Got a letter from the IRS...

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tualatindave
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Joined: Tue Jan 11, 2011 12:02 pm

Got a letter from the IRS...

Post by tualatindave » Thu Mar 01, 2012 10:42 am

Stating that income for me had been reported to the IRS in the amount of 33,000.00 in 2010, and that I now owe 10,000 tax and penalties.

In 2010 my mother's estate began distributing its assets to my sister and me, all from CD's and savings accounts, thus with no tax implications. This was in the fall of 2010. In January of 2011, the last part of the estate was distributed, 33,000.00 from the sale of my mother's BP stock. This was handled by the estate's executor/attorney. We received a K-1 form in 2011 indicating such, and I am in the process of doing 2011's taxes with H&R Block, and we are including the 33,000 as income for the year 2011. I did point out to the tax person that the K-1 form had a date on it the spanned 2010/2011. My sister received the same IRS letter and the same K-1 form.

Is it possible the estate attorney processed this wrong? Or did I miss an obligation to file an amended 2010 tax statement? Any thoughts? Thanks!

jebmke
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Re: Got a letter from the IRS...

Post by jebmke » Thu Mar 01, 2012 10:50 am

Can you provide a few details:

What was the date of death?
Did you receive a K-1 in 2010?
Does the K-1 you received in January, 2011 indicate that it was a final K-1?
Did you also get a copy of the 1041 for the estate?

Just a note - the IRS often reacts with incomplete information and the initial letters seem quite daunting. Not to worry (yet). However, these things take a bit of time to resolve. The key is to make sure you respond to any inquiries within the time allotted and keep scrupulous records. I also recommend sending any replies in writing and with POD.
When you discover that you are riding a dead horse, the best strategy is to dismount.

sscritic
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Re: Got a letter from the IRS...

Post by sscritic » Thu Mar 01, 2012 10:53 am

The letter gave you a phone number. Call and ask politely.

You aren't going to owe $10,000. The issue might be that the IRS gave your mother's stock a basis of zero as you didn't file a Schedule D that covered it. Since the stock should have received a step up in basis at the time of your mother's death (there are exceptions), your gain would have been almost zero. Did the K-1 show a basis or just the proceeds from the sale? I haven't filled one out in a long time.

We need the answers to jebmke's questions.

note to jebmke: The distribution was in January; the K-1 might have come in June. I was fooled by that at first also.

jebmke
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Re: Got a letter from the IRS...

Post by jebmke » Thu Mar 01, 2012 11:02 am

sscritic wrote:The letter gave you a phone number. Call and ask politely.

You aren't going to owe $10,000. The issue might be that the IRS gave your mother's stock a basis of zero as you didn't file a Schedule D that covered it. Since the stock should have received a step up in basis at the time of your mother's death (there are exceptions), your gain would have been almost zero. Did the K-1 show a basis or just the proceeds from the sale? I haven't filled one out in a long time.

We need the answers to jebmke's questions.

note to jebmke: The distribution was in January; the K-1 might have come in June. I was fooled by that at first also.
Good catch on the date. If the stock was sold by the estate, the gain should be on the 1041. If the stock was distributed in-kind, then the beneficiary should have a 1099B showing the sale in his SSN. More facts definitely needed. Something doesn't jive on the dates/transactions so far.
When you discover that you are riding a dead horse, the best strategy is to dismount.

pshonore
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Re: Got a letter from the IRS...

Post by pshonore » Thu Mar 01, 2012 11:14 am

sscritic wrote:The letter gave you a phone number. Call and ask politely.

You aren't going to owe $10,000. The issue might be that the IRS gave your mother's stock a basis of zero as you didn't file a Schedule D that covered it. Since the stock should have received a step up in basis at the time of your mother's death (there are exceptions), your gain would have been almost zero. Did the K-1 show a basis or just the proceeds from the sale? I haven't filled one out in a long time.

We need the answers to jebmke's questions.

note to jebmke: The distribution was in January; the K-1 might have come in June. I was fooled by that at first also.
Generally K1s do not show a basis, they pass through income that the entity (trust, estate, partnership) did not pay tax on. Not positive about the timing, but I think you missed an amended return (assuming the K1 is correct).

sscritic
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Re: Got a letter from the IRS...

