IRS wants to Tax twice same income.

[VFK57]

I need advise. In 2017 my wife and I exercised Intensive Stock Options (ISO) from her company. ISO exercised amount minus what we owed her company was included in her W2, we paid 1040ES to cover Taxes. Yet last year IRS send me CP2000 note where they state that,exactly same date exercised ISO, were presented as sold security and requested Tax and penalties on it. I responded explaining that the amount is included in W2 and we paid Taxes correspondingly with proof of W2 included. Yet this year they send same note requesting much higher penalties for the same ISO shares we already had been Taxed for. Once again I mailed them proof that all exercised shares were included in W2 but not sure what else I can do.

 

[lemming]

I don't get the many steps in this process either. You should be able to show your compensation as ordinary income and the buy/sell as only the gain between the cost-your wage addition and the price you sold it for.
Ask this question on the turbotax boards and hope Tom Young answers you. In fact put @tomyoung in your question. https://ttlc.intuit.com/community/file-with-turbotax/discussion/03/303

 

[pb4uski]

Did you sell the shares that were acquired when you exercised the option? If so, when?

The proceeds of the ISO sale are included on the W-2 form in box 14 (code 'ISODD'). Do we need to report this sale elsewhere, eg. under 'Stocks, Mutual Funds, Bonds)?

Generally the amount reported on your W-2 as income is the discount amount you received on the FMV stock price. This is reported in the year you exercise your stock option.

If you sold the stock in the same year, you may receive a 1099-B from the broker to report the gain/loss on the sale of the discounted stock, which is usually taxed at a lower capital gains rate. Type '1099b' in the Search window, and 'Jump to 1099-B' for the entry area.

If you haven't sold the stock yet, you don't need to report the option exercise anywhere else. Tax consequences are a combination of grant date, exercise date, sale date.

Here's more detailed info to help you:

https://turbotax.intuit.com/tax-tips/investments-and-taxes/incentive-stock-options/L4azWgfwy

https://ttlc.intuit.com/community/i...-14-code-isodd-do-we-need-to-report/00/182757

 

[kaneohe]

Perhaps talking w/ IRS might help so that both parties are clear about what the other is thinking.

 

[VFK57]

No any shares, other then exercised ISO, were sold that date. Calling to IRS is useless waste of time as there are hours to wait and they still will tell you to contact the office from which the CP2000 Form came from. The Fresno CA office does not provide actual phone #, only automated answering service phone number.

 

[RunningBum]

Not sure how ISO options are handled, but I had a similar situation with NQ options. I paid the tax on the income for the option exercise. I also did a same day stock sale, but forgot to include that on schedule D. The basis would've been the same as the proceeds, minus fees and perhaps the fluctuation within the day. I knew I was supposed to include it on schedule D but simply overlooked it. The IRS had the record of the sale from the 1099, but no idea of basis. This was back in the late 90s or early 2000s. They assumed 0 basis and presented me the tax bill based on that. It was an easy task for me to file an amended return with the correct basis on schedule D.

Perhaps this is what you need to do as well. As I said, I don't know if there are differences with ISO options. I know the difference in option price and exercise price is taxed differently, but I don't think that's the part at issue here.

 

[kaneohe]

.....................................

Perhaps this is what you need to do as well. As I said, I don't know if there are differences with ISO options. I know the difference in option price and exercise price is taxed differently, but I don't think that's the part at issue here.

betting on you and pb4uski......... https://www.investopedia.com/articles/stocks/12/introduction-incentive-stock-options.asp

Sounds like a disqualifying iso is similar to NQSO where as you say you have to report the bargain element as income and then the gain upon sale of shares as
a capital gain even if the gain is small or even 0 as it might be for a same day transaction. Wonder if a 1099B was issued and ignored.

 

[MichaelB]

I need advise. In 2017 my wife and I exercised Intensive Stock Options (ISO) from her company. ISO exercised amount minus what we owed her company was included in her W2, we paid 1040ES to cover Taxes. Yet last year IRS send me CP2000 note where they state that,exactly same date exercised ISO, were presented as sold security and requested Tax and penalties on it. I responded explaining that the amount is included in W2 and we paid Taxes correspondingly with proof of W2 included. Yet this year they send same note requesting much higher penalties for the same ISO shares we already had been Taxed for. Once again I mailed them proof that all exercised shares were included in W2 but not sure what else I can do.

The CP2000 will state somewhere what type of income and how much was reported to the IRS but not included in the tax return, and their assessment will include a specific tax calculation. Are they stating that there was a brokerage transaction not reported, or are they claiming other earned income was not reported?

Edit to add - might they be looking for a brokerage transaction because there was stock sold?

 

[pb4uski]

Sounds like the OP never reported the sale, similar to what RB wrote.

