Washington, D.C. - Jan. 2003 - The IRS is currently exploring the use of publicly available software that will help determine the cost basis for securities transactions. Such technology can reduce taxpayer burden by streamlining documentation of cost basis calculations during audits and can create a reliable standard for taxpayers, preparer, and the IRS.

The National Taxpayer Advocate encourages the IRS to continue it efforts to reduce taxpayer burden regarding capital gain and loss issues, and supports all education and assistance efforts that are currently in place. Our office is particularly interested in the computer software that the IRS is testing regarding the computation of basis. It appears this initiative would not only significantly reduce taxpayer burden in preparing tax returns, but would also impact the number of audits, administrative appeals, and litigated cases that result in a disagreement between taxpayers and the IRS regard.

September 26, 2002 - As he watched the stock market plummet in mid-July, Jack Collins lost heart. On the day the stock market hit a four-year low, the retired Pfafftown, N.C., investor sold Lucent and AT&T Wireless shares spun off from the AT&T stock that he'd purchased years ago.

But he and other long-term investors who took part in this year's sell-off have to deal with more than seller's remorse. They've created a giant tax headache.

To protect their savings, many people dumped investments -- or spin offs from investments -- that they bought and then held for decades. In some cases, there are huge gains, but many have no idea what they paid for the stock they've sold. In order to calculate their taxes, they must now unravel the convoluted history of the stocks, many of which have had mergers, stock splits and spin offs over the years.

These corporate changes -- which generated huge stock movements throughout the '90s -- have made it incredibly complicated to figure out what a share of stock was originally worth. Folks who bought Manufacturers Hanover stock in the 1980s now -- after three mergers and two stock splits -- own shares of J.P. Morgan Chase. Those who bought Time Inc. two decades ago have seen their shares become Time Warner and most recently AOL Time Warner.

And consider this: Someone who bought American can stock back in the 1970s would end up today with shares of both Citigroup and the insurance company Travelers Property Casualty. If he or she sells the Travelers, a portion of the original American Can investment is treated as the purchase price of those shares. But how much? Among other things, it depends on the fair market value of the stocks on the day of spin-off.

"It will be ugly," says Norman P. Posner, an accountant with Samet & Co., Chestnut Hill, Mass., who is already girding for an onslaught of clients who need to reconstruct these records before filing their 2002 tax returns. People selling stock held more than a year must pay capital-gains taxes, typically 20%, on any profit over the original purchase price

No one knows exactly how many investors are affected. But John Markese, president of the American Association of Individual Investors in Chicago, says a huge wave of long-term investors sold into the nose-diving market. "I got far more calls in late July than I ever did in any other market downturn, including 1987," he says.

The 3.7 million AT&T shareowners are the poster children for the tax-basis problem. In addition to adjusting for stock splits over the years, they also must deal with a litany of stock spin-offs and mergers that could leave a shareholder tracing as many as 19 different companies if they bought before the 1983 breakup.

"Please, please, on bended knee, don't even think of selling," AT&T shareholder Frances Corneaby of Robbinsdale, Minn., says her accountant told her. She knows she first bought shares of the old AT&T for about $300 in 1955, but can't find the records. Now her investment has grown into a multi-stock portfolio valued in the mid-six figures. "I think it totally unreasonable of the IRS to expect us to have records 47 years old," she says.

To make things worse, the IRS has a new compliance weapon that could make this year's calculations particularly painful. In the past, investors who couldn't come up with a cost have often guessed, and the IRS probably couldn't figure it out any better. Now new software promises to help the IRS track trades back as far as 1962, making it much easier for them to spot mistakes. The software will debut as part of the IRS's National Research Project, a spot-audit of 50,000 random taxpayers scheduled to launch this fall.

According to IRS rules, those who can't come up with a proper cost basis have to calculate capital-gains tax as if the investment cost is zero and pay taxes on the entire proceeds of the sale.

People who don't want to do that should start by contacting the company itself, since it may have detailed shareholder records. AT&T, for example, says its stock-transfer agent EquiServe can track information back to 1984 through a Social Security number or certificate number.

