someone to help you out. In fact, I highly recommend it. An accountant or other tax professional will usually be able to prepare your simple return for between $200 and $500, depending on the complexity and your geographic location. For me, considering the time value of money (and the intangible value of my time for my family), it’s well worth the cost.

That said, I’m not insisting that you hire a tax preparer. Some folks – God love ‘em – like doing their own taxes. If you can do it on your own – and you want to – for the equivalent of $200-$500 of your own time, then do it. But if you can’t, hire someone.

Choosing a tax professional can be confusing. Here are some tips:

1. Understand what you need. Do you simply need a preparer? Do you need help with tax planning? Are you being audited? Having problems with the IRS? Depending on your situation, you might need an accountant, an attorney, an Enrolled Agent or a CPA – or more than one. We don’t all do the same thing. As a tax attorney, I focus on tax planning and tax compliance issues (appeals, examinations, FBAR reporting). I don’t prepare returns. And many accountants I know? They won’t touch appeals with a ten foot pole. Sort out what you need before you start looking.

2. Ask about qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number (PTIN) and register with the IRS. Other professionals (like attorneys and CPAs) may have additional licensing requirements. Inquire about education and experience. Ask what those initials on the business cards mean – sometimes, they are more or less made up to look impressive. Yes, you can buy your way into a number of organizations in order to tack on a few suffixes. It is absolutely okay and not insulting to ask about credentials. If your tax preparer doesn’t want to tell you about his or her training, chances are, there’s a reason.

3. Do your homework. Check with professional organizations, licensing agencies and the Better Business Bureau to determine whether any complaints have been lodged against the preparer. Heck, Google around a bit. A complaint isn’t necessarily indicative of any wrongdoing, but you should regard a preparer with a number of complaints with some measure of caution.

4. Get some opinions. It’s weird that people will ask for a gynecologist’s name in a heart beat but will often remain tight-lipped about tax professionals. Ask. Ask your lawyer, your investment advisor, your colleagues and your neighbors who they use for tax preparation and tax planning services. Word of mouth is one of the best ways to find a good tax professional – and a good way to determine who you should avoid. But don’t accept an opinion as gospel (remember, this is a country full of folks who watch the Kardashians on TV so take some opinions with a grain of salt) and do some follow-up on your own.

5. Make sure the bottom line is really the bottom line. Don’t be fooled: bulk tax companies are not always less expensive than professional services firms and they tend to hit you with fees for extras and try to sell you products. If the initial fee is small, ask upfront about add ons, “accuracy guarantees” and more that might cost you money. Remember that “too good to be true” usually is. Don’t be sucked in by promises of huge refunds if you’re not sure that you qualify. And ignore preparers who base their fees on the size of your refund: the IRS has found a disproportionate number of fraudulent preparers use this technique.

6. Bigger Isn’t Always Better. *Insert random off color joke of your choice here.* Now that you’ve stopped giggling like a 12 year old, take my word for it that bigger isn’t always better. Sometimes bigger firms and bigger companies mean more resources. But sometimes they just mean bigger fees. Don’t jump to conclusions about a professional based on the size or sparkle of their office.

7. Choose someone who will stick around. I am not a fan of many bulk tax prep companies because they are gone most months out of the year. You shouldn’t have to make a call to a call center and speak with someone who will inevitably give you the run around if you have a question. I prefer tax preparers that are around more than seasonally – if yours shuts down for the year on April 19, consider finding someone more available.

8. Use your gut. If your calls or emails aren’t returned within a reasonable amount of time (keeping in mind that during busy seasons, wait times will be understandably longer), consider going elsewhere. If the staff is rude, if the tax preparer seems pre-occupied, walk away. You’re paying for a service. You deserve to be treated in a professional manner. Remember that you’re liable at the end of the day for the information on your return, not the preparer. If the preparer isn’t willing to work with you to make you feel comfortable, find someone who will.

9. Nothing lasts forever except maybe Betty White’s career. If things aren’t working out, well, then, they’re not working out. It doesn’t have to be something huge – maybe you just don’t get along. It’s okay to pay your bill and walk away. I’ve done it. Twice. And I still refer folks out to the one accountant; he’s a fine accountant, just wasn’t a good fit for us. This isn’t a “till death do us part” type deal. It’s a professional transaction. And while I believe that it makes the most sense to have a reliable, consistent tax professional (see #7) to depend on, sometimes you’re just not that into him (or her). And that’s okay.

