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Checking Form 1040 for Telltale
Signs of Investment-Related Abuses
All too often, investors today make the mistake of relying entirely on their stockbroker or investment advisor for investment-related advice, a situation which frequently results in investment-related abuses.
While most brokers provide their clients with competent advice, an alarming percentage, however, are placing their own personal interests ahead of their client’s. Investors, consequently, especially those who lack investment sophistication or perhaps the skills to interpret stockbroker account statements, often remain unaware of the money losses they may incur through account management abuse until their tax returns are filed. Even then, absent relevant questioning by their tax preparers, many investors remain totally unaware of the abuses their investment advisor may have either intentionally or unintentionally committed.
There’s no question that vigilant accountants and tax preparers who remain alert for investment-related abuses provide a value-added service for their clients. Our firm, Bachner & Herskovits, has worked closely with many accountants and tax preparers over the years and we have successfully recouped substantial amounts for clients who were victimized by investment-related abuses.
Telltale Signs of Abuse
Form 1040 provides a number of telltale signs of investment-related abuses which your firm should lookout for during this and every tax season, some of which we have listed below:
Form 1040 – Schedule A
Brokerage firms charge interest fees on their margin loans to investors, which are usually itemized as a deduction on Schedule A and filed with an accompanying Form 4952. However, whether a particular investor actually authorized the margin loan, or was even made aware of the inherent cost/risk of margin loans by his or her stockbroker, is important matter that all accountants and tax preparers should discuss with their clients who report margin account interest fees on their tax return forms.
Investing on margin, as you realize, is not only aggressive and speculative, but it can also subject the investor to a margin call or account liquidation. It’s only suitable for those investors who fully understand the risks of margin account trading and for those financially secure investors who have the resources to protect themselves from the inherent risks of investing with borrowed money. So if you see an investment interest fee deduction on any of your clients’ returns, especially if the taxpayer is elderly or has limited financial means, it is always prudent to gather more information about the deduction from your clients to protect them from possible margin account loan abuses.
Form 1040 – Schedule D
Substantial short-term capital gains or even losses can often signify “churning,” whereby a broker purposely over-trades an account in order to generate commissions. Moreover, a wrongdoing of a different nature can also be spotted when losses result from a particular investment that was disproportionately large relative to the investor’s liquid assets. Any signs of either of these two abuse examples warrant further inquiry to protect your clients from unscrupulous or unethical stockbrokers.
Give Us A Call Today
Bachner & Herskovits welcomes referrals from the accounting community, and we always provide our initial consultation at no charge. So please feel free to contact us anytime with any questions you or your clients may have in regard to our investor protection legal services or our other legal services. To contact us, simply call our New York office at 1-212-344-7778 or just spend a moment completing our convenient website inquiry form located at www.bhlawfirm.com. Thank you!
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