Post by sscritic » Thu Mar 01, 2012 11:19 am

pshonore wrote: Generally K1s do not show a basis, they pass through income that the entity (trust, estate, partnership) did not pay tax on. Not positive about the timing, but I think you missed an amended return (assuming the K1 is correct).
That was my recollection. Now all he has to do is provide the basis to the IRS to show the gain was zero or close to it. There may not be any penalties, as I think the penalties are based on the tax owed, which if zero ... . I know, I could look it up, but ...

pshonore
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Re: Got a letter from the IRS...

Post by pshonore » Thu Mar 01, 2012 11:26 am

But assuming the K1 is correct, he might owe tax on 33K although probably at LTCG rates. All depends on the K1 box in which the number appears.

jebmke
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Re: Got a letter from the IRS...

Post by jebmke » Thu Mar 01, 2012 11:49 am

I have never seen K-1s that listed the assets distributed to beneficiaries (that doesn't mean they never are, I just haven't seen it). I have seen the distributions shown on the 1041 (second page as "Other distributions"). Normally, the K-1 is for distributable income items so if the assets were sold by the estate, the gain or loss pass to the beneficiaries via the K-1, Line 3 and 4 (right?).

If the assets were distributed to the beneficiaries and then sold, it is up to the beneficiary to show the sales on Schedule D of his 1040.
When you discover that you are riding a dead horse, the best strategy is to dismount.

pshonore
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Re: Got a letter from the IRS...

Post by pshonore » Thu Mar 01, 2012 12:02 pm

Sounds right to me. Saw one the other day with 50K in Box 5. Still not sure what that is but it evidently goes on Sched E.

MarkNYC
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Re: Got a letter from the IRS...

Post by MarkNYC » Thu Mar 01, 2012 12:58 pm

tualatindave wrote:Stating that income for me had been reported to the IRS in the amount of 33,000.00 in 2010, and that I now owe 10,000 tax and penalties.

In 2010 my mother's estate began distributing its assets to my sister and me, all from CD's and savings accounts, thus with no tax implications. This was in the fall of 2010. In January of 2011, the last part of the estate was distributed, 33,000.00 from the sale of my mother's BP stock. This was handled by the estate's executor/attorney. We received a K-1 form in 2011 indicating such, and I am in the process of doing 2011's taxes with H&R Block, and we are including the 33,000 as income for the year 2011. I did point out to the tax person that the K-1 form had a date on it the spanned 2010/2011. My sister received the same IRS letter and the same K-1 form.

Is it possible the estate attorney processed this wrong? Or did I miss an obligation to file an amended 2010 tax statement? Any thoughts? Thanks!
It sounds like you received a 2010/2011 fiscal-year K-1 showing a $33,000 capital gain. The K-1 would have been produced on a 2010 form-year K-1. The fiscal-year information near the top of the K-1 is easy to miss, and it's likely that the IRS incorrectly attributed the income to your 2010 tax year, rather than your 2011 tax year. If my assumption is correct, you should send the IRS a letter explaining their error and attach a copy of the K-1 with the fiscal-year information highlighted.

If you think the $33,000 capital gain amount is not correct, that is a different issue, and you should contact the accountant who prepared the estate's income tax return for an explanation.

jebmke
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Re: Got a letter from the IRS...

Post by jebmke » Thu Mar 01, 2012 1:14 pm

You may be right but here is what doesn't smell quite right. Normally, the income distributed on a K-1 has various deductible expenses (e.g. attorneys fees, etc) subtracted from the gross income. So if there was an actual CG of $33K in the estate, one might expect that some of the expenses of the estate were subtracted before the gain is reported on the K-1. It is possible that the expenses were all allocated to other income (I believe this is permitted) -- but without the full document, we can only guess.
When you discover that you are riding a dead horse, the best strategy is to dismount.

c.Alvin
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Re: Got a letter from the IRS...

Post by c.Alvin » Thu Mar 01, 2012 1:26 pm

Sounds like a backup withholding issue.

Go to the http://WWW.IRS.GOV website and search for "backup withholding" and read carefully. Better yet, call the IRS. It is their job to answer your questions.

Telephone Assistance for Individuals:
Toll-Free, 1-800-829-1040
Hours of Operation: Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).

SP-diceman
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Re: Got a letter from the IRS...

Post by SP-diceman » Thu Mar 01, 2012 1:31 pm

Don’t fear the IRS.

They sent me something that I owed $15,000,
by the time I was done they owed me 8 cents.


Thanks
SP-diceman

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damjam
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Re: Got a letter from the IRS...

