Know THIS About Investing Apps and The IRS…
April 5, 2017 : Jim Buttonow - The Tax Institute
Active investors have complicated tax situations. That’s because they must properly report all their investment activity and gains and losses on their tax returns. And with a new crop of investing apps like Robinhood, Acorns, Wealthfront, and Stash, some online investors are left confused on how to report earnings to the IRS.
The IRS knows all about these transactions, too. For 2015, the IRS received more than 1.4 billion pieces of information about stock and investments sales – namely, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. The IRS matches these information statements against tax returns to make sure all the income is on the returns.
(Did you know… Form 1099-B makes up more than half of the tax statements the IRS receives each year.)
For April 18 filers, the IRS starts matching the returns against information statements the summer after they file. For extended filers (Oct. 18), the IRS starts matching the returns in the winter.
When people leave income off their return, they can expect the IRS to notice
Each year, nearly 28 million returns out of more than 150 million returns filed don’t match information statements. If this happens to you, you may receive a letter from the IRS – usually IRS notice CP2000 or, especially for investors, IRS notice CP2501. This is called an automated underreporter inquiry.
The notice proposes changes to your return and asks you to explain the missing income on your return. In short, underreporter inquiries look and feel a lot like an IRS audit.
Because the IRS receives so many Forms 1099-B, investors often experience underreporter inquiries from the IRS. The only way to avoid these inquiries is to report every transaction.
For many investors, that’s easier said than done. Keeping track of investment sales can be difficult. And the IRS isn’t much help in providing Forms 1099-B before the filing deadline, because it doesn’t compile all of the forms until late May of each year.
If you’re a frequent online investor or you’re unsure whether you have all your information statements to file an accurate return, here’s one tip that can save you from an underreporter inquiry: File an extension and request your wage and income transcripts from the IRS in June. You can use this information to make sure you report all transactions on your return. Doing this can also save you money by making sure you report losses, too.
How to get your wage and income transcripts
To get your wage and income transcripts, use the online IRS Get Transcript tool. If you have trouble accessing the application, order the transcripts by mail using the same Get Transcript request or by using Form 4506-T, Request for Transcript of Tax Return.
Or, your tax preparer can easily get your transcripts through a special tax pro hotline if you fill out a Form 8821, Tax Information Authorization.
If you actively use investing apps, save yourself the time and hassle of an underreporter inquiry, and request all the information you need to file an accurate return!
If this information is making you dizzy, don’t worry! A tax pro at H&R Block can help. Use our tax office locator to find a tax pro near you now!