The Internal Revenue Service has made a significant change to the method by which capital gains and losses will be reported of 2011 US Federal individual income tax returns and has also introduced new Form 8938 which will be used to report Specific Foreign Financial Assets that have an aggregate value over $50,000.Schedule D Capital Gains and LossesIn 2011 you will now have to use two forms to report capital gains and losses, Form 8949 and Schedule D. New rules have gone into effect for stocks and securities purchased after 2010 and sold in 2011 and later years. In prior years brokers reported stock sales on Form 1099-B and some brokers also reported on a ancillary schedule such information as date purchased, date sold, proceeds and cost basis. Commencing in 2011 brokers must now report on Form 1099-B the basis of stocks purchased after 2010 along with the related proceeds.Form 8949 will now report stock sales under three different categories, 1) sales where basis is reported by the broker, 2) sales where the tax basis is not reported by the broker, and 3) sales where no Form 1099-B was received reporting the gross proceeds. As in the past, sales must further be reported by short term or long term. The information on Form 8949 will then flow to Schedule D. Individuals who in prior years kept their own excel spreadsheet to report capital gains and losses will have to re-format their spreadsheets to conform to IRS guidelines. The purpose of these changes is to allow the IRS to cross reference the information they receive on Form 1099-B with Form 8949. If the amounts do not agree the taxpayer will receive a letter from the IRS asking for reconciliation.Specific Foreign Financial AssetIn addition to the complexity added to 2011 tax returns by capital gains and losses the Internal Revenue Service has introduced Form 8938 to the Forms required to be filed with your 2011 tax return by individuals with a “specific foreign financial asset” for any year the aggregate value of all such assets is greater than $50,000. A “specific foreign financial asset” is defined as: 1) any financial account maintained by a foreign financial institution, 2) any stock or security issued by a person other than a US person, 3) any financial instrument or contract held for investment that has as issuer or counter-party which is other than a US person, 4) any interest in a foreign entity such as a corporation, partnership, trust, etc, 5) foreign rental properties but not vacant land or a foreign personal residence. The foreign currency in which the asset is denominated must be provided as well as the foreign currency exchange rate used and the source of the exchange rate must be specified.If the foreign asset is a stock or an interest in a foreign entity you must disclose 1) the name of the foreign entity, 2) whether the entity is a partnership, corporation, trust or estate, 3) whether the entity is a Passive Foreign Investment Company, and 4) the address of the foreign entity. A detailed accounting of taxable items attributable to each “specific foreign financial asset” such as interest, dividends, royalties, capital gains or losses, other income, deductions and credits must be separately disclosed. Penalties for failure to file this form will be significant. The filing of Form 8938 with the 2011 tax return does not relieve the individual of having to separately file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.E-FilingAll entities that prepare more than eleven 2011 US Federal individual income tax returns must do so electronically. While the preparer must file the tax return electronically, a taxpayer can opt out of electronic filing and still file a paper tax return. To do so they will be required to provide the preparer with a signed statement opting out of electronic filing and the preparer must then complete and attach Form 8948 to the tax return to be manually filed.Tax PreparersThe number of individuals who prepare tax returns who are not lawyers, CPA’s or enrolled agents is expected to significantly decrease in 2012. Individuals in this category will be required to pass a competency test and be fingerprinted prior to being allowed to prepare a tax return. In addition they will be required to pay a fee to apply to take the test, a fee to apply to be fingerprinted, a fee when they take the test, a fee when they are fingerprinted and lastly a fee to obtain a preparer tax identification number.Tanning SalonsThe first industry to have to pay an excise tax under President Obama’s health care legislation was tanning salons that were immediately subject to a 10 percent excise tax. Now, the expected revenue from the excise tax is lower than expected so the IRS is going to subject tanning salons to additional examinations. There is likely a reason why this specific industry has been seemingly singled out, but it clearly eludes this columnist.State Tax RefundsIf you continue to be subject to your home state income tax you might want to monitor your tax payments to be sure that you will not be getting a large refund. It is not a secret that States are hurting for tax revenues. When faced with giving taxpayers refunds, we have seen more States try to delay this payment as long as legally possible. Taxpayers with an address outside the State seem to be favourite targets of this tactic. We recently had a problem with both New York and Massachusetts with respect to refunds. Both States insisted that their tax law allowed them to see a copy of the taxpayer’s social security number, last pay stub and a letter from the employer verifying that the information on the Form W-2 is correct prior to their issuing the refund.2011 Estimated Tax PaymentThe 2011 fourth quarter estimated tax payment is due on January 15, 2012. December is a good time to review your projection of income and tax for the 2011 tax year. If you are underpaid and below the “safe harbour” provision you should make an additional payment with your fourth quarter estimated tax voucher. And if you are overpaid, you could scale back the 4th quarter estimated tax payment. With respect to estimated state income tax, if you are not subject to alternative minimum tax you might consider making the state payment prior to December 31, 2011 so that you can obtain a deduction for this payment on your 2011 US federal tax return.Congressional LogicCongress has proposed reducing the Internal Revenue Service’s budget by $500 million despite the fact that the IRS can prove that for each $1 devoted to compliance audits the IRS brings in $8. Seemingly a Congress person will be able to brag about a $500 million expense cut to their constituents while ignoring the fact that this “saving” cost the country $4 billion.Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo[AT]expatriatetaxservices.com