Discussion in 'Professional Trading' started by NanoTick, Nov 17, 2006.
If I have 6000 trades in a year, will they go line by line to verify the record?
file trader status
How is that related to the auditing question?
Depends on what the audit is about.
If they are auditing you about your specific trades...maybe yes.
For example, you can take 1 million trades in a year and if they are questioning your home office deductions, lavish trading party deductions et cetera...
They aren't going to ask to see each and every trade because at that point they already know your a trader but they got red flags about how your deducting particular expenses.
My point...audit of a trader can be about anything.
Further, you should already make it a routine to download or do a screen image capture of your trading records (daily, weekly, monthly...whatever is easy for you) and store them on DVD just in case they ask to see each and every trade if the audit is concerned about your trades and not about another aspect of your trading.
I know several traders that have stopped storing printed copies of their trading records and keep it all organized as digital files or spreadsheets.
Thus, if they ask to see each and every trade...just hand them a copy of the DVD.
never heard of a trader being audited because of the amount of trades he makes. i've averaged around 300k trades a year for 7 years and never had 1 question knock on wood
unless there is something unusual about your case, i think unlikely. The brokers report to the IRS, so unless your info is out of line with what the broker reports, u should not be hearing from them.
other business stuff, like that chain of laundry mats, expect to hear from them.
I was audited a few years ago, although it wasn't from my daytrades, but rather from not including my employee option trades in my Schedule D (taxes are taken out in the W-2 but you still need to put the sales in the Sched D). From what I understood talking with the IRS guy, they compare the gross proceeds from all the 1099's with your schedule D total. If the numbers are off a certain amount, the computer kicks it out and a human takes a look. I don't know if they ever really look at your individual trades but if the gains looked out of whack, I wouldn't be surprised if you'd get an audit.
The audit itself was no big deal, BTW. I received a letter requesting me to visit the local office with my Schedule D and 1099s and trade information. I spent a morning there talking to the guy as we both tried to figure out why the numbers were off. Surprisingly, this IRS guy knew amazingly little about how stock options were supposed to be reported -- I had to explain to him what I had read on the subject on irs.gov.
This was a few years ago, but he didn't have a summary of all my trades, just a stack of paper with each individual transaction recorded on a separate page. I'm not kidding, we had to use my only documentation of my trades because what he had was useless!
Anyway, as long as you don't do anything dishonest, audits are no big deal. I probably know more about how to successfully cheat the government know that I know what they look for -- probably not the purpose of auditing me! LOL
Disclaimer: above is not legal advice, just my own experience.
My take is: since there are so few making money, IRS couldn't be bothered. When was the last time you read news about they came after a trader?
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