Help! The IRS is at my door. How can I find the cost basis for TIPS that matured?

[lucky penny]

I just received a pretty unsettling letter from the IRS about my 2019 return telling me I owe more than $27,000. Yikes!

The discrepancy relates to 2 TIPS I had purchased for $25K each & at maturity totaled around $57K. The IRS letter refers to these as "securities" that were "sold or disposed of" and seems to say that since the proceeds ($57K) were reported to them with no cost basis indicated, they considered the cost basis to be zero; ergo, I owe $27K in taxes, penalties & interest. If I disagree, they say, I should send them a completed Schedule D and Form 8949 with the information needed, including the cost or adjusted basis.

I did my taxes on Turbotax & input everything I thought was needed from Treasury Direct's rather confusing 1099s. But the TIPS never showed up on a Schedule D or 8949, & I didn't realize that was needed. Yes, I see now the TIPS are listed on the 1099-B, with the amounts listed in the "Proceeds" column & the Cost or Other Basis column -- blank, so foolishly I ignored them entirely. Lesson learned.

My questions are:

1. The IRS wants a Schedule D & 8949 with this info, but should that be just those forms with just these transactions, or an amended Schedule D that includes the other transactions I had reported earlier? Confusingly, the 11-page letter says (at another point) that it's unnecessary to do an amended return, but maybe that's just boilerplate. Should I go back to Turbotax to amend the return, which I guess will produce a new schedule D?

2. What is the cost basis of those TIPS & how do I find it? Is it just the purchase price, or does it include the interest paid over the years? Can Treasury Direct give me that info? How can it be documented?

I would appreciate any guidance you wise & empathetic folks can provide.

 

[ocean view]

I can only advise on your item 1: Use TurboTax to make the needed changes to your tax return (adding in the missing cost basis). Save this as a new tax return so that you’ll still have your original tax return file. Do not file this changed return as an amended return, but instead print all of the pages that changed and clearly write at the top of each page “As Corrected”. Then print those same pages from your original return and label them “As Originally Filed”. These items, along with any other documentation that was requested and a letter should be provided back to the IRS.

Good luck!

 

[ocean view]

One more comment, the instruction to not file an amended return means that they don’t want you to file a 1040X with your local IRS service center; just send the info to them and they will update your record.

The 1040X is only filed if you discover a necessary change before the IRS identifies it.

 

[SecondCor521]

I received a similar letter from the IRS earlier (and made a post about it you could find if you want). I'll give you similar advice to what I received on that thread.

1. Since you used Turbotax before, probably the easiest thing for you to do is to enter the cost basis and sales proceeds for the TIPS which matured. This will generate the Schedule D and Form 8949 for you. I would not file an amended return, but I would print out the Schedule D and Form 8949 from Turbotax and mail those in.

I also chose to include a little table with the lines that changed on my return as a result of the changes I needed to make. In your case you may or may not want to do that, because your Schedule D and Form 8949 are going to affect nearly every line on your return starting with line 7. You may just want to let the IRS do the adjustments to the return for you.

I would not file the amended return because the IRS is telling you not to do that. I also wondered about amending my return but chose not to because my letter also said not to do so. I figure in confusing situations like this it's better to just do exactly what they say to do (which is what my googling of various IRS resources said to do).

2. The cost basis is your purchase price. Some quick googling says you can also add any OID, which is a form of interest which increases basis. You should be able to find your OID on your Forms 1099-OID, which should have been issued by whomever you bought the bonds through, so in your case Treasury Direct. You may have received Forms 1099-OID for each year that you owned these TIPS, so you'd add up all of the OID amounts in box 1 to your cost basis.

You are responsible for keeping track of your basis, but Treasury Direct may be able to help you figure out your purchase price.

The IRS doesn't require any documentation of the cost basis which you put into Turbotax and that will show up on Schedule D and Form 8949. However, they may request documentation if you are audited. Generally if your records are contemporaneous and accurate that's all you need. A screen print or statement showing your purchase should suffice for the purchase price; the Form 1099-OIDs should suffice for any OID you add.

If the records are lost or you can't recover them, while it would give me the willies there is some precedent for establishing a reasonable and fair estimate. So in this case if you couldn't get records from Treasury Direct, you could document whatever info you have to show that you paid $25K for them - maybe you have a bank statement where you sourced the funds for the purchase that shows that amount being deducted, for example.

And yeah, if you don't provide basis, the IRS will assume zero.

Finally, you should understand that if you have a capital gain on these TIPS then that will increase the amount of taxes you owe. It should be much less than the original $27K number the IRS cited, but it still could be a significant amount. You should know as well that this will probably affect your state income tax return(s) as well, because the capital gains should have been reported to the state(s) also.

