How does IRS verify cost basis?

Editorial team InsuredAndMore.com Published on October 28, 2026

The IRS verifies cost basis primarily through automated third-party reporting (like Form 1099-B) and, during an audit, by requesting original purchase and transaction records.

📊 Automated Broker Reporting (Form 1099-B)

Covered securities: Brokerages automatically send stock, bond, and fund purchase data (cost basis) to both you and the Form 1099-B from brokerages.
Matching: The IRS matches your Form 8949 and Schedule D data against these automated reports.
Discrepancies: Mismatches trigger automated IRS notices (like a CP2000 notice) demanding extra tax or proof.

🔎 Audit and Record Verification

Self-reporting burden: You carry the legal responsibility to prove basis if an asset is "noncovered" or unlisted by a broker.
Primary documents: The IRS requests original closing statements, purchase receipts, or confirmation slips.
External & third-party data: If your records are missing, agents cross-reference county deeds, bank outflows, or lender registries.

🗓 Asset-Specific Verification Methods

Asset Type	Primary Verification Documents	Secondary / Third-Party Sources
Stocks & ETFs	Brokerage confirmation statements, Form 1099-B	Transfer agent records, historical stock price databases
Real Estate	Closing/settlement statements (HUD-1/CD), original deeds	County property tax records, recorder of deeds, canceled mortgage checks
Inherited Property	Estate appraisal, probate court filings, Stepped-up basis rules	Executor records, market valuation data at date of death

What happens if I don't know the cost basis of a stock?

If you do not know the cost basis of a stock when you sell it, the custodian or brokerage may report a cost basis of zero to the IRS, which means you could be taxed on the entire sale proceeds as profit.

What Happens

Higher Tax Bill: If no basis is reported or known, the IRS may treat the entire amount you received from the sale as a capital gain.
Noncovered Securities: This is common for "noncovered securities"—stocks purchased before 2011, when brokerages were not legally required to track and report cost basis.
Tax-Advantaged Accounts: If the stock is held inside an IRA or 401(k), a missing cost basis does not matter because trades inside these accounts are not subject to capital gains taxes.

How to Fix It

Check Your Brokerage: Contact your broker or check old online statements to see if transaction records exist.
Reconstruct the History: Look up historical stock prices using the estimated year of purchase. Tax software and IRS guidelines suggest using a conservative "good faith estimate"—such as the lowest trading price of the stock during that purchase year—and saving your printed proof of the data.
Adjust for Splits and Dividends: Remember to account for any stock splits, mergers, or dividend reinvestment plans (DRIPs) that change your share count and overall investment value.

How do I know if the cost basis was reported to the IRS?

You can tell if your cost basis was reported to the IRS by checking your tax statement from your broker, such as Form 1099-B or Form 1099-DA.

How to Check Your Tax Form

Form 1099-B: Look at Box 3 (Check if basis reported to IRS). If this box is checked, the broker reported the cost basis to the IRS. If it is empty or unchecked, it was not reported.
Form 1099-DA (for digital assets): Look at Box 2 (Check if basis reported to IRS). A checkmark means it was reported.
Covered vs. Noncovered Securities: Brokers label assets as "covered" or "noncovered". Covered securities have their basis reported to the IRS by law. Noncovered securities (often older purchases or transferred assets) do not.

What to Do Next

If reported: You will match your data to the appropriate section of Form 8949 (like Box A or D).
If not reported: You must calculate and enter the correct cost basis yourself using your own purchase records. Do not assume a zero balance.

What happens if cost basis is not reported to the IRS?

If your broker does not report the cost basis of an investment to the IRS on Form 1099-B, you are still legally required to calculate, report, and pay taxes on any capital gains yourself.

Why Cost Basis Might Not Be Reported

Noncovered Securities: Assets purchased before IRS tracking rules took effect (such as stocks bought before 2011) are considered "noncovered".
Asset Type: Certain assets like specific RSUs, options, or complex partnerships do not require automated broker reporting.
Transfers: Data can sometimes be lost when moving assets between different brokerage firms.

What Happens and What You Must Do

The IRS Only Sees Proceeds: The broker reports the total amount of money you received from the sale (the proceeds), but leaves the cost basis blank or marks it as noncovered.
Risk of Overpaying: If you fail to report the basis on your tax return (Form 8949 and Schedule D), you might treat the basis as zero. This makes it look like 100% of the sale proceeds are profit, leading you to overpay your taxes.
Reconstructing the Basis: You must find the original purchase price using old confirmation statements, historical records, or employer records.
Audits: If you estimate a missing basis incorrectly or leave it out, you risk an IRS inquiry or adjustment. Keep all records showing how you calculated your figures.

What raises red flags for the IRS?

Unreported income, mismatched tax forms, and unusually high deductions relative to income are the primary triggers that raise red flags for the IRS.

The IRS uses automated scoring systems (like the Discriminant Function or DIF) to compare tax returns against statistical norms.

Common Audit Triggers

Income Mismatches: Forgetting to report income from W-2s, 1099s, or digital assets/cryptocurrency that third parties already reported to the IRS.
Disproportionate Deductions: Claiming business expenses, travel costs, or charitable contributions that are unusually high compared to your reported income level.
Mixing Business and Personal Expenses: Writing off 100% vehicle use or claiming personal travel and meals as business deductions without proof.
High Income Levels: Filing returns with very high adjusted gross income (AGI), as higher brackets face statistically higher audit rates.
Foreign Bank Accounts: Failing to properly report foreign accounts or missing FBAR (Foreign Bank and Financial Accounts) requirements for accounts exceeding $10,000.
Math and Filing Errors: Making manual calculation mistakes, typos, or using generic rounded numbers instead of exact figures.

