Frequent Trading Increases IRS Audit Risk?
Q.I have recently started doing more frequent trading of stocks, say 3 or 4 trades per week. This is not exactly day trading, and I certainly am not doing it with big bucks. But at the end of the year, that will be over 150 trades. My question: does such frequent trading by individual investors, even at the low dollar amateur level, significantly increase the chances of an audit by the IRS?
A.I would think that frequent trading would be a nightmare for the IRS- matching all those 1099-Bs against the tax forms. As a first aproximation, I'd guess an audit would check the reported short term gain/less against the annual change in the broker account. (This what mark-to-market professional trader status computes income. The average change in my brokerage accounts would have no meaning at all to the IRS without a transaction list or at the very least a cash flow summary. I transfer and otherwise adjust cash balances amongst accounts and in one portfolio even pay bills in one of its accounts; have also both removed and added gifts and other assets. We can't know for sure, but I've never seen any reports on this newsgroup of people being audited simply because they had a long Schedule D. I sure haven't.
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