Even if you don’t think you need a tax preparer or a tax attorney, I vote that you make friends with one anyway. No, not just because we’re cute and offer sparkling wit and cocktail party conversations… but because one day, you might need a tax professional.

Here’s what you don’t want to be doing: calling up and saying, “I need to hire an attorney to represent me in an audit. Tomorrow.” And you don’t want to be crouched at the bottom of your closet with the feds banging on your door as you desperately dial up information for the first number you can find. By then, it’s probably too late.

So all of those tips that I just offered for finding a tax pro? Here’s perhaps the most important one to add to the mix: do it now. Not tomorrow. And definitely not the week of April 10th. By that time – and trust me on this – tax professionals are tired. They might be a little cranky. They might not be so quick to return your calls and they might be a little short when they do. And you would be, too, if you’d been fed a daily diet of tax forms for the past four months (tax season officially starts in January).

There’s more to come – including how to read and understand your notices from IRS – as part of this series. If you missed my other best tax advice ever, you can find it here:

• My Best Tax Advice Ever, Part I: Open Your Mail
• My Best Tax Advice Ever, Part II: Get Some Help

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Today, we celebrate the life of Martin Luther King, Jr. To honor the day, I am reposting something that I wrote around this time three years ago. It remains one of my favorite posts. Enjoy!

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I’ll be frank. I don’t always love being a lawyer.

When I was a little girl, I used to watch Perry Mason with my grandfather on TBS. That constituted my entire legal experience before entering law school. And it was flawed.

You see, on TV, none of the lawyers lied to Perry Mason over the phone about being amenable to a continuance and then told the Clerk of Court differently. Nobody faxed Perry Mason a witness list the day before a hearing along with evidence that they “forgot” to send prior. A lawyer didn’t claim proper service on Perry Mason and then fail to deliver the notices to his law offices. You never saw a lawyer represent clients who had sent Perry Mason death threats via email attempt to assert that Mr. Mason was the one being unreasonable. You didn’t see cases drag on for years and years (yes, plural) because counsel just couldn’t get it together enough to resolve the matter. On TV, no matter how dire, how dramatic, there was ultimately justice.

The law is supposed to be about justice, about finding the truth. And increasingly it feels like it’s not. It’s more about touting your wares, putting yourself on commercials during daytime television standing in front of legal books shouting about maximizing money, about doing anything to get paid. And that is sad.

A few months ago, I attended a hearing that made me question my role in the law. You’re probably assuming that the hearing somehow didn’t go well. That isn’t true. It went remarkably well. Our client was an excellent witness. The judge was fair and very accommodating. We walked out of the hearing knowing that we had done a good job. The thing was, I felt relieved that it was over. I was happy for my clients. But I wasn’t happy for me. Truth be told, I hated every minute of preparing for the case. Well, not every minute. The theory, the strategy? That I didn’t mind. Our strategy was simply to tell our story. And we somehow felt that should be enough. In the end, I think it was.

But the getting there? The games? The complete lack of professionalism exhibited by opposing counsel? Lying about continuances? Surprise witnesses? Last minute evidence? Maybe that seems exciting on TV but in real life, it’s not exciting. It’s sickening. It’s stressful. It’s not fair to good lawyers who spend their time crafting a case. It’s not fair to clients who don’t know what to expect in the court room. And yet somehow, month after month, this behavior doesn’t seem so unusual.

And as opposing counsel sat at her chair in her too tight blouse with the clickety-click of her little heels on the floor, the same counsel who called my clients’ claims frivolous, the same counsel whose supervising partner at Big Law Firm once commented to me that she didn’t understand why a small firm like mine would go up against a big firm like hers, I thought about why we were all at that place, how it all happened that we were in the same room believing two different versions of the truth. I couldn’t explain it.