How does the IRS determine the value of a property?

9 related questions found

How does the IRS verify cost basis?

The IRS verifies cost basis through automated third-party reporting (like Form 1099-B for securities) and by requesting original purchase documentation if you are selected for an audit.

Automated Broker Reporting

Form 1099-B: For "covered" securities (stocks and bonds bought after specific IRS mandate dates), brokerage firms automatically report both the sale proceeds and the cost basis directly to the IRS.
Matching: The IRS matching system compares the figures on your tax return (Form 8949) with the data sent by your financial institution.

Audit and Document Verification

If the IRS questions a transaction or conducts an audit, they require you to prove the basis using primary or secondary records:

Purchase Records: Brokerage statements, trade confirmations, commission receipts, and settlement sheets.
Real Estate Closing Statements: Settlement statements (HUD-1 or closing disclosure), original deeds, and records of capital improvements.
Third-Party Confirmation: If your records are missing, the IRS may subpoena or request data from banks, lenders, county deed registries, or previous owners.

What if 1099-B does not show cost basis?

If your Form 1099-B does not show a cost basis, you must find and report the correct amount yourself on your tax return rather than leaving it blank.

Why It Is Missing

Noncovered Securities: The asset was likely purchased before mandatory broker tracking rules took effect (stocks bought before 2011, mutual funds before 2012, and options/securities before 2014).
Transfers: The asset was transferred from another broker or crypto exchange, meaning your current broker does not know what you originally paid.

What Happens If You Leave It Blank

Taxed on 100%: If you do not enter a cost basis and file without it, the IRS may treat your cost basis as zero.
Overpayment: You will pay income tax on the entire sale proceeds instead of just your actual net profit.

How to Fix It

Find your records: Look for old trade confirmations, purchase receipts, account statements, or historical stock price data. You can also ask your original brokerage or employer stock plan administrator for historical purchase data.
Estimate if necessary: If exact records are gone, you can reasonably estimate the historical cost basis.
Report on your tax software (like TurboTax): Enter the sales proceeds exactly as shown on the 1099-B, but select that the cost basis is missing or needs an adjustment, and input your calculated amount.
File Form 8949 and Schedule D: Report the transaction with the correct basis, and keep your supporting documents and notes in your tax records for at least 7 years.

How do you prove cost basis?

To prove cost basis, you must provide original financial records or purchase documents that show how much you paid for an asset plus any fees.

For Stocks and Securities

Brokerage statements: Use trade confirmations, monthly statements, or year-end summaries from your Charles Schwab or other broker accounts.
Form 1099-B: Check tax forms provided by your broker when you sell an asset.
Dividend reinvestment records: Keep track of shares bought automatically through reinvested dividends, which add to your total basis.

For Real Estate

Closing statements: Save the HUD-1 settlement statement or closing disclosure from when you bought the property.
Purchase contracts: Keep signed bills of sale and original deeds.
Improvement receipts: Save invoices, receipts, and contractor agreements for permanent capital improvements (like a new roof or room addition) that increase your adjusted basis.

For Inherited or Gifted Assets

Appraisals: Get a professional appraisal to establish the fair market value at the date of the previous owner's death for inherited property (stepped-up basis).
Gift records: Obtain records of the donor's original adjusted basis if you received the asset as a gift.

What happens if the cost basis is missing on 1099-B?

If the cost basis is missing on your Form 1099-B, you must find and report the correct amount yourself on your tax return, or you risk paying taxes on the entire sale price.

Why It Happens

Noncovered Securities: You bought the asset (usually stock) before 2011, meaning brokers were not legally required to track the basis.
Transfers: You moved shares or crypto from one broker or wallet to another, and the data did not transfer with it.
Inheritance or Gifts: The asset was acquired through an estate or gift rather than a direct cash purchase.

What Happens If You Do Nothing

Double Taxation Risk: The IRS only sees the total proceeds (sale price) sent by the broker. If you leave the cost basis blank or report $0, the IRS may treat the entire amount as profit, meaning you pay tax on the gross sale instead of your actual net gain.

How to Fix It

Check Old Records: Look for old confirmation slips, account statements, or trade history from your broker.
Research Historical Prices: If you cannot find the exact purchase price, use historical stock data or corporate action records (like stock splits or mergers) to calculate a reliable estimate.
Report on Form 8949: Enter the transaction on Form 8949 and fill in the correct cost basis yourself, making sure to use the proper adjustment code if required by tax software.

What happens when cost basis is wrong?

When your cost basis is wrong, you risk overpaying your taxes or underreporting capital gains to the IRS.

Tax Consequences

Overpaying taxes: If your cost basis is listed as too low (or defaults to $0, which is common with missing crypto or transferred assets), the IRS thinks your profit is much higher than it actually is. You end up paying taxes on money that was just your original investment.
Underpaying taxes (and penalties): If your cost basis is artificially inflated, your calculated capital gain looks smaller than it should. This leads to underreported taxes, which can trigger an IRS audit, back taxes, and penalties.

Reporting Issues

Mismatched forms: Brokerages report sales on forms like the 1099-B or 1099-DA. If you file taxes using numbers that conflict with what the IRS received from your broker without making a proper adjustment, it can flag your return for review.

How to Fix It

Adjust on your tax software: Most tax filing tools let you check a box to adjust your total cost basis or use specific adjustment codes (like Code B for incorrect cost basis on a form).
Amend past returns: If an error affected a previous year's filing, you can correct it by filing an amended return using Form 1040-X.
Gather records: Reconstruct your true basis using old trade confirmations, historical prices, or corporate action records.