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tax surprise
Old 02-23-2012, 07:28 PM   #1
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tax surprise

I've got an interesting dilema here. In 2010 I exchanged some mutual funds in taxable accounts:

500 index fund -> intl stock = $24k
small cap index fund -> intl stock = $21k

So today I received a letter from the IRS saying my income doesn't match what was reported, it was $45k higher so I ower $16k in taxes and penalties. Ouchie eh.

I've got to go dig up my old returns, but I did find the 1099B that shows those proceeds, but I've also got the average cost summary showing total gains (which I reported) of only about $2k.

Am I crazy in thinking that only the gains are what I pay taxes on here?

Thanks.
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Old 02-23-2012, 08:17 PM   #2
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Quote:
Originally Posted by tiuxiu View Post
I've got an interesting dilema here. In 2010 I exchanged some mutual funds in taxable accounts:

500 index fund -> intl stock = $24k
small cap index fund -> intl stock = $21k

So today I received a letter from the IRS saying my income doesn't match what was reported, it was $45k higher so I ower $16k in taxes and penalties. Ouchie eh.

I've got to go dig up my old returns, but I did find the 1099B that shows those proceeds, but I've also got the average cost summary showing total gains (which I reported) of only about $2k.

Am I crazy in thinking that only the gains are what I pay taxes on here?

Thanks.
Sounds like your thinking is correct.
You did 2 sales for which you must account for gains/losses. You said this was a taxable account. You use the term exchange which I take to mean you sold two funds and then bought two others (which should not even be relevant.)
Something must have gotten reported wrong.
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Old 02-23-2012, 08:18 PM   #3
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Get all your ducks (docs) in a row. Verify that you filled out the Sched D correctly. Recall there are sales amount and cost basis, which leads to gain/(loss). Perhaps you left out one or the other number, and that threw them off?

If all is correct, practice what you will say. Call them, and make them do the work. Play it close to your vest. Make them give you info to prove you are wrong, don't offer anything other than every scrap that proves you did it right.

For example. - 'I have $1793 on line such-and such, so that is my Sched D income'. If they have a different number, make them work backwards to find the delta with your numbers and theirs. 'Why is your number different? Let's go back a line.'

Did you use TurboTax? I'm not sure the Geithner defense works for us regular folk, you will probably need a real defense.

I had a letter like that a few years back. It basically came down to they had a zero on a line where I had an entry. Can't imagine how that happened, as I mailed copies, and I kept pdf originals of the tax forms (Turbo tax or TaxAct, don't recall which). Maybe their scanner glitched? Anyhow, I got the impression that the person on the other line new zilch about taxes, they just went through a script. Bottom line, I faxed (!) them a copy of the page with the numbers they didn't have, and a while later I got a letter of correction. A pain, but no big deal.

I'm guessing they took the sales amount as total gain. Maybe you put (or they have) a zero cost basis?

-ERD50
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Old 02-23-2012, 08:21 PM   #4
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A few years ago, I received a similar notice. Apparently the basis was not reported to the IRS correctly (or not reported at all). All I had to do was make copies of the Ave Cost Summary document and send it back to them with some form they had included. I also included a cover letter telling them I believed they were mistaken, etc, and to let me know if I needed to do anything else.

Never heard from them again.
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Old 02-23-2012, 08:36 PM   #5
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Quote:
Originally Posted by tiuxiu View Post
I've got an interesting dilema here. In 2010 I exchanged some mutual funds in taxable accounts:

500 index fund -> intl stock = $24k
small cap index fund -> intl stock = $21k

So today I received a letter from the IRS saying my income doesn't match what was reported, it was $45k higher so I ower $16k in taxes and penalties. Ouchie eh.

I've got to go dig up my old returns, but I did find the 1099B that shows those proceeds, but I've also got the average cost summary showing total gains (which I reported) of only about $2k.

Am I crazy in thinking that only the gains are what I pay taxes on here?

Thanks.
If you forget to report a sale the IRS will assume the sales amount has zero cost and apply the tax rate to the total. What you need to do is review your return. If you forgot the fund sales, which seems likely, you will need to pay the tax plus interest and penalty. You can ask them to waive the penalty if you have a reasonable excuse, and they are more likely to do so if you are cooperative.
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Old 02-23-2012, 09:03 PM   #6
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Originally Posted by KM View Post
A few years ago, I received a similar notice. Apparently the basis was not reported to the IRS correctly (or not reported at all). All I had to do was make copies of the Ave Cost Summary document and send it back to them with some form they had included. I also included a cover letter telling them I believed they were mistaken, etc, and to let me know if I needed to do anything else.

