Did you receive an IRS notice for tax year 2011? Wow, that's fast if you did. Send me the notice and I'll look into it. Saw your update above. Is it a 2010 tax notice? Makes sense, as it's too early to hear from the IRS for 2011 tax returns yet.
We noticed this exact problem on wash sales with IB, for a few clients, too. Wash sales are deferred until you absorb them with offsetting gains on substantially identical positions, but IB may not be considering subsequent gains correctly. So, taxpayers may be overstating their capital gains by deferring losses they don't have to defer, thereby overpaying their taxes. Conversely, traders may file correctly, and then receive a nasty tax notice saying they owe the IRS a big bill due to wash sales, which happen to be incorrect, but the IRS believes IB's 1099-B, first. It's emotionally upsetting and potentially costly to fix these brokerage errors with the IRS.
Yes, when brokers issue 1099-Bs, they send them to you and the IRS. This gets to the heart of the problem this year. Brokers are reporting income and loss incorrectly and the IRS is going to believe the broker and send you a tax bill for any differences, when it's in the IRS's favor. You need to demand and receive corrected 1099-Bs, to get the IRS off your back. Brokers are ignoring traders and not cooperating. We need collective pressure to force brokers to fess up and clean up their mess.
I've noticed the discrepancies are more isolated to the uncovered (basis not reported to the IRS) transactions rather than the covered (basis reported), even though the basis for the uncovered are provided to the trader/investor. What we're doing in our practice is reporting the covered transactions as provided by the broker, unless there are large discrepancies which hasn't been the case for the most part, and using the traders records for the uncovered transactions when discrepancies exist b/c the basis on this transaction type isn't reported to the IRS. I think it's going to take a while for the brokers to work the bugs/garbage out of their systems. Basis reporting should become more accurate as time goes by.
Thanks - I think that this mess completes my transition to only doing active trading in the IRA accounts, with the caveat that I need to not trade the same securities/ETF's in the IRA accounts as in the cash ones, because of wash sale considerations between the two. In the big picture, though I know it is easy for the IRA to justify what they are doing here, it effectively becomes another complicating tax factor that helps to justify their existence. It's too bad that their isn't the political will/competence to simplify the tax code and then provide IRA personnel with a quick 50% headcount reduction.
IB includes SPY and MDY as covered securities though they are ETFs. So, in tradelog software, I changed the type to stocks for these ETFs and able to match covered securities gross proceeds with IB. Also, EVEP is under uncovered securities in my 1099-B thought it is not ETF. Lesson, look at 1099-B and get a list of all symbols for both covered and uncovered securities and then match with tax software to get the gross sales proceeds correct for each category. Do not assume all stocks are covered securities and also do not assume all ETFs are uncovered securities. Thanks Mr. Green for your contributions.
If the IRS is only going to go by the 1099-B's, then doesn't calculating wash sales across multiple brokers (for those that use multiple brokers) a stupid thing to do as the IRS will go by the 1099-B's exclusively & you'll get audited for filing trade info that doesn't match the 1099-B's???? Why not just (if you use multiple brokers or just one) put on your tax form exactly what's on the 1099-B to avoid any hassle?
Proper trade-accounting software calculates wash sales across multiple brokerage accounts and taxpayers should do this procedure to be compliant. Wash sale rules are poorly drafted and now the IRS is going to tie themselves up in a knot having to tackle them with botched 1099-Bs and Form 8949 discrepancies. Hopefully, they will revise those rules afterwards.