For those who want to do the work themselves, the AT&T Web site at http://www.att.com/ offers a detailed breakdown of corporate changes, complete with worksheets. A workbook titled "AT&T Tax Wizard," currently available in paper form, provides an off-line tutorial for doing the calculations. Shareholders can get more information on the workbook at http://www.atttaxwizard.com/.

There are resources for shareholders of other companies as well. Glen Feeney of Maryland Heights, Mo., owns 216 shares of Emerson Electric as a result of an employee stock-plan purchase in January 1970, but no longer has the records. For the past three months, he has been trying to reconstruct his stock purchase and the history of company stock splits.

By using tools available on market-data Web sites, such as the Java charts at the brand-new http://www.prophet.net/, or the historical data at http://www.bigcharts.com/, it was relatively simple to find a split-adjusted Emerson stock price of $4.91 on Jan. 13, 1970.

In cases where there is no online information, people can revert to the public library, getting stock prices from old newspapers and then checking out stock splits and other changes in the CCH Capital Changes Reporter, which tracks all corporate changes back over 100 years.

That's where Stanley Stein of Lauderdale Lakes, Fla., may end up as he tries to reconstruct the basis of his mother-in-law's portfolio inherited from her husband in 1966. Mr. Stein has to tap her portfolio to pay for her care, so he sold 100 shares of AT&T in July. But there's no supporting paperwork to establish basis. "She threw everything out," he says.

There are, however, a couple of ways to get rid of stock without any such headaches. People who give appreciated stock to charity can get a tax deduction for the full market value of the stock.

Or they can take Mrs. Corneaby's approach. Stocks get a new tax basis pegged to the date of death when the owner dies, and she plans to keep holding it. "Let my heirs figure it out," she says.

Write to Lynn Asinof at lynn.asinof@wsj.com

Monday, August 19, 2002 - If you have sold a stock or a bond and have claimed a loss on your tax returns when you actually had a gain or fudged the numbers in other ways to reduce your capital-gains tax, then you may soon have reason to chew on your nails. The Internal Revenue Service is testing new software that might be able detect your cheating ways. If the software passes muster, the IRS will use it as part of the new National Research Project, an annual spot-audit of 50,000 random taxpayers.

The software was developed by a fledgling, privately held company in Tucson called NetWorth Services. The company has a 10-gigabyte database containing every single trade price for stocks and bonds traded in three major markets for the last 20 years. NetWorth believes that it can help the IRS determine the cost basis for every share you sell, even if you have been reinvesting the dividends for years and years and have lost your original paperwork.

"This is not a policing tool," NetWorth spokeswoman Marisa Diaz emphasized. "It's not designed to help the IRS clamp down on people." Her spin is that the new software is a "positive tool" in that it will enable the IRS quickly to eliminate accurate returns from its auditing sample, which makes it sound more like a cotton gin than a high-tech bloodhound. "It would be a teeny-weeny part of the National Research Project," she said. The software tests go on at least through October.

The National Research Program is still scheduled to launch sometime in the fall. The last time the IRS conducted spot audits on this scale was in 1988. Line-by-line dissections of the returns of 55,000 randomly selected taxpayers indicated that 8% of the populace was underreporting taxes to the tune of $200 billion a year. The random audits were so expensive, time-consuming, and excruciating for both crooked and honest taxpayers that Congress demanded the IRS put a stop to them and come up with a kinder and gentler method for gathering the data.

Under the new program, 50,000 returns will be selected from several sample groups, such as self-employed people, wealthy taxpayers, and corporations; but not every one of those taxpayers will be subjected to a face-to-face, line-by-line scrutiny. IRS Commissioner Charles Rossotti previously estimated that 8,000 of the randomly selected returns would pass the smell test, requiring no action. Some 9,000 taxpayers might receive a letter requesting information about specific line items. A block of 30,000 taxpayers will have to visit an IRS office for a "limited scope audit," which means they will not require documentation for every line of their return. Finally, about 2,000 will have to sit through a line-by-line audit with "reasonable substantiation expected." This means that if they lack documentation for a specific line item but have a convincing story, they might avoid a penalty for under-reporting their taxes.