Later that same day, while reaching for my Moscow Mule (yes, my favorite cocktail du jour, even before Rachael Ray put it in her magazine last month – grr) at the Union League, I understood why the partner at my former firm kept a bottle of wine in his desk: the pressure of being a lawyer, the pressure of having to win, it’s a lot to take in. And while other professions can often look to each other for reassurance, we don’t really have that in the legal profession with few exceptions. It is, by its very nature, adversarial. It is competitive. It is cut throat. And me? I am not. Of course, I like to win. I like to think that I am good at it. And then maybe I think that’s not something to be particularly proud of.

So, over the past few weeks, which have been professionally difficult, I have tried to remember why it is exactly that I became a lawyer – and what about it I used to love. And I was reminded of my favorite scene in the movie [entity display="Philadelphia" type="place" active="true" key="pa/philadelphia"]Philadelphia[/entity]. The one where Andrew Beckett sums up what’s actually good about the law:

Joe Miller: What do you love about the law, Andrew?

Andrew Beckett: I… many things… uh… uh… What I love the most about the law?

Joe Miller: Yeah.

Andrew Beckett: It’s that every now and again – not often, but occasionally – you get to be a part of justice being done. That really is quite a thrill when that happens.

And so I tried to think of when that happened last – when justice was actually done. Not when I won a case or when I got a client out of trouble – that happens often enough. But remember, winning and justice aren’t the same thing. I had to think for awhile.

Later, I was preparing to write post about Martin Luther King, Jr. Day. I figured I’d just put up a copy of his famous “I Have A Dream” speech and call it a day. But as I researched, I found part of his autobiography which, I will confess, I have never read in full. And I saw something interesting: I knew that Dr. King had been arrested several times for various accusations, but I didn’t realize that he had been on trial for tax evasion.

Yep. On February 17, 1960, a warrant was issued for the arrest of civil rights leader Dr. Martin Luther King Jr. on charges of tax evasion. He was accused of allegedly falsifying his Alabama income tax returns for the years 1956 and 1958; he was the only person ever prosecuted under the state’s income tax perjury statute. It seemed like an inevitable victory for the government.

In his autobiography, Dr. King described the trial like this:

This case was tried before an all-white Southern jury. All of the State’s witnesses were white. The judge and the prosecutor were white. The courtroom was segregated. Passions were inflamed. Feelings ran high. The press and other communications media were hostile. Defeat seemed certain, and we in the freedom struggle braced ourselves for the inevitable. There were two men among us who persevered with the conviction that it was possible, in this context, to marshal facts and law and thus win vindication. These men were our lawyers-Negro lawyers from the North: William Ming of Chicago and Hubert Delaney from New York.

And something quite remarkable happened. On May 28, 1960, only after a few hours, Dr. King was acquitted by an all white jury in Montgomery, Alabama.

Dr. King said about his trial:

I am frank to confess that on this occasion I learned that truth and conviction in the hands of a skillful advocate could make what started out as a bigoted, prejudiced jury, choose the path of justice. I cannot help but wish in my heart that the same kind of skill and devotion which Bill Ming and Hubert Delaney accorded to me could be available to thousands of civil rights workers, to thousands of ordinary Negroes, who are every day facing prejudiced courtrooms.

And it dawned on me: no matter how many slick-haired, silver-tongued attorneys do their best to make a quick buck at the expense of the reputation of the profession, you can’t dispute that justice is attainable. And justice is good. And justice is important. And even if it is infrequent, it’s worth it when it happens.

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This week, the eyes of the nation turn to South Carolina. No, not for the 37th Annual South Carolina Square and Round Dance Convention (though who among us doesn’t enjoy a good line dance?). They’ll be watching the South Carolina Republican primary, to be held on January 19, 2012. I know what you’re thinking: why does South Carolina matter? Aren’t the big guns Iowa and New Hampshire? Not necessarily. No Republican candidate for President has ever failed to win South Carolina and gone on to secure the nomination.

Apparently, as South Carolina goes, so goes the nation.

That’s why it was interesting to see the budget as proposed by Gov. Nikki Haley (R) this week. South Carolina voters are being issued a challenge this year as the legislature works to get spending under control without raising taxes, a challenge familiar to voters on the national scene.

