Recent and projected large deficits and the need for revenue to offset spending or tax reduction proposals generated congressional and executive branch interest in different proposals to reduce the tax gap; and consequently, raise additional revenue. Proposals in the 110 th Congress to require brokers to report adjusted basis on publicly traded securities sold by individuals are examined in this report. Basis reporting can help clarify the actual amount of capital gains and thus the tax revenue from such gains may rise if capital gains have been under reported. Basis is "the amount a taxpayer uses to determine the cost of acquiring an asset, which is used to determine the asset's capital gain or loss." The original cost may have to be altered in order to calculate the appropriate "adjusted basis" for tax calculations. For example, the original cost of a purchase of stock would be adjusted upwards to account for brokerage fees. The Internal Revenue Service (IRS) defines the tax gap "as the aggregate amount of true tax liability imposed by law for a given tax year that is not paid voluntarily and timely." The IRS defines the true tax liability for any given taxpayer as "the amount of tax that would be determined for the tax year in question if all relevant aspects of the tax law were correctly applied to all of the relevant facts of that taxpayer's situation." For the 2001 tax year, IRS estimated that the gross tax gap was approximately $345 billion. After enforcement efforts and late payments, this gross tax gap was reduced over several years by an estimated $55 billion to equal a net tax gap of $290 billion as reported in 2007. Current law requires brokers to report annually the name, address, and gross proceeds of each sale by a taxpayer to the IRS. Brokers are also required to report this information to each customer. The term broker includes "a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services." An individual taxpayer's gain or loss is the difference between the amount realized on the sale of property and the adjusted basis. Because brokers are currently not required to report adjusted basis to the IRS, there is no third-party reporting of adjusted basis; consequently, the ability of the IRS to verify the amount of capital gains and losses reported by individuals is limited. Brokers would incur significant costs in reporting adjusted basis, but taxpayers would be relieved of the often substantial costs of calculating adjusted basis to determine capital gains and losses from the sale of securities. According to the IRS, third-party reporting increases voluntary tax compliance. For tax year 2001, the Government Accountability Office (GAO) found that an estimated 8.4 million out of an estimated 21.9 million taxpayers (or 38%) with securities transactions misreported their securities gains and losses. GAO calculated that the most frequent reason for this misreporting of securities gains and losses was the inaccurate reporting of basis of securities sold. The issue of reporting basis is complicated by the following current computation rules: If a taxpayer has acquired stock in a corporation on different dates or at different prices and sells or transfers some of the shares of that stock, and the lot from which the stock is sold or transferred is not adequately identified, the shares deemed sold are the earliest acquired shares (the "first-in-first-out rule"). If a taxpayer makes an adequate identification of shares of stock that it sells, the shares of stock treated as sold are the shares that have been identified. A taxpayer who owns shares in a regulated investment company ("RIC") generally is permitted to elect, in lieu of the specific identification or first-in-first-out methods, to determine the basis of RIC shares sold under one of two average-cost-basis methods described in Treasury regulations. A proposal to report basis was included in the President's FY2008 Budget and is discussed in this report. The Senate Finance Committee's draft proposal to report basis on publicly traded securities, which was released on May 25, 2007, is also examined. On June 29, 2007, the committee held a hearing on this proposal. Written comments of representatives of private financial associations are examined and legislative implications presented. Lastly, relevant legislation in the 110 th Congress is described. The President's FY2008 Budget proposed that information reporting to the IRS be expanded to include basis reporting on security sales. The U.S. Treasury described this proposal as follows: Certain brokers (including brokerage houses, mutual funds, asset managers and fiduciaries) would be required to report information regarding adjusted basis in connection with the sale of certain publicly traded securities. The IRS and Treasury Department would be granted regulatory authority to promulgate specific rules, including exceptions, to implement this mandate. Brokers also would be required to report acquisition or disposition dates for securities to determine short-term or long-term gain or loss for taxpayers. To facilitate accurate basis reporting if a customer transfers securities from an account with one broker to an account with another, the transferor broker would be required to provide the relevant information to the transferee. Under regulations, a broker would be exempt from reporting items of information that the broker is unable to obtain with reasonable efforts. Regulations may establish a regime under which customers provide information to their brokers about customer transactions