Pen Pals
The five pens provided for President Bush at the signing of the Corporate Responsibility Act are certainly hot collector items. But beware if you ever encounter one on the secondary market. Bush only used three of the pens when he signed the bill on July 30, despite press accounts to the contrary. We were there and we later reviewed the video tapes to double-check our observation.

Bush mixed the pens in his right fist with the deftness of a three-card Monte dealer before he handed them out. From our vantage point, it appeared that Bush handed a "real" pen to Republican Rep. Michael Oxley, one of the Bill's two sponsors. Maryland Democrat Sen. Paul Sarbanes, the other co-sponsor, initially appeared to us to have gotten one of the unused pens. But reviews of the videotape provided inconclusive evidence. The president also presented pens to Sen. Majority Leader Tom Daschle of South Dakota and Sen. Minority Leader Trent Lott of Mississippi. He kept one pen for his presidential library.

Harry Rubenstein, a curator of political history at the Smithsonian Institution, says the pens used by Bush might be more valuable to collectors if, indeed, they can be identified. If not, they'd all be worth about the same. Rubenstein adds that he doesn't know when the tradition of giving away pens began. He believes it originated in the 18th century at treaty signings.

Chicago lawyer and pen collector John Loring says that Roosevelt, Truman and Eisenhower used inexpensive wood-shaft dip pens to sign bills. During Ike's last year, he substituted an Esterbrook pen that looked like a dip pen but held ink like a fountain pen, says Loring. Bush uses cross medium-point, felt-tipped pens for bill signings, according to the White House.

Bill Clinton, not surprisingly, was a prolific dispenser of souvenir signing pens. He used 20 Parker pens at one ceremony and 16 at another. Bush, by comparison, is a pen-miser. When he signed the trade legislation recently, he used just two pens.

Tucson, Arizona - August 10, 2002 - NetWorth Services, Inc., today announced that it was awarded an IRS contract to provide its net basis/equity basis determination application, NetBasis 2000 (NB2), to the National Research Program (NRP). Using a batch system process, NB2 will retrieve the historical price and corporate activity data, and then determine the cost basis of major stocks.

NetBasis 2000 (NB2) a patent pending software system developed by NWS, successfully retrieves an accurate adjusted cost basis of any investment regardless of its history of capital changes. These changes include stock splits, spin-offs, mergers, special dividends, dividend reinvestment programs and return of capital.

NetWorth Services is very proud to be a part of the modernization efforts that are taking place at the IRS. NB2 will provide an advancement technological method by using verification to minimize taxpayer burden.

"The results of the Tax Gap Report definitely exceeded our conservative estimates of lost revenue attributed to erroneous or unreported capital gains, said Nico R. Willis, CEO of NetWorth Services. "This report illustrates that the problem is greater than we originally anticipated. We are pleased to be able to provide the IRS with a solution to this problem."

IRS Commissioner Mark W. Everson announced that an additional analysis of the tax gap should be completed by the year-end, which may present a tax gap that further falls outside of the reported range. The next stage of the NRP is to finish the data analysis, refine the tax gap data and use that data to update the statistical tools used to select individual returns for audit, an important step in strengthening compliance with the tax system.

Nb2 is a simple, internet-based system that accomplishes in minutes what formerly seemed impossible. With as little information as the year of purchase, Nb2 quickly and easily filters through its massive database of financial information and within seconds, reaches back into time and recreates a complete history of that investment and then delivers the accurate adjusted cost basis.

Nb2 is the only product on the market that reconstructs the historical cost basis, and provides the security pricing. Furthermore, with the IRS and accounting firms both using the Nb2 system, NetWorth Services is rapidly moving towards creating an industry standard. When we designed this system, our goal was to level the playing field between the tax payer and the government," continued Nico Willis. "A system, such as Nb2, contributes to building a level of trust between tax return reporting and review through an impartial system where both parties arrive at the same numbers; giving a virtual stamp of approval to any data submitted."