Under Haley’s budget proposal, corporate income taxes would be phased out over four years. Individual taxpayers would receive a break, too, worth about $84 per taxpayer. Tax brackets would also be streamlined, reducing the number from six brackets to three.

Lower tax revenues, however, also mean fewer dollars to spend. As a result, Haley suggests cutting funding for public schools (and boosting charters, a notion popular among conservative voters) and pushing the responsibility for maintaining roads to counties. Her most controversial cuts include freezing wages for state employees, though the budget also includes increases for funding and employee health care. Haley acknowledged that this would be a bitter pill for state employees to swallow, saying:

You can’t give everything you want to give. Do I want state employees to have more? Yes. Was this year the year to do it? No, I think they deserve it. We have some of the hardest-working state employees out there.

I’m guessing that’s not going to be enough for state employees.

Pay freezes for government employees are a pretty popular budget cutting maneuver these days. The House of Representatives passed a similar bill that would affect federal employees but the final version didn’t make it through the Senate. Republicans generally supported the freeze while Democrats, including President Obama, have opposed the freeze.

But… why aren’t pay freezes on the table in lean times? It is in private enterprise. Why not in government? And yes, when I say government, I’m including Congress and their aides.

I don’t understand how we’ve gotten to the point where raises are automatic simply based on the passage of time. It used to be that raises were about achievement. Now, it’s simply for hanging around without getting fired. Isn’t that a bit like handing out a diploma merely because you showed up for school? Don’t misunderstand: I’m not begrudging anyone a raise. But when we start looking at how to save money, why should government employees get a pass?

I’m not so sure that those in the South Carolina legislature will share that sentiment. It will be interesting to see how the pay freezes and other parts of the budget will be embraced. It’s significant on a number of levels, including the fact the although Haley is in her second year as Governor, this represents her first official budget proposal. She’s touting pieces of it as important tax reform, a key platform issue. Tax reform and cost cutting… As South Carolina goes, so does the nation?

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As I noted before, in terms of what affects voters the most, I feel strongly that it’s important to understand what it is that each candidate hopes to bring to the table in terms of tax incentives, tax policy and tax proposals. With that in mind, I contacted each of the candidates who has officially declared an intention to run for president. To keep it simple, I asked each of the candidates the same six tax-related questions.

Next in the series is Libertarian candidate Lee Wrights. Here’s what Wrights had to say:

taxgirl: What’s the single most important tax issue facing Americans today?

Wrights: [entity display="Taxes" type="section" active="true" key="/taxes"]Taxes[/entity] are too many and too high.

taxgirl: If you could only make one “quick fix” in terms of an extra credit, a disallowed deduction or the like, what would it be?

Wrights: Abolish the federal income tax.

taxgirl: The current federal estate tax exemption is $5 million for individuals or $10 million for married couples. Do you recommend lowering the exemption, boosting the exemption, keeping it at its current rate or something else altogether?

Wrights: Abolish the federal income tax, so no “exemptions” would be needed.

taxgirl: It has been suggested that the IRS should be eliminated. Do you believe that this makes sense, and if you do, what would you establish in its place?

Wrights: Absolutely. I would abolish the income tax and replace it with … nothing.

taxgirl: Do you think that significant tax cuts are possible considering the current state of the economy, specifically with respect to the issues surrounding the debt ceiling and the federal deficit?

Wrights: Yes. Federal spending is totally out of control. We must stop the spending, beginning with all programs that are not specifically enumerated in the Constitution, and by stopping all wars and bringing all the troops home from overseas.

taxgirl: And just for fun, if Uncle Sam handed you a huge refund check right now, what would you do with it?

Wrights: I would not accept it, because it is money extorted from other people.

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You can read more about Wrights’ campaign here.

You can read more about other candidates in the series here:

Tax Talk 2012: Vern Wuensche

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Form W-2, check.

Form 1099-Misc, check.

Form 1098, check.

Form 1099-K… wait, what?

Yep, there’s a new form from the IRS out this year and one might be landing in your mailbox soon. The federal form 1099-K, Merchant Card and Third Party Network Payments, will debut early this year: forms 1099-K are due to merchants by January 31, 2012. Electronically filed 1099-Ks are due to the IRS April 2, 2012 (normally March 31), while paper 1099-Ks are due February 28, 2012.

