How can the IRS check Schedule D forms?

It’s tax day, so tax questions everywhere! I filed already, but they reminded me of a question I had:

The Schedule D form is for capital gains and losses, and is essentially free form as far as what the gain or loss was for:

(a) Description of property (Example: 100 sh. XYZ Co.)

It seems like it would be impossible to check these for accuracy, without doing a very time-consuming audit by hand. The only number they have from another source is the sales price, and that doesn’t match up very well, and even that doesn’t let them check the important number, which is the gain/loss. If they captured the data better, like with stock ticker and # of shares explicitly, they could at least check the stock gains, but they don’t even bother with that…

I don’t know if this is answerable, but anyone have any thoughts?

How do they check anything you put on your return? With a few exceptions, such as W-2s and 1099s which they receive copies of and can validate against what you submit, they don’t have a way (or the time) to verify every line item on every return.

What they do have is a fairly sophisticated algorithm that flags amounts which are outside the normal range, based on other items in your return (obviously they are not about to share the details of what criteria they use).

They *audit *you. Not a pleasant experience.

Sure that means if you spitball in the figure for your basis on that 1/2 share of stock you sold for $18, you are pretty well clear. :stuck_out_tongue: But if it makes a significant difference in your bottom line, it will go hard with you if you get audited.

And an audit for this can just be done by correspondence, if it isn’t worth calling you in for an in person audit.

Back in the high-flying late 90’s, I did some light stock trading on-line as did a lot of people. During a certain period, it was difficult to lose money on many tech stocks. I goofed around and bought and sold a handful of stocks. I didn’t have a system other than psychic intuition which was usually enough to mask idiocy back then. Sometimes I would sell a batch of stock, feel bad, and then buy part of it back an hour later. Repeat over a month or two. I made a little money but I was horrified to see the mess that I made when I got my financial and tax forms.

I had no idea that purchases weren’t magically linked up to sales and I spent the better part of a weekend trying to sort it all out. I wish I would have gotten audited just so someone could show me how you can keep track of swirling batches of mystery stocks. There wasn’t a good way after the fact as far as I could tell.

Well, the reason this came to mind was that I sold some stock last year that I had bought twice each month for 5 years. So, 120 different purchases. My Schedule D was five pages long.

Next time just put “various” in the place where you put the purchase date but be sure to separate the part that was purchased more than a year ago from the part purchased less than a year ago. You can just report it in two lumps all added together.

IANA Tax Professional, but that sounds just vague enough to get someone’s interest.

It’s a common thing to do for people who have DRIP accounts.

Here is a Motley Fool article explaining the same thing in more detail.

Interesting. I would have done it that way, because my only short term gains were a few shares of reinvested dividends.