Editor's note: Some funds mentioned in this article may now be closed to new investors.

Spending long, tedious hours over yearly income tax forms is nobody's idea of a picnic, but many people worry needlessly about issues that are relatively easy to keep under control.

In the eyes of the Internal Revenue Service, investors have a duty to keep sufficient records to prove how much they have paid for stocks, bonds, mutual funds and other items.

This information is essential when any asset is sold, because the sale must be reported as either a capital gain or a capital loss.

In a purchase and sale of an individual stock, the information is simple. If you purchase 100 shares at $28 and some time later sell those 100 shares at $38, you have a capital gain of $10 per share, or $1,000 (ignoring transaction costs). The essential information that the investor must keep is the original price paid for the stock.

With mutual funds, things are more complicated. Typical mutual fund investors have dividends and capital gains distributions re-invested in more shares. Many investors also buy additional fund shares regularly through automatic investment plans.

If you hold a fund for several years, it would be easy to have purchased shares at dozens of different prices. When it comes time to sell some of those shares, what is the cost of the shares you sold?

Once upon a time fund investors were on their own for figuring out their "cost basis" in whatever shares they sold. Now, mutual fund companies have to send shareholders a statement once a year showing the average cost of shares sold during the previous calendar year.

Still, this issue continues to challenge some investors.

Shirley in Hanover, New Hampshire wrote to vent about the problems she envisions if she recommends that her son invest in the Dodge & Cox Stock Fund (DODGX: news, chart, profile), a venerable no-load large-cap value fund with low expenses and an enviable track record.

She believes her son should plan to leave his money in this fund essentially for life.

"I have never seen anybody address what seems to me the overwhelming problem of tracking one's cost basis in a fund held over a lifetime and calculating the taxes that are owed when one inevitably needs to sell some shares," she said.

Shirley knows there are several acceptable ways to calculate the cost of mutual fund shares for tax purposes. One is the average cost of all shares that an investor has purchased, called "average cost basis."

Another is called FIFO (first-in, first-out), based on the assumption that the first shares you sell are the first ones you bought.

A third method is to specifically identify which shares are being sold; this method lets an investor pick and choose, giving some measure of control over the tax consequences of a sale.

But Shirley doesn't like any of those three methods.

"There is no assurance that a fund would calculate an investor's average cost basis over many decades," she wrote. "To use the FIFO rule for calculating taxes on the sale of shares would result in a costly tax bill."

And she dislikes the need to get written confirmation from the fund in order to identify the cost of specific shares.

"After several rounds of having to sell only some shares of the fund, I fear my son might be ready to pull his hair out and would probably end up overpaying on taxes. The idea of one fund for a lifetime seemed elegantly simple but I am about to rule it out for my son and recommend a managed stock portfolio - something I really hate to do. Do you think I am missing something or making a mountain out of a molehill?" she asked.

In a word, yes.

A managed stock portfolio wouldn't really change anything. Her son would still have to report gains or losses whenever he sold some shares, and he'd have to rely on either his own records or his manager for cost basis information.

I believe Shirley and her son can count on mutual fund companies to keep track of the cost basis. It's required -- to whatever extent the data exists.

And there's the rub: Data exists in computer files, which are regularly backed up and mostly secure. But conversions to new systems sometimes leave old data behind or garbled. Almost everybody who has migrated from one computer to another has experienced some version of this.

For that reason, it's smart for investors to keep their own records. And it's easy. Once a year, every mutual fund sends every shareholder an annual statement that includes the transactions from the prior year. At that time, the investor can toss out all the prior year's confirmation statements and accumulated slips for making additional deposits. Keep the annual statement for a given year, and all the information you need is there. This shouldn't take more than a few minutes a year for each fund you own.

After a future sale, if for some reason you don't or can't get a report of your average cost basis, you -- or an accountant, if you prefer -- can go through the annual statements and figure out your cost.

I think Shirley's concerns are magnified out of proportion for another reason. As a practical matter, the IRS rarely demands proof of cost basis for mutual fund transactions.

Unless the transactions are of truly monumental size or the taxpayer is being put through the wringer for some other reason, the IRS usually accepts the cost basis figures that taxpayers report.

In a worst-case situation, after a future sale, Shirley's son can buy an hour of an accountant's time to sort things out. If he is as successful an investor as she hopes, he'll easily be able to afford that expense.

And -- at least under today's laws -- he may be able to write off that expense on his taxes.