Never heard from them again.
Until tax year 2012 I've never seen tax basis reported to the IRS. Though if you download your tax info from the brokerage it may be available to you, and filled in automatically in Turbo Tax or whatever.
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Old 02-23-2012, 09:11 PM   #7
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Thanks for kind replies.

Yes they specifically said I didn't enter the gains sales for 1099B, which I guess is possible but I'm fairly robotic on this stuff I run turbotax online and as each question comes up I look thru my docs and enter the values. I found the 1099B immediately that I saved in the folder from that tax year and it has the 'em so I can't imagine that I wouldn't have entered them. Unfortunately I don't have a printed copy of the returns (likely when finished filing online I put it off forever) but maybe there is a way to retrieve them from turbotax.

I think I'll make copies of the 1099B and the average cost summary and return that with their forms.

Thanks again all.
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Old 02-23-2012, 09:37 PM   #8
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Originally Posted by ERD50 View Post
Get all your ducks (docs) in a row. Verify that you filled out the Sched D correctly. Recall there are sales amount and cost basis, which leads to gain/(loss). Perhaps you left out one or the other number, and that threw them off?

If all is correct, practice what you will say. Call them, and make them do the work. Play it close to your vest. Make them give you info to prove you are wrong, don't offer anything other than every scrap that proves you did it right.

For example. - 'I have $1793 on line such-and such, so that is my Sched D income'. If they have a different number, make them work backwards to find the delta with your numbers and theirs. 'Why is your number different? Let's go back a line.'

Did you use TurboTax? I'm not sure the Geithner defense works for us regular folk, you will probably need a real defense.

I had a letter like that a few years back. It basically came down to they had a zero on a line where I had an entry. Can't imagine how that happened, as I mailed copies, and I kept pdf originals of the tax forms (Turbo tax or TaxAct, don't recall which). Maybe their scanner glitched? Anyhow, I got the impression that the person on the other line new zilch about taxes, they just went through a script. Bottom line, I faxed (!) them a copy of the page with the numbers they didn't have, and a while later I got a letter of correction. A pain, but no big deal.

I'm guessing they took the sales amount as total gain. Maybe you put (or they have) a zero cost basis?

-ERD50

Sorry ERD, but this does not work... you are not being audited so you will not get in front of a live person... this is all computer...

The IRS has made their ruling, it is now up to the OP to prove THEM wrong..

To OP:

More than likely you just put down the gain amount from the cost basis sheet and did not give all the details. This is not the correct way to do it. You put it down just like any stock sale, with sales price and basis with the gain showing.

If you actually did pay the tax on the gain, I would just fill out the schedule D correctly and send them a 1040X showing zero tax due. If you failed to even put the gain on the return, again do a 1040X but figure out how much more tax you owe. I would not pay penalty and interest at this time, but put in a letter that stated you forgot or whatever and would like them waived. They will not waive interest, but might waive penalty...
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Old 02-24-2012, 05:55 AM   #9
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Thanks for kind replies.

Yes they specifically said I didn't enter the gains sales for 1099B, which I guess is possible but I'm fairly robotic on this stuff I run turbotax online and as each question comes up I look thru my docs and enter the values. I found the 1099B immediately that I saved in the folder from that tax year and it has the 'em so I can't imagine that I wouldn't have entered them. Unfortunately I don't have a printed copy of the returns (likely when finished filing online I put it off forever) but maybe there is a way to retrieve them from turbotax.

I think I'll make copies of the 1099B and the average cost summary and return that with their forms.

Thanks again all.
yes contact turbo tax customer support for their online product. Your return is still on their server, you just may have to pay for them to retrieve it or go thru verification process for you to get it.
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Old 02-24-2012, 07:59 AM   #10
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The G7 at the IRS is trained not ot think ... just shoot. And go BIG.

I assume it's an inquiry - not an audit. A letter and supporting documentation should suffice (been there, done that).
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Old 02-24-2012, 08:23 AM   #11
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Until tax year 2012 I've never seen tax basis reported to the IRS. Though if you download your tax info from the brokerage it may be available to you, and filled in automatically in Turbo Tax or whatever.
I think TurboTax automatic downloads are great but not perfect. All my dividend info came through, but I had two trades/exchanges this year, and cost basis did not come through on either one. For a moment, TT said I owed the IRS $38K, once I entered all the cost basis info, taxes owed dropped to $2.4K. No idea why they didn't come through since all the basis info was shown in my Vanguard account under realized gains/losses. Sounds like what happened to the OP, missing or erroneous cost basis.

I've only had one discrepancy with the IRS in my life. They pointed it out (with a mildly accusatory letter), I promptly supplied bulletproof supporting documentation, and they conceded without further fuss. Just be proactive and honest with them.

