Letter from the IRS

[REWahoo]

It came today, in an official US Department of Treasury envelope, the dreaded letter from the IRS. Said I had under reported my 2003 income and owed what amounts to 40% of our annual retirement budget in back taxes, penalties and interest.

DW dialed 91 and was about to hit the other 1 before I determined what happened and resumed breathing. Have a "tax exempt" money market fund where I was depositing after tax money and hadn't included the sale of shares from that fund on Schedule D. (Didn't really think of it as a fund where I was selling shares, rather as simply a money market account with check writing privileges. Stupid mistake on my part. ) The IRS, with no cost basis reported by yours truly, assumed a cost basis of zero, making all the withdrawls from the fund taxable income. Ouch.

Now I have to send in a revised Schedule D showing what I paid for those "shares" and go through all the hassle of dealing with what has to be the most bureaucratic organization in the US, not to mention one of the most powerful. Wish me luck.

REW

 

[riskadverse]

An audit with the IRS usually isn't that big a deal when you know the reason why.  Usually they start with how much you owe and no explaination.  Since you know why, it's really a formality and very easy to handle by mail.  I've been audited a number of times and never met face to face with an agent.  Most of the time it's been my oversight . . . and once they even sent me a check for $1200.  Be prepared for the state to audit you too; they end up auditing everyone the Feds do, only 6 months to a year later.   

 

[MasterBlaster]

I Agree, It's not that big of a deal.

You send in your revised Schedule D (pay any extra taxes that may be due).

The IRS will send you another letter saying they have received your response. Then a month or two later they will (probably) accept your revised return and you'll be off the hook.

If you are going to be a tycoon, you'll have to expect a little more oversight from the IRS.

 

[wabmester]

Those kind of IRS letters are computer generated. They simply compare what was reported to them by your broker, and if they can't match it up with what you reported, they send you a letter.

But I've never heard of a money market fund (tax-free or otherwise) that reported cap gains. Didn't you get a 1099-DIV from them?

 

[REWahoo]

But I've never heard of a money market fund (tax-free or otherwise) that reported cap gains. Didn't you get a 1099-DIV from them?

It is actually USAA's Tax Exempt Short-Term Fund, and they did send me a 1099-B.

REW

 

[laurence]

So ah, not to sort of hijack, but this thread fired off a synapse that hadn't fired in years. Is there a statute of limitations on not filing? I think about ten years ago in college I didn't file my state taxes....too afraid to inquire....

 

[wabmester]

So ah, not to sort of hijack, but this thread fired off a synapse that hadn't fired in years.  Is there a statute of limitations on not filing?  I think about ten years ago in college I didn't file my state taxes....too afraid to inquire....

Has it been 10 years? If so, this is for you:

http://www.ezinearticles.com/?IRS-Statute-of-Limitations:-Do-Taxes-Ever-Expire?&id=52707

If not, this is for the rest of us:

http://moneycentral.msn.com/content/Taxes/Avoidanaudit/P42263.asp

 

[SteveL]

Don't be surprised if you get a second letter in a few days or a week. I find that the IRS sends two copies of all these dumb notices. If you get your 1040X filed (amended return) you might, the next day, get another copy of the first notice. It happened to me.

 

[laurence]

You know, I think the reason I haven't heard anything in ten years (almost) is I'm owed money, rather than the other way around! Thanks for the link Wab, California can hound you forever....

 

[justin]

Anyone with vanguard money market funds know whether the buying and selling of these MM funds need to be recorded on schedule D? Are they on the 1099? I hadn't even thought about keeping exact records of transaction dates and amounts for the MM fund. I guess it is all online though. And the basis should always be $1.00, so the gain would be $0.00 in almost all cases.

 

[wabmester]

Anyone with vanguard money market funds know whether the buying and selling of these MM funds need to be recorded on schedule D?  Are they on the 1099?  I hadn't even thought about keeping exact records of transaction dates and amounts for the MM fund.  I guess it is all online though.  And the basis should always be $1.00, so the gain would be $0.00 in almost all cases.

Money market = cash = zero volatility = no capital loss or gain = just a 1099-DIV or 1099-INT. However, the sale of a short-term bond fund is different. For that, you'll get a 1099-B and you might have a capital gain or loss.

 

[maddythebeagle]

wow, sounds like a huge hassle.

 

[Nords]

It is actually USAA's Tax Exempt Short-Term Fund, and they did send me a 1099-B.

Is this the kind/amount of tax-free income that might trigger the AMT?

Maybe the IRS has more of a profit motive than they're telling you.

If you did your taxes on a computer program then when you enter the 1099 data you'll probably want to check the AMT again too.

 

[REWahoo]

If you did your taxes on a computer program then when you enter the 1099 data you'll probably want to check the AMT again too.

Agreed. Call me paranoid, but I am always very suspicious of any communication I have with the IRS.

This time it may actually turn out to be much ado about nothing, or at least that's the way it looks from here. After completing a revised Schedule D and plugging in the costs against all the sales in the fund, it looks like the 2003 taxable income that I initially reported was short by less than $200. And I'm in the process of filing an amended return for 2004 (when I'm wrong, I'm consistently wrong ) that will show I over-reported income by several hundred bucks. Bottom line, it looks to me the IRS is going to end up owing me money!

But I'm not counting on it until all the dust settles...

REW

 

[Martha]

Last week we got a big thick envelope from the IRS. I opened it with dread. We owe an additional 23.40--interest on underpayment of estimated taxes.

Pages and pages of tax payer rights materials.

Gee, thanks for scaring me.

 

[retire@40]

Last week we got a big thick envelope from the IRS.  I opened it with dread.  We owe an additional 23.40--interest on underpayment of estimated taxes. 

Pages and pages of tax payer rights materials.

So are you going to investigate, verify, double-check, and respond to the IRS with a lengthy letter explaining your position?

Or are you just going to pay it and get them off your back? 

 

[REWahoo]

Gee, thanks for scaring me.

You gotta know that's what they are trying to do. The second sentence on my notice from them said, "...you will owe $XX,XXX" with the amount in bold).

REW

 

[Nords]

Gee, thanks for scaring me.

I thought that in the legal profession this was referred to as "getting your attention"...