Post by damjam » Thu Mar 01, 2012 1:34 pm

[quot="c.Alvine"]Go to the http://WWW.IRS.GOV website and search for "backup withholding" and read carefully. Better yet, call the IRS. It is their job to answer your questions.

Telephone Assistance for Individuals:
Toll-Free, 1-800-829-1040
Hours of Operation: Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).[/quote]

IMO, your better off just looking it up on the website, unless your totally lost as to what publication(s) to look at.
I recently spent 2 hrs (no kidding) on the phone with the IRS only to have the representative read back to me a paragraph I already found in publication 525. I asked more questions and again the representative read back the same paragraph. I don't think they're allowed to give any interpretation of what is in the publications and if the publication is unclear...

MarkNYC
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Re: Got a letter from the IRS...

Post by MarkNYC » Thu Mar 01, 2012 1:41 pm

jebmke wrote:You may be right but here is what doesn't smell quite right. Normally, the income distributed on a K-1 has various deductible expenses (e.g. attorneys fees, etc) subtracted from the gross income. So if there was an actual CG of $33K in the estate, one might expect that some of the expenses of the estate were subtracted before the gain is reported on the K-1. It is possible that the expenses were all allocated to other income (I believe this is permitted) -- but without the full document, we can only guess.
Any deductible expenses would reduce the ordinary income on the K-1, but not the capital gain. In the final year, any deductible expenses in excess of ordinary income would transfer to line 11 of the K-1, to be deducted on the beneficiary's individual return.

jebmke
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Re: Got a letter from the IRS...

Post by jebmke » Thu Mar 01, 2012 2:18 pm

MarkNYC wrote:
jebmke wrote:You may be right but here is what doesn't smell quite right. Normally, the income distributed on a K-1 has various deductible expenses (e.g. attorneys fees, etc) subtracted from the gross income. So if there was an actual CG of $33K in the estate, one might expect that some of the expenses of the estate were subtracted before the gain is reported on the K-1. It is possible that the expenses were all allocated to other income (I believe this is permitted) -- but without the full document, we can only guess.
Any deductible expenses would reduce the ordinary income on the K-1, but not the capital gain. In the final year, any deductible expenses in excess of ordinary income would transfer to line 11 of the K-1, to be deducted on the beneficiary's individual return.
The K-1 instructions aren't specific about allocating expenses. I am working on a filing (small). The deductions in total are less than the DNI. Most of the DNI is an IRA distribution but there are some divs and CG. Are you saying I can (should) allocate the final expenses to everything except the CG?
When you discover that you are riding a dead horse, the best strategy is to dismount.

MarkNYC
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Re: Got a letter from the IRS...

Post by MarkNYC » Thu Mar 01, 2012 9:45 pm

jebmke wrote:The K-1 instructions aren't specific about allocating expenses. I am working on a filing (small). The deductions in total are less than the DNI. Most of the DNI is an IRA distribution but there are some divs and CG. Are you saying I can (should) allocate the final expenses to everything except the CG?
Under something called the tier method of allocating expenses to specific classes of income (as opposed to a pro-rata method), the expenses would go against ordinary income first. I can't point to any legal reference that would indicate if or when the tier method would not be allowed, but as a practical matter, it is highly unlikely the IRS will challenge the method you use.

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Steelersfan
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Re: Got a letter from the IRS...

Post by Steelersfan » Thu Mar 01, 2012 10:14 pm

SP-diceman wrote:Don’t fear the IRS.

They sent me something that I owed $15,000,
by the time I was done they owed me 8 cents.


Thanks
SP-diceman
I agree.

I got a letter from them that I owed a bunch of taxes on a presumed capital gain event and by the time I got through a single call they realized a mistake had been made and it was fixed on the spot.

ilmartello
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Re: Got a letter from the IRS...

Post by ilmartello » Fri Mar 02, 2012 12:37 am

Sometimes these letters are generated based on a computer spitting out some stuff, that may not necessarily be accurate.
Call them and get all the details and don't be afraid but the IRS is the nicest state,local,or federal agency I have ever dealt with it. I am not joking.

tualatindave
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Re: Got a letter from the IRS...

Post by tualatindave » Mon Jul 30, 2012 2:08 pm

UPDATE:

My justification letter contesting the claim was accepted by the IRS and they sent me a polite letter letting me know I owed nothing. All and all the experience was better than I would have thought going into it.

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damjam
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Re: Got a letter from the IRS...

Post by damjam » Mon Jul 30, 2012 2:43 pm

I'm happy to here it worked out well, and thanks for the update.

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