If they are right, whatever you do don't try to BS them. They have excellent BS detectors and rock solid enforcement...
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Old 02-24-2012, 08:23 AM   #12
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Sorry ERD, but this does not work... you are not being audited so you will not get in front of a live person... this is all computer...

The IRS has made their ruling, it is now up to the OP to prove THEM wrong..
But this happened to me. It was done over the phone with someone, I don't know if they were an 'agent' or not (they didn't seem to know anything about taxes). It wasn't an audit, they just denied something saying there was no documentation. So I called to try to understand what they were missing. They claimed line xyz was blank (zero), and I said there was a number there on my copy of my docs. I faxed them my copy and it was all settled.

This was a few years back, but just a few (less than 7). It might be different now, I dunno.

PS: My memory is fading on this, now that I think about it, I'm not sure if they specifically said something was missing, or if I just owed X and I had to work backwards to figure out what that number represented. But I do recall the rest as I wrote it.

-ERD50
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Old 02-24-2012, 09:31 AM   #13
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You need to get your 2010 return and see what you reported relating to these trades on Schedule D and determine whether you omitted them or not.

If you omitted them, file an amended return and you'll owe tax on the $2k gain.

If you reported correctly, then you'll need to write them a letter explaining the Schedule D entries with the related backup documents showing the proceeds and the basis.
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Old 02-24-2012, 10:04 AM   #14
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But this happened to me. It was done over the phone with someone, I don't know if they were an 'agent' or not (they didn't seem to know anything about taxes). It wasn't an audit, they just denied something saying there was no documentation. So I called to try to understand what they were missing. They claimed line xyz was blank (zero), and I said there was a number there on my copy of my docs. I faxed them my copy and it was all settled.

This was a few years back, but just a few (less than 7). It might be different now, I dunno.

PS: My memory is fading on this, now that I think about it, I'm not sure if they specifically said something was missing, or if I just owed X and I had to work backwards to figure out what that number represented. But I do recall the rest as I wrote it.

-ERD50
Hey, you learn something every day... the few people that I know who has gone through this did not get the same results as you... they had to mail their proof in...

But, it does seem like your example is different... you had a number on the return, so it was not 'wrong'. It seems they just failed to input it into their system for some reason.

The OP failed to put the sales price and basis (my guess), so he has to fix the problem. I still do not think a call will do it, but there is no harm in trying.
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Old 02-24-2012, 10:41 AM   #15
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You should have your TT files in the clouds. As you sign on you have lots of options one will say see old returns.
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Old 02-24-2012, 11:32 AM   #16
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Update = I did in fact find my a PDF of 2010 tax return that I had downloaded from TurboTax after finishing.

Good = Schedule D is indeed there, filed properly with both short and long term capital gains filled in and the total added to my income on line 13 of the 1040.

Bad = no 1099B, so somehow that didn't get included (either me or turbotax who knows)

I'm cautiously optimistic this can be resolved with some paperwork sent back their way. Thanks again for the help brothers and sisters.
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Old 02-24-2012, 12:36 PM   #17
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In past years, one did not need to include 1099B with their filing since the IRS gets the 1099B directly from your financial institution.
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Old 02-24-2012, 12:46 PM   #18
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Originally Posted by tiuxiu View Post
Update = I did in fact find my a PDF of 2010 tax return that I had downloaded from TurboTax after finishing.

Good = Schedule D is indeed there, filed properly with both short and long term capital gains filled in and the total added to my income on line 13 of the 1040.

Bad = no 1099B, so somehow that didn't get included (either me or turbotax who knows)

I'm cautiously optimistic this can be resolved with some paperwork sent back their way. Thanks again for the help brothers and sisters.
Your post isn't clear - you did report the specific sales with the $45k of proceeds that they are asking about and the $2k gain? If so, you just need to explain to them where you reported the sales and the documentation for your cost basis.

It seemed to me that their inquiry was because they couldn't see that the $45k of sales were reported on Schedule D and that they assumed your cost basis was zero and the gains were short term.
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Old 02-24-2012, 01:22 PM   #19
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I had something very similar happen to me, It turned out that I reported one sell transaction with ave cost basis, the IRS got the same total results with two transaction with two diff costs (end result was same total gain). I called the number and pointed out the transactions and the woman said "Oh, yes, I see that now." and that was the end of it.
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Old 02-24-2012, 01:30 PM   #20
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Your post isn't clear
Yeah my post must not have been clear, your second sentence nailed it.

It seems the Sched D was correctly reported but the $45k sales were not.
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