 

[RunningBum]

https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_tax.htm
may help.

I haven't been through this myself, but assuming you received 1099-INT and 1099-OID statements each year and included them in the respective year's taxes, those would increase your basis. Add the sum of those plus your initial investments to determine your basis. I would think it comes close or matches the $57K you received.

I could be wrong though. If oldshooter doesn't answer this thread soon you might send him a PM, since he invests in individual TIPS and might know this from experience. I'm only in TIPS mutual funds, and have not sold any, and it would probably be handled differently in an MF.

 

[SevenUp]

To determine your cost basis for a TIPS bond, you must record the phantom income each year as an increase in your cost basis. See that link for more.

 

[RunningBum]

Finally, you should understand that if you have a capital gain on these TIPS then that will increase the amount of taxes you owe. It should be much less than the original $27K number the IRS cited, but it still could be a significant amount. You should know as well that this will probably affect your state income tax return(s) as well, because the capital gains should have been reported to the state(s) also.

The link I provided says that TIPS are exempt from all state and local taxes.

 

[SecondCor521]

The link I provided says that TIPS are exempt from all state and local taxes.

That may be so.

However, my state (as well as others), essentially start with Federal AGI and then make various adjustments for things that are not taxed at the state level (as you say TIPS are).

If OP's federal AGI goes up by, say, $2K, then they probably should file an amended state return showing that $2K increase at the top of their return, then find the appropriate place to show a $2K subtraction later on.

OP might be in New York. I'm no expert, but a quick check it looks like the capital gain might need to be reported on the IT-201 form line 7 and the subtraction might go on line 28.

So while the tax due to the state might not change, I stand by my original statement that an amended return still might be required.

 

[lucky penny]

UPDATE
After the initial shock of facing a huge bill from the IRS, it feels good to know the issue is fixable and that once I submit the required information I will end up owing little or nothing & might even be owed a refund -- is this possible?

Since my 2019 return didn't indicate the cost basis for two TIPS that had matured, the IRS deemed the basis to be zero & therefore that the entire amount of the proceeds was taxable, resulting in a huge total of taxes, interest & penalties owed. I'm now in the process of calculating the actual basis, which I understand is based on the purchase price + the OID each year -- is that correct? (One poster indicated interest should be included but I believe that's incorrect -- right? It's not like the interest accrued; I received the interest & it was taxed.)

Based on my calculations, for the 5-year TIPS, the purchase price + OID totals a few hundred dollars more than the proceeds at maturity, & for the 10-year TIPS, the total is a few thousand dollars more -- which surprises me. Can the cost basis of TIPS be MORE than the proceeds at maturity? Is this normal? And if that's the case, does that mean when I report this I'm owed a refund for a long-term loss? This is mind-boggling.

Also, can anyone confirm that the proceeds of maturing TIPS should be reported on Schedule D? (This surprises me too.) The IRS letter lists the proceeds of the TIPS in a category called "Securities" & the boilerplate language later in the letter states if no cost basis is specified in the 1099-B, a completed Schedule D and Form 8949 are required to show the actual cost basis.

An added complication: I don't have 1099s for the first 3 years of the 10-year TIPS & they are not available on TD's website. When I called I was told these must be requested in writing (which I just did) & that I'd likely get them in 3 weeks. The IRS letter requests a response in 30 days. If I don't get them in time should I request an extension & explain why? Should I provide the info I've compiled to date (not including an incomplete Schedule D)?

I really appreciate your guidance on this extremely stressful situation.

 

[SecondCor521]

UPDATE
After the initial shock of facing a huge bill from the IRS, it feels good to know the issue is fixable and that once I submit the required information I will end up owing little or nothing & might even be owed a refund -- [1] is this possible?

Since my 2019 return didn't indicate the cost basis for two TIPS that had matured, the IRS deemed the basis to be zero & therefore that the entire amount of the proceeds was taxable, resulting in a huge total of taxes, interest & penalties owed. I'm now in the process of calculating the actual basis, which I understand is based on the purchase price + the OID each year -- [2] is that correct? (One poster indicated interest should be included but I believe that's incorrect -- [3] right? It's not like the interest accrued; I received the interest & it was taxed.)

Based on my calculations, for the 5-year TIPS, the purchase price + OID totals a few hundred dollars more than the proceeds at maturity, & for the 10-year TIPS, the total is a few thousand dollars more -- which surprises me. [4] Can the cost basis of TIPS be MORE than the proceeds at maturity? [5] Is this normal? [6] And if that's the case, does that mean when I report this I'm owed a refund for a long-term loss? This is mind-boggling.

