Almost all securities sales conclude with the seller either making or losing money on the transaction. Determining that profit or loss means the investor – or their tax professional – will need to know their basis in the assets, usually the amount initially invested in the security.

Unfortunately, many investors do a poor job of tracking their basis in securities investments and leave themselves and their tax preparers scrambling to find the necessary information at the same time they are preparing the investor’s taxes. That makes the months following the annual income tax filing deadline a great time for tax preparers to remind their clients to collect the information necessary to track their basis in investments going forward. This will both assist with future tax reporting and allow gains and losses to be more easily tracked.

Required basis reporting

Since 2012, brokerage firms have been required to track the adjusted basis of their client’s publicly traded securities. However, there are situations where those brokerage statements will not properly reflect the taxpayer’s basis in an investment. For example, if the taxpayer moved between brokers or has chosen to invest in non-publicly traded securities, their brokers’ statements may not provide a correct accounting of their basis.

Calculating cost basis

The starting point for calculating an investor’s cost basis in a security for tax purposes is usually the asset’s original cost. While this is a straightforward concept, certain events could change their cost basis. For example, a two-for-one stock split will reduce the investor’s basis by half. The fees associated with selling the security may also be included in the basis. Finally, automatically reinvested dividends can increase a taxpayer’s basis in securities.

A common issue faced by investors when calculating the gain or loss on the sale of an investment is when the sale involves securities that were purchased at different times for different amounts. In these situations, there are three primary methods for calculating the basis for the shares sold:

1. First-in-first-out (FIFO) method. This is usually the default method for calculating the basis of securities sold because it is usually the easiest. Under the FIFO method, it is assumed that the oldest securities are sold first, and it is assumed all of those shares are sold before the basis of more recently purchased securities is used.

2. Average cost basis method. Using this method allows the taxpayer to use the average purchase price for all of the securities they hold at the time of the sale to determine their basis in the securities.

3. Specific shares method. This is often the most complicated method of determining the basis of securities purchased in multiple transactions. It requires the taxpayer to provide the broker with instructions on which specific shares to be sold and maintaining detailed records of those sales. However, the specific shares method gives the seller more control over how their basis is calculated.

While it can be time-consuming for a taxpayer to track their basis in their securities investment, those records will be necessary if the IRS questions their basis calculations. If neither the taxpayer nor the IRS can come up with a satisfactory cost basis for securities that have been sold, the agency will assume the basis is zero and the entire amount received will be treated as taxable gains. This also means that it will be impossible to claim a loss on a sale because the taxpayer will have no basis.

For more information on calculating basis and capital gains and losses for securities and other capital assets, check out our introduction to Schedule D (Form 1040), Capital Gains and Losses, self-study. The self-study is free to NATP’s premium members.

As a tax preparer, you might wonder, can I represent my client in an IRS audit? Or, do I need to be an enrolled agent (EA) to negotiate with the IRS on my client’s behalf?

The short answer is that your representation rights may be limited without having an EA designation.

EAs possess unlimited rights to represent any taxpayer before the IRS, whereas noncredentialled tax preparers face more restrictions.

Let’s explore why client representation matters and how becoming an EA expands your services.

Who can represent clients before the IRS?

Not all tax professionals have the same authority.

• PTIN holders (no AFSP or credentials): Can only prepare returns – no representation rights for returns prepared after Dec. 31, 2015.
• AFSP participants: Can represent clients only for returns they prepared and signed, and only before revenue agents, customer service reps and similar IRS employees, including the Taxpayer Advocate Service.
• CPAs and attorneys: State-licensed professionals with unlimited rights, but may not have expertise in taxation or tax disputes.
• Enrolled agents (EAs): Federally enrolled with unlimited rights to represent any taxpayer before the IRS.

Unlike CPAs and attorneys, who may not specialize in taxes, all EAs specialize in taxation. They are the only professionals required to prove competence in taxation, representation and ethics before earning unlimited IRS representation rights.

Where an EA’s expertise is needed

1. IRS audits

EAs can assist in audit and letter responses, addressing all issues the IRS has raised, regardless of whether the EA prepared the examined returns.

2. Collections and payment plans

Clients with tax debt face liens, levies or wage garnishments. EAs can negotiate installment agreements, penalty abatements and settlements.

3. Appeals and IRS disputes

If the IRS makes an unfair ruling, an EA can file an appeal and advocate for their client. While generally only attorneys argue in Tax Court, EAs can handle most pre-court negotiations.

How an EA helps taxpayers

Your client, Sarah, receives an IRS audit letter. If you’re a PTIN holder without AFSP credentials, the help you provide would be very limited.

Sarah would either be alone or need to find other assistance.

As an EA, you would be able to:

• Communicate directly with the IRS on Sarah’s behalf
• Challenge any incorrect audit findings
• Negotiate any potential penalties

Instead of facing the IRS alone, Sarah now has a pro defending her.