So what is the new form 1099-K? It looks like this (downloads as a pdf and yep, no longer in draft form!).

And here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will be reported to the IRS via the form 1099-K. A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

In plain talk, this means that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment for their wares.

But not every dollar will count. Reporting is only required when gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee. So the occasional sale of a crocheted toilet paper roll cover over the internet? Not likely to merit the issuance of a 1099-K. But a successful online store? That’s another story.

It’s the first year of reporting so there’s bound to be a lot of confusion. As a result, the IRS will delay penalty provisions and withholding requirements until January 1, 2013, for entities required to issue the forms 1099-K. The reporting, however, is moving forward.

The point of the law is to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Read: the IRS thinks you’re cheating. And some of you are. That explains the whole tax gap problem. This is yet another effort to step up compliance. Taxpayers who receive those forms 1099-K are going to be expected to report the income. Don’t get caught off guard.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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“The income tax has made more liars out of the American people than golf has.” – Will Rogers

But what if it were easier? And what if the IRS made it nearly impossible to lie? What then?

Last year, IRS Commissioner Doug Shulman hinted that one way to reduce the potential for tax fraud was to have IRS prepare returns for taxpayers. That’s right, you wouldn’t have to prepare returns come tax time: the IRS would do it for you.

The idea is commonly referred to as a “simple return” or “ready return” (yes, it sounds like a snack you might buy at a Wawa). Under the plan, the IRS would send out tax returns that had already been completed with taxpayer identification and wage information. Taxpayers would merely review the returns for accuracy and sign at the bottom… kind of a “check the box if you agree” system. Taxpayers would have the opportunity to correct any mistakes prior to submitting the returns to the IRS.

Why not? The IRS already has a good chunk of taxpayer information on file. Add to that the obligations of employers, financial institutions and other third parties to provide wage and other income information to the IRS and there’s already a nice little database at the IRS’ disposal.

But putting those returns together is not cheap. Right now, the IRS simply doesn’t have the manpower to prepare returns for taxpayers and pursuant enforcement and collections activities and adding to the rosters (and thus, the budget) would be a major endeavor. Shulman, however, seems to believe that it might be worth considering.

A limited version of the plan is already in place in California. The plan, called (of course), ReadyReturn, is free to taxpayers who qualify in the Golden State. The state uses information from the prior year’s return along with information from the form W-2 to pre-fill a California state tax return. The return only needs to be reviewed by the taxpayer and signed. Brilliant, right? Then how come no one is signing on?

For one, the number of taxpayers who qualify is limited. To qualify, taxpayers must have filed a 2010 California resident return as single or head of household and no more than five dependents. Taxpayers must only have income from wages from a single employer and must claim the standard deduction with no credits other than the renter’s credit. Depending on who you are, the program was either wildly successful or a terrible failure. The pilot program, sent out to 50,000 taxpayers, had a 27% participation rate. That works out to about 13,500 taxpayers. The state has about 20 million taxpayers, making the overall participation rate less than 1/2%. In 2009, the number of participants in the program grew to 60,000 taxpayers, or about 3%. Hardly statistically significant. But the folks who are using the system appear to like it.

The program has also seen success outside of the U.S. Programs in Sweden and Denmark claim participation rates of over 75% (downloads as a pdf). Could the IRS duplicate those kinds of results?

I’m not so sure.

Notwithstanding the costs – which would be huge – to convert to such a system in the U.S., I don’t think that U.S. taxpayers would embrace a system where the government prepared their returns. For one, U.S. taxpayers aren’t enthralled with the feds these days. Most are seeking less government interference, not more. I don’t think many taxpayers would trust the government with their own finances; after all, the government can barely manage its own. Further, if you’ve ever seen a substitute return (one prepared by the IRS for a taxpayer), you know that there’s a financial incentive to prepare a return that produces the most revenue for the government, not what’s most advantageous to the taxpayer. And the benefit of that to taxpayers is what, exactly?