[7] Also, can anyone confirm that the proceeds of maturing TIPS should be reported on Schedule D? (This surprises me too.) The IRS letter lists the proceeds of the TIPS in a category called "Securities" & the boilerplate language later in the letter states if no cost basis is specified in the 1099-B, a completed Schedule D and Form 8949 are required to show the actual cost basis.

An added complication: I don't have 1099s for the first 3 years of the 10-year TIPS & they are not available on TD's website. When I called I was told these must be requested in writing (which I just did) & that I'd likely get them in 3 weeks. The IRS letter requests a response in 30 days. [8] If I don't get them in time should I request an extension & explain why? [9] Should I provide the info I've compiled to date (not including an incomplete Schedule D)?

I really appreciate your guidance on this extremely stressful situation.

[Numbers inserted for reference.]

1. Yes, it's possible.

2. I'm not an expert on TIPS, but that sounds correct from what I googled before.

3. I'm not an expert on TIPS, but that sounds correct also.

4. Yes.

5. Normal isn't a word I would use. It's not uncommon for securities to lose value.

6. Indirectly, yes. The long term capital loss will end up flowing to line 7 of your Form 1040, which will end up reducing your taxable income and your adjusted gross income, and your tax liability. After that it depends a bit on your credits, but it would be very common for this to result in a refund.

7. Correct.

8. If the IRS gives you the option, sure. Or you can just not add the OID in from those years.

9. I wouldn't.

 

[SnowballCamper]

I had this problem a few years ago (no cost basis reported with proceeds reported). I sent a letter with supporting document for the cost basis, very factually stating that I didn't have the full proceeds as income. They replied with a much much lower amount due and I just paid it. Even though they asked for forms and such, I didn't bother. I know it's stressful, but I think it's a pretty routine thing. Mine was capital gains on municipal bonds which I learned are taxable. Good Luck!

 

[RunningBum]

UPDATE
(One poster indicated interest should be included but I believe that's incorrect -- right? It's not like the interest accrued; I received the interest & it was taxed.)

I wasn't sure if you reinvested interest somehow. You said you received the interest so I agree that's not a factor.

 

[lucky penny]

Thanks so much!

I now realize that TIPS -- Treasury Inflation-Protected Securities -- obviously are securities (duh!) & therefore should be reported on Schedule D when they're disposed of.

One final question (I hope): I see that some of the 1099s pertaining to these securities include a small amount as a "Bond Premium". Should that amount have been reported as interest, and/or be included in the cost basis for the bond?

I'm very glad these are the only TIPS I ever purchased & will likely be the last -- though by the time I'm through with this I will hopefully be an expert.

 

[lucky penny]

I had this problem a few years ago (no cost basis reported with proceeds reported). I sent a letter with supporting document for the cost basis, very factually stating that I didn't have the full proceeds as income. They replied with a much much lower amount due and I just paid it. Even though they asked for forms and such, I didn't bother. I know it's stressful, but I think it's a pretty routine thing. Mine was capital gains on municipal bonds which I learned are taxable. Good Luck!

Hmm, interesting.

 

[SecondCor521]

Thanks so much!

I now realize that TIPS -- Treasury Inflation-Protected Securities -- obviously are securities (duh!) & therefore should be reported on Schedule D when they're disposed of.

One final question (I hope): I see that some of the 1099s pertaining to these securities include a small amount as a "Bond Premium". Should that amount have been reported as interest, and/or be included in the cost basis for the bond?

I'm very glad these are the only TIPS I ever purchased & will likely be the last -- though by the time I'm through with this I will hopefully be an expert.

I'm not sure on that one. What kind of 1099 is it and what box has the bond premium in it?

I should mention also that if your capital loss is greater than $3,000, then the excess will be carried over to the next tax year (2021 in your case), and you should make a note of it in case your tax software doesn't carry it over for you (or if you switch tax software). The capital loss carryover will help reduce your 2021 taxes owed.

 

[Dash man]

We once got a similar letter when we missed putting in the cost basis for some exercised stock options. The tax due had been withheld on the W-2, but the letter said we owed over $100k. I didn’t have a heart attack, but it was a shock. After we realized what it was we gathered the information and sent in the corrected schedule D with a letter of explanation. A few weeks later we got a letter saying no new information was needed.
I think this happens a lot.

 

[lucky penny]

I'm not sure on that one. What kind of 1099 is it and what box has the bond premium in it?

