A legislative recommendation in the Advocates 2005 report to Congress calls for brokers to report basis prices and purchase dates for stock transactions to the IRS. This would effectively hold capital gains to the same reporting standard as wages, which employers have reported since 1943; under the Advocates plan, financial institutions would have to do the same for capital gains. Only the proceeds from sales are currently reported, and these tell the IRS next to nothing.
Few tax reforms could be fairer or make more fiscal sense.
It mocks tax equity that wages are reported by a third party to the IRS, but capital gains are not. Whats up with keeping a tighter tax rein on ordinary workers than on the high rollers?
And consider the hit the Treasury takes. Listen to the Advocate: From the governments perspective, the absence of information reporting enables underreporting by taxpayers who deliberately overstate their basis (thereby reducing their gain or even generating a loss), because they know the IRS generally cannot detect errors in basis reporting in the absence of an audit. One recent estimate puts the revenue loss from such underreporting at $250 billion over the next 10 years.
The Taxpayer Advocate is not alone in recognizing the merits of third-party capital gains reporting. Pamela Olson served as the Treasurys acting assistant secretary for tax policy during George W. Bushs first term. In May 2002, she answered my letter to Congressman Charles Rangel:
Mr. Scorse believes that tax compliance would be improved if information reporting for capital gains included the amount of capital gains income that a taxpayer is required to show on his or her return. We couldnt agree more! Information reporting is the most efficient, least intrusive way of helping taxpayers comply with their tax obligations to the federal government.
Professors Joseph M. Dodge of Florida State and Jay Soled of Rutgers couldnt agree more, either. Their paper in the tax policy journal Tax Notes called the potential for capital gains tax cheating virtually unlimited, particularly for stock transactions; in their opinion, it could virtually be eliminated with third-party reporting.
The Advocates recommendation takes note of financial institutions that do not keep track of basis prices, leaving clients the sometimes-daunting task of doing it on their own. Ms. Olson floats a remedy, a one-time tax credit to brokers for setting up a tracking system. Full speed ahead, and let the Congress work out the details.
Look at her idea this way. Its one tweak of the Tax Code, one large leap for tax fairness. Plus those billions for the Treasury.