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or break even - and it will either be short-term or long-term which impacts on the rate at which it is taxed. The taxpayer needs to know the date that the stock was purchased and sold, how long it was held and the basis of the stock. Short-term stock is held for one year or less and long-term stock is held for more than one year. The basis is the purchase/acquisition cost plus any allowed expenses such as broker's fees. This basis is compared to what the stock sells for and the result is a gain, a loss or zero.

Until very recently the only information reported to the IRS was the sell price of the stock, the sale date and the number of shares sold. It was the taxpayer's responsibility to supply the IRS with the cost basis and date acquired by filing a Schedule D with their tax return. The only way the IRS could verify this information was through an audit. The IRS is now requiring financial institutions that sell stock for individuals to include more information that helps the IRS determine the correct basis of the stock sold. This is called third-party verification because it involves someone other than the taxpayer. The IRS has the authority to fine the third party if due diligence is not exercised in reporting the information.

Erroneously claimed credits involve someone intentionally or "mistakenly" taking a credit on their tax return that they are not legally entitled to take. Credits have a significant impact on the amount of taxes owed or the amount of refund received. This is because credits are a dollar-for-dollar reduction of tax liability. These credits can be very generous depending on the individual's tax profile.

An example of tax credit abuse is the Earned Income Credit (EIC). EIC requires a qualifying dependent and often taxpayers claim dependents they are not legally entitled to claim which incorrectly qualifies them for the credit. Because of the tendency for abuse, Congress and the IRS consider credits such as EIC as high-target audit areas.

So, the bottom line for taxpayers is to ensure that they only take those credits and deductions that they are legally entitled to and that they claim all taxable income received regardless of the source. After years of decline, the number of audits the IRS conducts of individual tax returns is increasing in response to mandates from Congress to close the Tax Gap for the past three and future years. The best defense taxpayers have against becoming part of the Tax Gap is to use reputable tax preparation software or a reliable tax preparation service.

For more information go to www.irs.gov and see the following publications and links;

- Use the term "tax gap" to search for the latest updates
- 17 - Your Federal Income Tax (For Individuals)
- 523 - Selling Your Home
- 525 - Taxable and Nontaxable Income
- 526 - Charitable Contributions
- 529 - Misceallaneous Deductions
- 551 - Basis of Assets
- 552 - Recordkeeping for Individuals

Learn more about this author, Teresa Stone.
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