The underlying problem isn’t that taxpayers don’t have the wherewithal to fill out a simple tax form (and keep in mind that this option would only be available to taxpayers with simple returns): it’s that the Tax Code is far too complicated as it stands. The simple tax forms aren’t the problem and yet, those are the very returns the IRS seeks to make more, well, simple with this kind of plan. We keep skirting the real problem: a tangled, confusing Tax Code. I would suggest that reform, not pre-filled returns, is a better, more economical answer.

What do you think?

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Dear overeager taxpayers:

As an employer and a tax professional, I am asking you in the nicest way possible: please be patient.

I know you want to file your tax return already. Apparently you’re one of the lucky folks getting a refund this year. And I know you want your money.

But give us some time, okay?

You should receive your forms W-2 and most forms 1099 by January 31, 2012. That’s a couple of weeks yet. For some of us, it’s a couple of long, long weeks.

If that day comes and goes and you haven’t received your forms, you should first contact your employer (or the issuer). It might be crazy easy to fix. You might not have received the form because of an incomplete or bad address, so check to make sure that your info is correct. Or maybe it got lost in the mail. If that’s the case, your employer can simply furnish you with another form. Problem solved. So don’t be nasty or rude about it.

But what about employers who are no longer in business or those that have moved? I still recommend trying to contact your employer. Again, it’s the fastest, easiest solution. If you don’t know where they’ve moved, try putting something in writing to the last known address: it’s quite possible that there is a forwarding order at the post office. Businesses that have wrapped up their affairs are not excused from filing their tax forms so some arrangements should have been made to take care of these matters. Don’t assume that’s not the case.

If after all of that, you still don’t have your forms (or if your forms aren’t correct), contact the IRS. But don’t jump the gun: the IRS does not want to hear from you about missing forms until after February 14. Then, consider it your little love note to them on Valentine’s Day. Contact the IRS by calling 1.800.829.1040. You’ll need to have your personal info handy, including address, phone number, Social Security Number, your dates of employment and the name, address and phone number of your employer. Do yourself (and the IRS) a favor and have all of that info together before you call. You don’t want to sit on hold for an hour and then find out that they can’t help you because you don’t have the right info.

After you contact them, the IRS will contact your employer (or the form issuer) with a form 4598, Form W-2, 1098 or 1099 Not Received, Incorrect, or Lost. You’ll receive a copy of the form 4598, along with a form 4852, Substitute for Form W–2 or Form 1099–R. If your employer is smart, they’ll send your docs right out to you. But if they’re not? If you still don’t receive your form W-2 after all of that, you should use file a form 4852 (downloads as a pdf). But that will definitely slow down the preparation of your return: the IRS requests that you not file the form 4852 until April 17.

But remember at the beginning when I said “most forms 1099″? There are some exceptions to that January 31 deadline. You might not receive some info by the January 31 deadline on purpose. Those include forms 1099-B, 1099-S and 1099-MISC (if amounts are reported in boxes 8 or 14): those are due to taxpayers by February 15. The February 15 deadline also applies to statements furnished as part of a consolidated reporting statement. You should also expect, as stragglers, Schedules K-1 from partnerships and pass through entities. A good rule of thumb: if you’re a beneficiary of a trust or estate, or a shareholder, partner or member of an LLC, LLP, s corp or other small company, give a quick call to the person in charge to find out when you can expect your forms. But don’t pester. Pestering is rude. And it won’t get you anywhere.

And do me one more favor: do not – I repeat, do not – attempt to file your returns until you’ve received your forms. I know it’s tempting. I know you think you know what’s on those forms… but what if you’re wrong? What if you’ve missed something? Not only are you making it hard on your preparer when you ask them to decipher your year end check stub or your year end investment statement, you’re asking them to break the rules: the IRS specifically prohibits preparers from submitting electronic returns prior to the receipt of all Forms W-2, W-2G and 1099-R.

You’re also begging for an audit. Begging. At the most basic level, the IRS matches your forms W-2 and forms 1099 to your tax returns. And if they don’t match, they’re going to want to know why. My mom – who is right almost all of the time – used to tell me that it was okay to be different. That might be true in junior high but it’s not true at the IRS. Trust me. You want your return to look like every other return. Don’t give the IRS a reason to pull yours out and look at it again.

Let’s be careful out there.

Sincerely,

taxgirl

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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