Thursday, March 10, 2011

Love Letters from the IRS

Q.  Honey, I'm in a total panic!  I just received a letter from the IRS wanting an additional $8,000+ dollars from a stock sale they say I didn't report in 2008.  I know the taxes were paid on the stock as the stock options were  included on my W-2 form. They also want interest and a penalty. What do I do now? MW, New York

A.  Get our all your paperwork for 2008, sit down with a glass of wine, and try to relax!  I really feel there is no need to panic. I'm assuming that you prepared the return yourself, so the first thing you need to do is to see if you filed a Schedule D reporting the sale.  If not, you will need to amend the return. Stock options can be tricky, and quite often are overlooked.

The good news is that the reason the stock options are reported on your W-2, is that you paid tax on the difference between the option price and the FMV of the stock when you exercised the option. This means that if like most people, you sold the stock the same day you exercised the option, your tax basis is the same as the value placed on your W-2. You should have paperwork from your employer telling you exactly what the FMV was that day.

On your amended return, the sale price should match the 1099-B which you will probably find somewhere in that paperwork. Your basis will be the FMV per share associated with the W-2. You should have virtually no gain and quite possibly a small loss.  Return the IRS letter together with the amended return, and that should clear up the matter.

Tax Tip:  Brokers are required by law to report the sale of securities on a 1099-B to the IRS. Never forget to include the gross proceeds reported with the resulting gain or loss on a Schedule D. Failure to do so will result in a love letter from the IRS as they have no knowledge of the transaction other than the gross sales price reported to them by the brokerage house.

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