Assuming so, I would write a response explaining what happened with numbers.... W2 includes income for the discount... x shares * ($y FMV per share on exercise date - $z per share that you paid).... and the shares were sold on the same date so your gain was zero. You may want to communicate with the company to ascertain that what you are explaining is correct.

And that you forgot to report the sale and the sale proceeds were $a and your basis was $b... comprising of $c paid for the shares and $d included on the W-2.

Then include with the letter an amended return including a Schedule D for the sale.

Once you have your ducks in a row and your supporting documentation you ay want to make an appointment with your local IRS Taxpayer Assistance Center.

https://apps.irs.gov/app/officeLocator/index.jsp?zipCode=93722&radius=10&submit=1

 

[VFK57]

@Michael, their note shows them as securities sold so I have to pay the Capital Gain Tax. But I have a statement from my wife company about this amount is included it W2. This is second year I explain it to them that if I pay the Cap Gain on it, it will be Taxed twice, moreover including penalties they add there will be no income from that amount at all. I think E Trade reported it wrong and called them but they said we reported properly. At the time of ISO exercise they do not withhold Taxes but the amount included in the W2 and we paid them via 1040ES.

 

[SecondCor521]

@Michael, their note shows them as securities sold so I have to pay the Capital Gain Tax. But I have a statement from my wife company about this amount is included it W2. This is second year I explain it to them that if I pay the Cap Gain on it, it will be Taxed twice, moreover including penalties they add there will be no income from that amount at all. I think E Trade reported it wrong and called them but they said we reported properly. At the time of ISO exercise they do not withhold Taxes but the amount included in the W2 and we paid them via 1040ES.

What I think you are missing, VFK57, is that you have to report the sale on Schedule D. Since it was already included in your (wife's) W-2 income, your basis will be close to what you sold it for, so little to no capital gains tax will be due.(*) But properly reporting the sale on Schedule D will probably stop the IRS from sending you CP2000 notices, which is what you seem to want.

(*) In fact, with selling expenses such as SEC fees and brokerage fees, I usually ended up with a slight capital loss on my same-day sales.

 

[MichaelB]

@Michael, their note shows them as securities sold so I have to pay the Capital Gain Tax. But I have a statement from my wife company about this amount is included it W2. This is second year I explain it to them that if I pay the Cap Gain on it, it will be Taxed twice, moreover including penalties they add there will be no income from that amount at all. I think E Trade reported it wrong and called them but they said we reported properly. At the time of ISO exercise they do not withhold Taxes but the amount included in the W2 and we paid them via 1040ES.

My uneducated guess is the same as RunningBum and p-ski. The IRS wants to see a schedule D. You can respond by checking the “I don’t agree” box on the CP2000 and saying this entry on schedule D was unintentionally missed, the proceeds are $n, the cost basis is $n, there is 0 tax due, and the entire cost was recorded as earned income on the W-2.

You can also refile, include the Schedule D with cost equal to proceeds, then answer the CP2000 saying the same thing, but adding you have refiled.

 

[VFK57]

SecondCor521 It is not first time we file ISO exercise, it has always been via W2. It is not reported by schedule D. Company grants employee stock options(ISO) for example on the day employee starts, after 1 year of work about 25% of those mature and you can exercise. When transaction is done, you do not pay Taxes but the difference in what the grant price was and sale price is reported on W2. Employee must pay Tax themselves, we did right after the sale and there is nothing to add.

 

[JoeWras]

You are getting sound advice about Schedule D. Suggest you take a breath. Do further reading, and then come back for more discussion.

Every option I've been involved with has ended up on Sched D, even if it was a net zero.

 

[SecondCor521]

SecondCor521 It is not first time we file ISO exercise, it has always been via W2. It is not reported by schedule D. Company grants employee stock options(ISO) for example on the day employee starts, after 1 year of work about 25% of those mature and you can exercise. When transaction is done, you do not pay Taxes but the difference in what the grant price was and sale price is reported on W2. Employee must pay Tax themselves, we did right after the sale and there is nothing to add.

@VFK57, I understand that the stock option was added into your W2. I also understand that this happens with all of your wife's ISO exercises.

I think everyone else thinks you need to file a Schedule D with your taxes. What you seem not to understand is that filing a Schedule D will not increase your taxes owed. You will not be taxed twice on the ISO proceeds. As @JoeWras suggests, go read up on ISO stock options and Schedule D (or ask any CPA).

 

[pjigar]

Not sure how ISO options are handled, but I had a similar situation with NQ options. I paid the tax on the income for the option exercise. I also did a same day stock sale, but forgot to include that on schedule D. The basis would've been the same as the proceeds, minus fees and perhaps the fluctuation within the day. I knew I was supposed to include it on schedule D but simply overlooked it. The IRS had the record of the sale from the 1099, but no idea of basis. This was back in the late 90s or early 2000s. They assumed 0 basis and presented me the tax bill based on that. It was an easy task for me to file an amended return with the correct basis on schedule D.

Perhaps this is what you need to do as well. As I said, I don't know if there are differences with ISO options. I know the difference in option price and exercise price is taxed differently, but I don't think that's the part at issue here.

This what I have always done when I excersized RSUs or ISOs in the past. Always reported adjusted basis for schedule D.

PS: And yes, there were times where the gains/losses were few dollars because I never held the RSUs a day more than necessary.

 

[VFK57]

Filing schedule D will put me in a position that I pay the Tax twice. Lets say the difference of grant and actual cost at the time of exercise was $50K, it was added to our W2 and our Tax increased (depend on total income) about $14K. Then I input it in schedule D as well and the Tax again adds another $12K. Do you think IRS takes more than 50%? Well there is also California Tax on it. Do you think this is correct filing?

 

[JoeWras]

Filing schedule D will put me in a position that I pay the Tax twice. Lets say the difference of grant and actual cost at the time of exercise was $50K, it was added to our W2 and our Tax increased (depend on total income) about $14K. Then I input it in schedule D as well and the Tax again adds another $12K. Do you think IRS takes more than 50%? Well there is also California Tax on it. Do you think this is correct filing?

Adjust the basis.

 

[kaneohe]

If you do a disqualifying transaction w/ your ISO, it seems to be similar to a NQSO. There are 2 parts to the transaction:
1) Exercise the option.......you get taxed on the bargain element which is the difference between exercise price you pay and actual value at time of exercise. This ends up on the W2. You are now holding the stock instead of the option.
2) Sell the stock..........there could be a period of time between exercise of option or sale of stock.......or it could be "simultaneous".......at least to you as a same day option. In this case the basis of the stock and the sales price could be very close so that the gain is 0 or nearly so when you include transaction fees. This transaction should be reported to you on a 1099B and you include it on 8949/Sch D. In the absence of you reporting it, IRS will see a sales price on the 1099B but if they don't see a basis, they will assume 0 so your gain comes out the same as your W2 income from the exercise. I would have thought that modern options would be "covered" so that basis would be reported.........but maybe it's not.

 

[MichaelB]

SecondCor521 It is not first time we file ISO exercise, it has always been via W2. It is not reported by schedule D. Company grants employee stock options(ISO) for example on the day employee starts, after 1 year of work about 25% of those mature and you can exercise. When transaction is done, you do not pay Taxes but the difference in what the grant price was and sale price is reported on W2. Employee must pay Tax themselves, we did right after the sale and there is nothing to add.

VFK57, if the IRS notice CP2000 states you didn’t report a capital gain, either your employer and the brokerage firm reported this as a brokerage transaction. Probably the broker. Your employer may have used a different broker in the past, or the broker may have changed procedure, which would explain why it’s different this time.

The IRS looks for income by category, so even the amount is on the W-2, if they don’t see the proceeds reported as Capital Gains and Losses, it gets flagged. CP2000 is an automated process, no humans involved, so reasoning doesn’t work.

 

[JoeWras]

BTW, this situation was probably the most common frightening question we'd see on our internal "finance and money" board at Megacorp. It is a common problem to forget the Sched D stuff since it is on the W-2.

And it usually popped up around this time of the year. The IRS starts getting those printers and computers humming on automated audits, now that they've ingested the spring and extended tax forms.

 

[VFK57]

@kaneohe Thanks.

 

[SecondCor521]

Filing schedule D will put me in a position that I pay the Tax twice. Lets say the difference of grant and actual cost at the time of exercise was $50K, it was added to our W2 and our Tax increased (depend on total income) about $14K. Then I input it in schedule D as well and the Tax again adds another $12K. Do you think IRS takes more than 50%? Well there is also California Tax on it. Do you think this is correct filing?

No, I don't.

As others have said, you're not entering the correct basis.

Make sure that the number you enter in column (e) on Schedule D is equal to your actual basis. I'm not exactly sure how to calculate it for ISOs, but it should be almost exactly equal to the amount in column (d) on Schedule D. Thus the gain or loss will be very close to zero, and your incremental tax should be very close to zero, not the $12K that you've mentioned.

 

[MichaelB]

I'm not exactly sure how to calculate it for ISOs, but it should be almost exactly equal to the amount in column (d) on Schedule D. Thus the gain or loss will be very close to zero, and your incremental tax should be very close to zero, not the $12K that you've mentioned.

The basis is the amount reported on the W-2.

 

[FIREd]

When reporting stock option sales, I always reported 2 types of income: W-2 income and capital gain (or loss) income on schedule D. The capital gain or loss, in case of a same day sale was usually small. That capital gain or loss was reported to the IRS by the brokerage company but the basis reported was always wrong and had to be adjusted.