If you’re not an EA, you can only go so far for your clients. When the stakes are high – like audits, appeals or collections – the limitation could cost your client… and you.

Why becoming an EA is a good idea

• Defend clients in serious IRS matters
• Expand beyond tax prep into representation and resolution
• Increase your income
• Represent clients in all 50 states

EAs have advantages and privileges with the IRS that unenrolled tax preparers don’t.

With unlimited representation rights, EAs can fully advocate, negotiate and defend any client.

Want to grow your skills and your tax business?

Ready to take your tax career to the next level? We’re building a free library of guides, blogs and tools to help you become an enrolled agent. Drop your email below, and we’ll send new resources as they’re released.

It happens more often than you’d think — a college student or young adult files their tax return before their parents, checking the wrong box and claiming themselves as a dependent. When their parents later e-file, their return is rejected, claimed credits are denied, and frustration sets in. Fortunately, the IRS rolled out new tools for 2025 to help resolve these mix-ups more efficiently, saving time for tax preparers and their clients in the thick of tax season.

With filing day just a week away, there are a few things to consider if you or your client find themselves in this situation.

What happens when a dependent claims themselves on a tax return?

Many students and young adults don’t understand when they’re considered a dependent for tax purposes. Sure, they might be 18, a college freshman and “technically” not dependent on their parents. However, if they don’t meet the IRS’s requirements of being a dependent for tax purposes, or their parents have a different view of their dependency status, checking the box indicating they are NOT a dependent can create headaches for everyone

Often, the problem is the result of a dependent wanting their refund quickly and not checking in with their parents or guardian. This can cause:

1. Duplicate claims: The IRS only allows one taxpayer to claim a dependent. If a dependent files and claims themselves, the return from the primary taxpayer (usually the parent or guardian) is rejected when e-filing.

2. Delayed refunds: If a parent tries to claim tax benefits such as the child tax credit (CTC) or the earned income tax credit (EITC) after the dependent has already claimed themselves, the parent’s return is flagged and potentially delayed. If the dependent goes to college, the parent cannot claim education credits like the American opportunity tax credit (AOTC) either.

Dependent claim changes for the 2025 filing season

Starting with the 2025 filing season (2024 tax returns), the IRS is making it easier to resolve these situations by allowing the second taxpayer (usually the parent or guardian) to e-file their return – even if their dependent has already been claimed. The parents must meet a few requirements to do so.

1. Create an IP PIN: The primary taxpayer must include a valid Identity Protection Personal Identification Number (IP PIN) when filing. This helps the IRS verify the taxpayer’s identity.

2. Re-file electronically: Parents then use the IP PIN to refile their return electronically. If a dependent accidentally claimed themselves in prior years, the parent or guardian had to file a paper return amending the dependent status. This process led to extended processing times and delayed refunds.

Why do I need an IP PIN?

An IP PIN is a unique six-digit number issued by the IRS to prevent fraudulent filings and identity theft. Starting in 2025, an IP PIN will be mandatory if a dependent is accidentally claimed, allowing the second taxpayer to submit their return electronically and avoid refund delays. Taxpayers can request an IP PIN online through the IRS IP PIN tool or by completing Form 15227, Application for an Identity Protection Personal Identification Number (IP PIN). Once enrolled, the IRS issues the taxpayers a new IP PIN annually and they should include it with their return each year.

What to do if a dependent claims themselves

Here’s an example to demonstrate the process. Let’s say Lucy’s 21-year-old daughter Madison claims herself on her tax return to get a refund of withholding. Madison made $3,000 working part-time last year. Lucy provided more than 50% of her daughter’s support since Madison goes to college, works part-time and lives at home. Madison got her refund, but when Lucy tried to file her return claiming Madison as a dependent, the return was rejected.

Here are the steps a tax pro will take to rectify the situation.

1. Confirm the error: Review the dependent’s return to verify they mistakenly claimed themselves.

2. Amend the dependent’s return: The dependent may need to file Form 1040-X to correct the error and indicate that they are being claimed as a dependent.

3. File the parent/guardian’s return: Include an IP PIN when e-filing to prevent rejection and process the return smoothly.

4. Review credit eligibility: Claim any applicable credits, such as the CTC, EITC or AOTC, if eligible.

Navigating dependent-related filing issues can confuse taxpayers and frustrate those relying on important tax credits. If you are a tax professional, staying up to date on the IRS’s evolving e-file options – like the new IP PIN requirement – allows you to better guide clients through the process of resolving common filing errors with confidence and clarity.

NATP members are committed to providing accurate, timely advice in even the trickiest of tax situations. As the IRS modernizes filing options, having a trusted tax expert on your side makes all the difference. For more updates like this, subscribe to our blog and get notified when a new post is published!