that produce adjustments to basis and about the customers' initial basis in securities when the broker has no other way of knowing this information. Information about basis adjustments that are applicable to all holders of securities of a particular class would be available to brokers either directly from the relevant issuer or indirectly from the issuer through a central repository of information. This reporting proposal would apply to securities acquired after December 31, 2008; consequently, revenue estimates in the first year are not on a fiscal year basis. The Treasury estimates that this reporting proposal would yield revenue of $1.035 billion for the period of January 1, 2009, through September 30, 2112, and $6.709 billion for the period of January 1, 2009, through September 30, 2017. The President's FY2009 Budget also proposed that information reporting to the IRS be expanded to include basis reporting on security sales. The Treasury's description of this proposal was the same as the same proposal in the President's FY2008 Budget with only a few changes in wording. The U.S. Treasury described this FY2009 Budget proposal as follows: Certain brokers (including brokerage houses, mutual funds, asset managers and fiduciaries) would be required to report information regarding adjusted basis in connection with the sale of certain securities. The IRS and Treasury Department would be granted regulatory authority to promulgate specific rules, including exceptions, to implement this mandate. Brokers also would be required to report acquisition or disposition dates for securities to determine short-term or long-term gain or loss for taxpayers. To facilitate accurate basis reporting if a customer transfers securities from an account with one broker to an account with another, the transferor broker would be required to provide the relevant information to the transferee. Under regulations, a broker would not be penalized for failure accurately to report items of information that the broker is unable to obtain with reasonable efforts. Regulations may establish a regime under which customers provide information to their brokers about customer transactions that produce adjustments to basis and about the customers' initial basis in securities when the broker has no other way of knowing this information. Information about basis adjustments that are applicable to all holders of securities of a particular class would be available to brokers either directly from the relevant issuer or indirectly from the issuer through a central repository of information. This reporting proposal would apply to securities acquired after December 31, 2009. The Treasury estimated that this reporting proposal would yield revenue of $1.203 billion for the period of January 1, 2010, through September 30, 2013, and $7.480 for the period of January 1, 2010, through September 30, 2018. The Joint Tax Committee (JCT) indicated that this proposal "is based on findings that third-party reporting increases compliance." Currently, brokers did not report information to the IRS that allows the IRS to calculate gains or losses from securities sales. JTC found that this proposal would reduce compliance costs of some taxpayers, raise compliance costs of some brokers, and impose significant costs on the Internal Revenue Service. "Under present law taxpayers must determine the effects of certain actions undertaken by issuers of securities—spin-offs, recapitalization, mergers, and return of capital distributions, for example—on the taxpayers' basis in those securities." The proposal would relieve some taxpayers from making these calculations concerning basis because brokers would be required to provide this information to customers when securities are sold. Some brokers, particularly brokers with large portfolios, currently provide information about adjusted basis to customers. Other brokers provide partial information or no information concerning basis to their customers. Some brokers may incur additional expenses in meeting the proposal's reporting requirements. The IRS would incur significant costs from altering or creating new forms, processing data including matching data, and storing data. Because the proposal would only apply to publicly traded securities, if the cost of compliance is passed onto taxpayers, some taxpayers may shift part of their assets from publicly traded securities to other securities and assets. Some taxpayers may prefer to acquire assets not subject to the requirement that brokers must report basis information to the IRS. "The proposal provides few details about which taxpayers and securities would be subject to reporting requirements." The Senate Finance Committee drafted a proposal, which is almost the same as the proposal in the President's budget that brokers be required to report basis to the IRS and customers for publicly traded securities. One of the advantages of analyzing this draft proposal is the availability of extensive testimony and background documents provided by witnesses at the committee's hearing on the proposal. The Senate Finance Committee description of its draft proposal included the following excerpts: The proposal provides that in every case in which a broker is required under section 6045(a) to file with the IRS a return reporting a customer's gross proceeds with respect to any applicable security, that broker is required to include in the return the customer's adjusted basis in each applicable security and information necessary to determine the customer's holding period in that security.