How the IRS Verifies Cost Basis: 1099-B, Records, and CP2000 Notices

The IRS verifies cost basis by running your tax return through its Automated Underreporter program, which compares what you filed against the Form 1099-B your broker sent in for every stock sale.¹ For shares purchased after 2010, the broker reports both the sale proceeds and the adjusted basis, and the matching system flags any return where the reported gain doesn’t line up. For older shares, or anything the broker didn’t track, the burden of proving basis falls entirely on you, and the records you keep are what stand between a clean return and a notice proposing tax on the full sale price.

What Your Broker Reports and What They Don’t

Form 1099-B is the document the IRS uses to check your numbers.² What appears on it depends on when you acquired the security. The tax code splits investments into “covered” and “non-covered,” and only covered securities carry broker-reported basis to the IRS.

Regular corporate stock is covered if acquired after January 1, 2011. Mutual fund shares and dividend reinvestment plan shares became covered after January 1, 2012. Most bonds and options followed after January 1, 2014, with more complex debt instruments phased in through January 1, 2016. Digital assets acquired after January 1, 2023 count as covered, though basis reporting on the new Form 1099-DA doesn’t begin until 2026.³

For a covered security, the broker reports proceeds in Box 1d and adjusted basis in Box 1e, and marks whether the holding period is short-term or long-term.² Because the IRS has both figures, its matching program can instantly compare your reported gain to the broker’s numbers.

For a non-covered security, Box 1e can be blank and Box 5 will be checked to signal that basis wasn’t reported. This is where most notices originate. If you sell a non-covered security and skip your basis on Form 8949, the IRS effectively treats basis as zero and the full sale price looks like taxable gain. That single omission is the most common driver of inflated CP2000 bills.

Brokers also track wash sales inside the same account. Sell a stock at a loss and buy the same or a substantially identical security within 30 days on either side of that sale, and the loss is disallowed and added to the basis of the replacement shares.⁴ The 61-day window catches people with automatic reinvestments in particular. The broker reports the wash sale adjustment on the 1099-B, and the IRS expects your Form 8949 to show the same adjustment.

When the 1099-B Is Wrong

Broker-reported basis isn’t always right. Shares transferred in from another firm, corporate actions that predate basis tracking, and gifts with carryover basis are all situations where the number in Box 1e may be off or missing. You don’t ask for a corrected 1099-B. You fix it on Form 8949.

If basis was reported to the IRS but is wrong, enter the broker’s figure in column (e), use adjustment code “B” in column (f), and put the correction amount in column (g).⁵ If basis wasn’t reported (a non-covered security), enter the correct basis directly in column (e). This gives the IRS a paper trail that reconciles to the 1099-B while still reflecting the accurate number.

Doing this correctly on the original return is far easier than fighting a notice later. And there’s a quieter risk: if the 1099-B basis is wrong in your favor and you file using the broker’s number, the matching program won’t catch it because the figures agree. You’ve underpaid, and the mistake only surfaces in an actual audit.

Records That Prove Your Basis

Federal law requires every taxpayer to keep records sufficient to support the items on their return.⁶ For stock, that means holding onto the documents that establish what you paid.

Trade confirmations showing purchase date, share count, price, and any commissions or fees
Monthly or annual account statements showing holdings and transaction history
Dividend reinvestment records, since each reinvestment creates a separate lot with its own basis and holding period
Corporate action notices covering splits, mergers, spin-offs, and return-of-capital distributions that change your basis

How Long to Keep Them

The general limitations period is three years from when you filed the return that reports the sale.⁷ That’s the floor. The IRS gets six years to assess additional tax when a return omits more than 25% of gross income, and an overstated basis counts as an omission for this purpose.⁸ For property records specifically, the IRS says to keep them until the limitations period expires for the year of sale.⁹

Practical rule: keep basis records for as long as you own the investment, then at least six more years after filing the return that reports the sale.

The CP2000 Notice

When the matching program flags a discrepancy, the IRS sends a CP2000. It isn’t an audit. It’s a computer-generated proposal saying the numbers don’t match and here is what we think you owe.¹⁰ The proposed tax is often dramatic because the system assumed zero basis wherever the broker didn’t report one.

You have 30 days to respond, or 60 if you live outside the United States.¹⁰ Ignore it and the IRS assesses the amount and moves to collect. Three response paths:

Agree in full, sign the response form, and pay.
Disagree in full and submit a written explanation with documentation of your actual basis. Trade confirmations and account statements are the strongest evidence.
Partially agree, accepting the adjustments that are correct and disputing only the specific transactions where the IRS is wrong.

