Sold wrong lot of stock. Problem with cost basis

A potential client just contacted me and his question is that he sold stock, but accidentally sold the ones with lower cost basis.

His bank refuses to "fix" his 1099-B to reflect the more favorable higher cost basis. He asked me if I could change it in his tax return. Of course I can enter whatever in the cost basis, but I think the IRS will challenge it, since it won't match the 1099-B.

My client can provide me with the cost basis for the stock, but I am afraid that he sold that specific lot and he is stuck with the basis. My question is, Can I enter the most favorable (higher) cost basis in his tax return? Is this something we can fight with the IRS and win?

Thank you!!

but accidentally sold the ones with lower cost basis.

His bank refuses to "fix" his 1099-B to reflect the more favorable higher cost basis

Client erred, bank reported actual transaction accurately. In situations like this I tell the client he has to fix it at the source. For you to report otherwise would be malpractice IMHO.

When the client sold the stock, did he specifically identify the lot/shares to be sold? Or is the brokerage using FIFO to identify the basis because he didn't specify which lot s/be sold? I'm trying to follow how he "accidentally" sold the wrong shares.

There are two ways he could have sold the wrong shares. Firstly, he could simply have specified the wrong ones prior to sale. His fault and he must deal with the consequences. Secondly, the bank may have messed up. If the bank messed up, will not amend the 1099-B and he has proof of specific identification in writing, I would advise the client thus:

Use the basis for the shares that client wishes to use. If covered securities, disclose fully on F8949;
Ask client to obtain sufficient information, going forward, to allow basis to be tracked. Of course, this costs money, which he may find unpalatable.

My feelings is that your "potential client" is shopping around.

If he can not provide the properly dated documentation that he provided to the bank to initiate the sale - you probably don't have much wiggle room.

Michael, where you been?

He's toast. He screwed up and is making up a story now....too bad so sad. It is what it is and unless he sold mutual funds, the whole specific identification of lots is there for a reason!

I agree the client is shopping around. His current preparer won't fudge the cost basis so he's looking for a sucker.

Lala wrote :
Is this something we can fight with the IRS and win

100 % No if the sale was a covered sale which means cost basis was reported to IRS . In this instance IRS will have in their system the cost basis as shown on client's copy of the consolidated 1099, Client will receive a CP 2000 Notice about 1 1/2 years later because cost doesn't match up and IRS will not accept the client's explanation.

If the sale was a non- covered sale (no cost basis reported to IRS) the transaction will sail thru .I am not saying this is the right action but merely telling you IRS processing steps .

Thank you all for your answers!

It turned out that a financial advisor is helping this client. The FA asked the client to sell the stock with higher basis and the client sold the ones with the higher gain (!?).

It seems to be a non-covered transaction and the FA will keep track of the basis for future sales.

I'd want some confirmation. My feeling is that client is covering up his booboo....talk to the FA. And don't bend.

I'd want some confirmation. My feeling is that client is covering up his booboo....talk to the FA. And don't bend.

I’ve done NO research and am responding on my tablet but I don’t believe the code says WHO determines cost. If my client is a math wiz and is tracking basis, I would imagine we could disagree with the 1099 and simply add basis and we are the custodian of cost. I don’t like the idea but I don’t see it as illegal.

If a custodian has NO cost basis we can’t go with zero because they say so.

The rules are right clear about identification of lots, tho'. That's the issue. He sold the wrong lot. Not a matter of cost basis, but lot identification.

If the sale was a non- covered sale (no cost basis reported to IRS) the transaction will sail thru .I am not saying this is the right action but merely telling you IRS processing steps .

It seems to be a non-covered transaction and the FA will keep track of the basis for future sales.

I'd be careful about this.

It's possible a position might be composed of both non-covered and covered lots. If it is, using a lot cost basis other than the one sold could jam you up in the future, even if it sails through now.

Client (or client's agents) should either code the brokerage dispositions for tax efficiency, or use specific identification at the time of sale.

The FA asked the client to sell the stock with higher basis and the client sold the ones with the higher gain (!?).

I presume this instruction was orally. Unfortunately, the Regulation says this:
Where the stock is left in the custody of a broker or other agent, an adequate identification is made if—
(a) At the time of the sale or transfer, the taxpayer specifies to such broker or other agent having custody of the stock the particular stock to be sold or transferred, and
(b) Within a reasonable time thereafter, confirmation of such specification is set forth in a written document from such broker or other agent. Stock identified pursuant to this subdivision is the stock sold or transferred by the taxpayer, even though stock certificates from a different lot are delivered to the taxpayer's transferee.

But fortunately, an astute taxpayer, somebody like Harry Boscoe, might make the case that, “While this Regulation is nice, it is just one example of when adequate identification will be satisfied. It is more or less a safe harbor and is not the exclusive means to satisfy the specific id rule.”

Lavla’s situation is very much like the Concord Instruments case, assuming Lavla’s client could corroborate the verbal instruction to the Advisor. All the client might want to do is get the Advisor to sign a document that says, “My client, Mr. X, verbally instructed me to sell Y number of XYZ shares on or around Date Z and to sell those XYZ shares that had the highest cost basis. I accidentally sold the ones with the highest gain.” Getting such a letter now might be advisable because if the return gets audited years from now, the Advisor might no longer be around. And even if he or she is around, any corroborating written statement by the Advisor would be less proximate in time than one obtained now. Further, if we have to adjust the basis of a Covered transaction, having that letter might prove helpful if correspondence is sent from the IRS. (And if we are going with the “correct” basis, it matters little if the transaction is Covered or Non).

https://www.leagle.com/decision/1994310 ... m303612858

If it is, using a lot cost basis other than the one sold could jam you up in the future, even if it sails through now.

Good point. We’ll want to make sure that the Advisor’s basis records are adjusted so that we attach the “correct” basis to all remaining shares.

isn't there a code in the 8949 instructions to tell the IRS that the 1099-B basis was wrong (when that is indeed the case), and then the taxpayer shows the adjustment needed to correct the gain/loss?

All the client might want to do is get the Advisor to sign a document that says, “My client, Mr. X, verbally instructed me to sell Y number of XYZ shares on or around Date Z and to sell those XYZ shares that had the highest cost basis. I accidentally sold the ones with the highest gain.” . One of us is reading the facts too cursorily, because such a letter would not comport with them. Which one of us?

One of us is reading the facts too cursorily, because such a letter would not comport with them.

I now see what you’re saying. It sounds like OP had an account somewhere, like an E*Trade account…self-directed/managed. Client simply “got some advice” from some guy, with respect to client’s self-managed account that wasn’t held with the FA. OP client didn’t follow FA’s advice. Thereafter, that account was transferred to the FA.

If those are the facts…

As most of us have said all along....he's hosed is the Canadian eh term for it.

One of us is reading the facts too cursorily, because such a letter would not comport with them.

I now see what you’re saying. It sounds like OP had an account somewhere, like an E*Trade account…self-directed/managed. Client simply “got some advice” from some guy, with respect to client’s self-managed account that wasn’t held with the FA. OP client didn’t follow FA’s advice. Thereafter, that account was transferred to the FA.

If those are the facts…

That's the case!

Would this case (Issue #1) have any bearing on the matter?

https://www.courtlistener.com/opinion/1 ... v-penrose/