Your Money: Tax changes coming to a return near you

Tax season is going to become more complicated if you are an active trader/investor. This is the first year brokers must start reporting to you and the U.S. government the cost basis from your investments.

"Cost basis" is what you paid for stock. It's used to calculate profit or loss when you sell. There are several methods for determining cost basis, and you can decide which one makes sense for you (ask your broker or accountant).

In the past, taxpayers reported to the Internal Revenue Service any capital gains or losses from selling securities or mutual fund shares. For the 2012 filing season, however, brokers also have to report the information, and the amounts need to match up.

As a result, the IRS has published an updated Schedule D and incorporated a new form (Form 8949) that requires a list of specific transactions in detail. The agency is phasing in the financial services for which companies report cost-basis information directly to the IRS.

For 2011, the only cost-basis information reported to the IRS will be for the sale of stocks acquired in 2011. Reporting changes for other securities will be phased in over the next three years. The legislation goes into effect over that period, during which specified securities will become considered "covered" under the new rules:

2011: Stock. All stock held in a corporation, except those for which average cost is allowed, acquired on or after Jan. 1. Includes U.S.- and non-U.S.-issued stock.

2012: Mutual funds. Securities eligible for average cost acquired on or after Jan. 1, 2012. Certain exchange-traded funds also fall into this category.

2013: Options and other securities. Options as well as other securities prescribed by the IRS acquired on or after Jan. 1, 2013.

Big brokerages such as Vanguard, Fidelity, TD Ameritrade, and Charles Schwab should have information about the cost-basis tax changes on their websites.

"The IRS expects additional revenue" from the measure, said Brian Keil, director of cost-basis and tax reporting for Schwab in San Francisco. For investors who had only one sale transaction in 2011, the additional filing should be simple, he said. "For active traders, however, this could be very complicated."

If you are a do-it-yourself tax filer and want to read the original IRS rules, visit the IRS website http://www.irs.gov/pub/irs-prior/p550--2011.pdf for a downloadable version of Publication 550 on Investment Income and Expenses. The IRS also has walk-in centers in Philadelphia, King of Prussia, Cherry Hill, and other locations, which you can find online at http://www.irs.gov/app/officeLocator/.

Separately, the IRS warns Americans to be alert to fraud committed by tax preparers, because some prey on unsuspecting taxpayers. Questionable preparers have been known to skim clients' refunds, charge inflated fees for services, and attract new clients by promising guaranteed or overestimated refunds. (Preparers charge $100 to $200 an hour on average and about $200 to $300 in total for the typical client.)

Every paid preparer needs to have a preparer tax identification number and must enter it on the returns he or she prepares. Signs that you might be dealing with an unscrupulous preparer include when the preparer:

Does not sign the return or enter a preparer tax identification number on it.

Does not give you a copy of your return.

Promises larger-than-normal refunds.

Charges a percentage of the refund as a preparation fee.

Requires you to split the refund to pay the preparation fee.

Erin E. Arvedlund is a finance reporter in Philadelphia. Contact her at 646-797-0759 or erinarvedlund@yahoo.com. Read more of her columns at www.philly.com/arvedlund