Responses can go through the IRS document upload tool, by fax, or by mail to the address on the notice.¹¹ If the notice also prompts you to correct unrelated items, file Form 1040-X with “CP2000” written at the top. If the IRS reviews your documents and still disagrees, you can request review by the Independent Office of Appeals before the case moves to a formal Notice of Deficiency.

Stock You Didn’t Buy on the Open Market

Shares acquired outside a normal purchase follow different basis rules, and these are common trouble spots during verification.

Inherited Shares

Your basis in inherited stock is generally the fair market value on the date the original owner died, not what they paid.¹² The documentation you need is a date-of-death valuation, which typically comes from a brokerage statement or a formal appraisal. If the estate had to file Form 706, the executor also files Form 8971 reporting the estate tax value of each asset to both the IRS and the beneficiaries, and your basis has to be consistent with that value.¹³ The IRS cross-checks the two, so inconsistencies surface.

Gifted Shares

Stock given to you generally carries over the donor’s original basis.¹⁴ If the donor paid $5,000 and the shares are worth $50,000 when handed to you, your basis is still $5,000. There’s a twist when the market value at the time of the gift is below the donor’s basis: if you later sell at a loss, your basis for measuring that loss is capped at the market value on the date of the gift. Proving basis for gifted stock means getting the donor’s purchase records, ideally at the time of the gift rather than years later.

Transfers in Divorce

Stock transferred between spouses, or to a former spouse as part of a divorce settlement, is tax-free at the moment of transfer, and the receiving spouse takes over the transferring spouse’s adjusted basis.¹⁵ The transfer has to happen within one year after the marriage ends or be clearly related to the divorce. For verification, the receiving spouse now needs the other spouse’s original purchase records. If those aren’t exchanged during the proceedings, establishing basis later can be very hard, because the IRS doesn’t have the information.

What Getting Basis Wrong Costs

A misreported basis means the wrong amount of capital gains tax on your return. Catch by the IRS means the additional tax plus interest running back to the original due date. The IRS can also add an accuracy-related penalty of 20% of the underpayment when the error results from negligence or a substantial understatement of income.¹⁶ For especially egregious valuation errors, the penalty doubles to 40%.

The penalty isn’t automatic. Taxpayers who show reasonable cause and good faith can get it waived, and documentation is what makes that argument. Trade confirmations backing a good-faith calculation put you in a very different position than someone who guessed or left the basis blank.

The limitations period also stretches. If overstated basis caused you to omit more than 25% of gross income, the IRS has six years to assess additional tax rather than the usual three.⁸ On a sizeable stock sale, a significant overstatement can cross that threshold easily.

If You’ve Lost the Records

If your original purchase documentation is gone, there are still practical ways to rebuild the trail before a sale forces the issue.

Contact your broker. Most firms retain transaction history going back ten years or more, including for non-covered securities. Start here.
Pull old tax returns. If you reported earlier sales from the same account, Schedule D or Form 8949 from those years may contain lot details you can work backward from.
Use historical pricing data. If you know the purchase date but not the price, publicly available historical stock price databases can establish what the shares traded for that day. Combine that with the share count from any surviving statement.
Request transfer statements. When stock moves between brokers, the receiving firm gets a transfer statement with basis information. Ask whether the current broker has it on file.
Track down corporate action records. For splits, mergers, or spin-offs, the company’s investor relations department or transfer agent may have documentation of how basis was allocated.

Doing nothing is the worst option. Without any documentation, the IRS treats the entire sale as gain. A partially reconstructed basis, supported by whatever you can gather, is far better than zero.

1
Internal Revenue Service. Internal Revenue Manual 4.1.27 – Document Matching, Analysis and Case Selection
2
Internal Revenue Service. Instructions for Form 1099-B (2026)
3
Office of the Law Revision Counsel. 26 US Code 6045 – Returns of Brokers
4
Internal Revenue Service. Income – Capital Gain or Loss Workout
5
Internal Revenue Service. 2025 Instructions for Form 8949
6
Office of the Law Revision Counsel. 26 US Code 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns
7
Internal Revenue Service. How Long Should I Keep Records
8
Office of the Law Revision Counsel. 26 US Code 6501 – Limitations on Assessment and Collection
9
Internal Revenue Service. Topic No. 305, Recordkeeping
10
Internal Revenue Service. Topic No. 652, Notice of Underreported Income – CP2000
11
Internal Revenue Service. Understanding Your CP2000 Series Notice
12
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
13
Internal Revenue Service. About Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent
14
Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
15
Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce
16
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments