The IRS Notice:
How can I possibly owe over $20,000 in taxes, penalties and interest? Don’t panic. Call me and be ready to fax me a copy of your notice and we can look at resolving a situation that many times results in little if any tax being owed to the IRS. This time of year (of course the IRS probably finds some sadistic joy in sending out these notices when CPAs are the busiest) many clients receive these notices and usually it is because income from sale of securities was not reported on your tax return. I have two of these I am working on this week alone. In these cases you usually do not owe all that money to the IRS. The reason why is that the brokerage firms are required to report to the IRS the proceeds from your transactions. What gets reported on your tax return however are both the proceeds and your cost basis (usually what you purchased the securities for) and you are subject to tax on the difference in these two figures. The IRS only receives the proceeds figures and not the offsetting costs so they send you a notice based on this information. What we typically need to do is amend your return to reflect both numbers and typically you owe next to nothing or in some cases the IRS actually owes you. It would actually be a good thing if you owed money but not as much as the IRS indicates on the notice. I say that because you would owe money if you made a profit on buying and selling securities (something we had not seen much of in recent years). If you exercised options that is typically a different matter. If you exercised company stock options you will want to know if the profit from exercising these options is reflected on your W-2. But don’t panic instead call me to help you resolve this issue with the IRS.
Not all cases are the same and your results will depend on your particular situation. Please keep in mind that without seeing the IRS notice I am not in a position to speak about what we can do for you. So we need to have a conversation after I have a copy of your IRS notice. Typically there is no need to panic. I know it is disturbing to receive these notices but realize that what is an unusual situation for you is one I deal with regularly so I have the experience to help you with it.
How to Avoid This Situation:
To avoid this situation from happening to you provide your CPA all of your tax documents. He needs that 1099 from your brokerage firm even if the profits are reported on your W-2 as the proceeds and cost still need to be reported elsewhere to avoid these IRS notices. In addition, have a discussion with your CPA about your situation including your stock options so he is aware of your situation. What I see happen is clients exercise stock options and they know it is reported on their W-2 so they do not feel they need to be concerned with it. Then in addition their brokerage firm has their 1099s available online for them to print out instead of mailing them to the client. So it is easy for these 1099s to be overlooked. It can be a hassle but once you have worked through this with your CPA he will know in future years to make sure he asks about your 1099s.
The other action you need to take is assumed in the above discussion but it is very important. If you have stock sales and especially if you exercise stock options you need to have a CPA prepare your return because of the complexities involved in reporting these transactions. The reporting of the exercising of stock options is especially complex and you want to make sure you have a CPA who is experienced with reporting these transactions. I have been preparing these type of returns for about 10 years now and I can tell you that you do not want to try to prepare these yourself or pay an inexperienced tax preparer at a national chain to try to prepare these for you either. Call me to prepare these for you and let’s get it right the first time so you do not get these frightening notices. And if you received such a notice, call me and in many cases we will be able to save you many thousands of dollars in these situations involving securities transactions.
For assistance from an experienced CPA to prepare your tax returns or amend prior returns give call me or email me today at:
Jeff Haywood, CPA
I prepare the following types of tax returns:
Federal and State Returns
Also, I am available for tax planning and discussions about business, retirement planning and life goals.
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As always keep in mind that the content provide on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.