A capital headache

If you sold stocks or bonds last year, you could spend a lot more time filling out your income tax returns this spring.

Accountants across the country are buzzing about a slim paragraph the Internal Revenue Service added to the instructions for filing 2005 forms. The change means that people with capital gains or losses must detail each transaction individually.

Previously, tax preparers simply wrote in the net gains or losses and attached a brokerage’s summary of the year’s transactions. Now the IRS has explicitly prohibited that technique.

“It adds a whole level of complexity,” said Leon Taylor, a certified public accountant in Beaverton, Ore., who predicts tax preparation fees will climb as a result.

Whenever you sell an asset, such as a house or a share of stock, you experience a capital gain or loss. It’s a gain if the sale price was higher than you paid, a loss if it was lower. The government’s interest is in the net capital gain — that is, your combined gains minus your combined losses.

IRS spokeswoman Nancy Mathis said the new instructions merely clarify that the government needs details of individual gains and losses. “We always required this information, but people were sending in copies of their brokerage statement that did not contain all the details,” she said.

The brunt of the change will fall on investors in individual stocks and bonds, since they are the most active buyers and sellers, said John Pridnia, a CPA in Muskegon, Mich. People who own mutual funds or real estate are also subject to capital gains taxes, but typically have fewer transactions each year.

The cost of completing a tax return could double or triple for many clients, both Pridnia and Taylor said.

In 2004, 55 percent of people who owned individual stocks made no transactions, 24 percent made five or fewer trades, 10 percent had six to 12 transactions and 11 percent completed more than 12 trades, according to a Securities Industry Association survey.

“If you literally have to enter everything and we can’t get it in any form but paper, it could easily add $20 to $30 per trade,” said Ed Zollars, a CPA in Phoenix. “It could become fairly costly to have a number of trades during the year.”

Someone with 50 securities transactions in a year will probably pay $200 to $500 more in tax preparation fees, said Dennis Echelbarger, a CPA in Grand Rapids, Mich.

“It not only puts a financial burden on taxpayers, but is one more burden on staffing needs that most firms are having trouble fulfilling,” Echelbarger said.

Many full-service brokerages calculate capital gains and losses for clients when they sell securities. But that information can be scattered in statements throughout the year, said Jeffrey Kelson, partner at BDO Seidman, an accounting firm in New York.

“Some of the brokerage houses might try to issue a statement that would mirror” the IRS tax form, Kelson said. “That would solve a lot of problems.”

Mathis said the IRS would accept an attachment if it’s in the same format as Schedule D-1 and contains all the required information.

Ideally, securities brokerages would provide capital gains and losses for each transaction in a computerized format compatible with popular tax software packages. But practically speaking, brokers within the same firm may have different understandings of what their system can provide, Zollars said.

“There’s not a lot of time to adapt to this or make changes,” he said. “They’ve got to train the brokers. They’ve got to be able to talk tech and tax in the next few months.”

Bank of America, Citigroup and Merrill Lynch provide brokerage customers the option of online access to their account statements, which can be set up to include capital gains and losses for each transaction, representatives said. Goldman Sachs and Morgan Stanley did not respond to requests for information.

The American Institute of Certified Public Accountants on Dec. 23 asked IRS Commissioner Mark Everson to reconsider the change, in light of the “significant burden” and cost it would impose on taxpayers. The group also expressed concern that the new instructions would discourage electronic filing and that individuals would face tougher requirements than large corporations.

“Corporations have full-time professionals that keep track of their finances, but for individuals doing taxes is a side occupation,” said Tom Ochsenschlager, the group’s vice president of taxation. “We’re getting a lot of e-mails from people saying it’s going to be a big problem.”

Ochsenschlager isn’t optimistic the IRS will reverse course.

“We’re trying to get them to consider changing it on the Web site and sending out a notification that they’ll put it off for a year,” he said. “We’re not getting good traction on that. They’re hanging tough.”

If taxpayers disregard the new instructions, the IRS probably will send a notice requesting the detailed information, Mathis said. “It would hold up your refund,” she said.