It's on the 1099-INT, Box 12. I thought a bond "premium" is something that's included in the purchase price.

Now, as Lieutenant Colombo liked to say: "Just one more thing..."

As to the cost basis, the IRS letter requests "a completed Schedule D and Form 8949 (or similar attachment)" showing the asset name, the date of purchase and "the cost or adjusted basis." Since they don't request any documentation, is it necessary to include it? Why send more than what was requested? (It would be voluminous -- 10 years of 1099s that are 8 or 9 pages each, plus print-outs from Treasury Direct's website.)

A "similar attachment" sounds like a letter with a table showing the purchase price and OID for each year might suffice.

 

[SecondCor521]

It's on the 1099-INT, Box 12. I thought a bond "premium" is something that's included in the purchase price.

Now, as Lieutenant Colombo liked to say: "Just one more thing..."

As to the cost basis, the IRS letter requests "a completed Schedule D and Form 8949 (or similar attachment)" showing the asset name, the date of purchase and "the cost or adjusted basis." Since they don't request any documentation, is it necessary to include it? Why send more than what was requested? (It would be voluminous -- 10 years of 1099s that are 8 or 9 pages each, plus print-outs from Treasury Direct's website.)

A "similar attachment" sounds like a letter with a table showing the purchase price and OID for each year might suffice.

Let me look into the box 12 thing. Or maybe someone else knows offhand.

As far as your Columbo question, you should provide a completed Schedule D and Form 8949 as the IRS requested.

The Schedule D will have your name and SSN at the top and one line filled in, probably in Part II, columns (d), (e), and (f). This will be the total basis, proceeds, and net gain or loss for both TIPS. You will also of course have entries probably on lines 15, 16, and 21.

Form 8929 will have your name and SSN at the top and one box checked at the top (D, E, or F). You can then fill in either one or two lines on Line 1 of the form. One line is permissible if the TIPS matured on the same day in 2020. If they matured on different days, you'll put in one line for each TIPS. You will then total the one or two lines at the bottom on line 2. These numbers on the bottom should match the entries in Part II of your Schedule D.

You do *not* provide any of the supporting documentation (such as your brokerage 1099-Bs, 1099-INTs, 1099-OIDs, or anything else). But you should keep copies of them with your tax paperwork to support your entries in the case of an audit. They don't want to see it, they didn't ask for it, and you providing it will just confuse them and could slow things down.

 

[SecondCor521]

On the box 12 thing, according to the link below you should have subtracted any entries in box 12 from your taxable interest. So if you filled out your taxes using tax software and entered the amount in box 12 into the tax software, it should have done the adjustment for you.

To be clear, the box 12 numbers only affect your tax return for the years in which you received 1099-INTs with entries in box 12. The amount should *not* be added to your basis for these TIPS.

If you didn't use tax software or didn't enter the amount in box 12, then you could, in theory, go back and amend the returns for those years to reduce your taxable interest and your taxes owed. This would only apply to approximately the last 3 tax years; anything before then is too late to amend.

If the amounts in box 12 are not large, I'd probably just forget about them. The IRS doesn't care if you paid a little too much in taxes, so there won't be any repercussions to your mistake. And it would only reduce your taxes by the amount in box 12 times your marginal rate, which is probably not worth filing amended return(s) to receive.

Link:

https://support.taxslayerpro.com/hc/en-us/articles/360009173294-Form-1099-INT-Interest-Income

 

[lucky penny]

As far as your Columbo question, you should provide a completed Schedule D and Form 8949 as the IRS requested. The Schedule D will have your name and SSN at the top and one line filled in, probably in Part II, columns (d), (e), and (f). This will be the total basis, proceeds, and net gain or loss for both TIPS. You will also of course have entries probably on lines 15, 16, and 21.

Silly question but...

Should the new Schedule D only include the information regarding the TIPS, or should it be an amended Schedule that also includes other transactions I previously reported on my original 2019 return?

 

[SecondCor521]

Silly question but...

Should the new Schedule D only include the information regarding the TIPS, or should it be an amended Schedule that also includes other transactions I previously reported on my original 2019 return?

The latter. Include all the other transactions that were originally there. Add the appropriate entries for the TIPS.

 

[sengsational]

I didn't read this too carefully, but did I see that the basis calculation wasn't just the purchase price? It's usually the purchase price plus any expenses incurred (like commissions and fees). Income, even phantom income of the OID variety, does that really have an effect on the basis? If it does belong, you can look-up that information... each TIPS issued has all the data posted somewhere ... I've seen it, but can't remember exactly where. Not on treasury direct, but "some guy" had the data.