HELP - IRS says I owe close to $12,000 for 2016 taxes

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privateID
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HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Fri Apr 13, 2018 10:23 pm

Ok, helping out a relative here. She got a bill from the IRS for an omission on her 2016 taxes. I do understand what happened, but not sure the best course on how to correct it. Here are the details (I'll simplify the numbers to make it easier to discuss).

Johnson Controls had some kind of merger in 2016 and all shares of Johnson Controls got automatically sold. Relative did not understand what happened. I believe all the shares went to buy the new parent company - Johnson Ctls Intl, but that detail is not important.

Gross proceeds from the sale: $42,000

The $42,000 consisted of covered shares and uncovered shares. $5,000 of the proceeds came from covered shares, meaning that the broker knew the cost basis. These were reported on her 2016 return correctly. $37,000 of the proceeds came from uncovered shares, meaning that the broker did not know the cost basis. This amount was omitted from her 2016 return. The IRS realized the mistake and sent her a bill this week.

Gross proceeds not reported: $37,000
Taxes owed: $9,100
Tax understatement penalty: $1,800
Interest: $440

I assume the IRS used a cost basis of 0 and assumed everything was a short-term gain. She's in the 25% tax bracket and that seems to make sense with these numbers. So, obviously she needs to tell the IRS the correct cost basis to compute what she really owes and the correct associated penalty. Here's the kicker - although she really did this by accident, she has no idea what cost basis should be. These shares were bought over many years and she has no records.

I would think she should check "I don't agree with some or all of these changes". It says to include a signed statement explaining the disagreement and include statements supporting the statement. Given that she has no statements of proof, what should she do? Would hiring an accountant at this point help at all?

I appreciate any help

trueblueky
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by trueblueky » Fri Apr 13, 2018 10:52 pm

Do what you can to find the basis. The brokerage may know more than it reported, so ask them. If the shares were bought systematically, say $50/month, use that info.

Yahoo finance has excellent price history on stocks. Type Johnson Controls in the text box at https://finance.yahoo.com. Looks like records for JCI start March 1, 1985.

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celia
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by celia » Fri Apr 13, 2018 11:25 pm

privateID wrote:
Fri Apr 13, 2018 10:23 pm
Would hiring an accountant at this point help at all?
What would you want the accountant to do?

She will likely say that you need to find the basis.

If the shares were inherited, it is easy, since the shares get a stepped up value (basis) on date of death.
If the shares were an RMD from a retirement account, look in the IRA/401K to see the value on the dates shares were distributed.
If she bought them through payroll withholding, how much was she contributing each month and for how many months?
What does the brokerage have in their records for purchase price? Were they purchased at the broker where they were sold?

Only you (your relative) can get this information--or pay the IRS bill.

PS. While your relative is investigating this, he/she might as well get the basis for everything currently owned.

mouses
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by mouses » Sat Apr 14, 2018 6:04 am

First off, I would send the IRS a letter with this form, explaining what happened and saying she is finding the cost basis but that that may take some time. My experience has been, from taking over as executor of an estate the previous executor had made a paperwork mess of, that the IRS is decent about this if one keeps it informed.

They may even waive the penalty if she has a good reason for having omitted this, although I can't imagine what that reason would be.

If I were in this situation and I were totally unable to find the cost basis, I might find the lowest price for Johnson Controls over the time period she owned it and say, the original purchase price was that or higher, so she might see if that flies with the IRS as a cost basis. That would no doubt cost her money, but it's better than using zero.

How did she acquire the shares that she doesn't know of the cost basis of? What is the situation with her other financial records?

cas
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by cas » Sat Apr 14, 2018 6:48 am

privateID wrote:
Fri Apr 13, 2018 10:23 pm

Gross proceeds from the sale: $42,000

The $42,000 consisted of covered shares and uncovered shares. $5,000 of the proceeds came from covered shares, meaning that the broker knew the cost basis. These were reported on her 2016 return correctly. $37,000 of the proceeds came from uncovered shares, meaning that the broker did not know the cost basis. This amount was omitted from her 2016 return. The IRS realized the mistake and sent her a bill this week.

<skip>

I assume the IRS used a cost basis of 0 and assumed everything was a short-term gain. She's in the 25% tax bracket and that seems to make sense with these numbers. So, obviously she needs to tell the IRS the correct cost basis to compute what she really owes and the correct associated penalty. Here's the kicker - although she really did this by accident, she has no idea what cost basis should be. These shares were bought over many years and she has no records.
Sorry, running out the door, so this will be brief...

You are kind to be helping your relative out. This type of financial forensics can get time-consuming.

Some thoughts:

1. Even if shares were non-covered, the broker should have issued a 1099-B for them. If this 1099-B was issued, it would almost certainly have been on a *separate page* from the 1099-B for the covered shares. Or, worse, on the back side of the covered shares 1099-B. I can see that it could pretty easily have occurred that your relative to have gotten to the first 1099-B in the broker consolidated statement, then assumed there was nothing else to look for. Be that as it may, if you can possibly get physical access to your relatives 2016 tax records, then leaf through the broker's consolidated statement, there may well be useful information there.

2. Brief google of "tax implications johnson controls tyco" shows that this seems to have been a complicated corporate action (and, unfortunately, that the tax information put out by johnson controls international explaining the tax consequences to shareholders is one of the less informative and more poorly written such communications I've seen.) In any case, there were a couple of different things that could have happened (all cash or cash&stock, and your relative had to chose between them. Look like by default, maybe she got the cash+stock option. But, if so, you (again) may really want to see the 2016 broker's consolidated statement to track down where they they reported the different portions ... especially whether the cash was reported on a 1099-B as a sale with no basis (maybe the "covered" 1099-B was actually the cash?) or dividend on a 1099-DIV (in which case maybe the smaller amount really was a covered portion of the stock from the (taxable) merger?) Don't pay too much attention to the last few 2 sentences I just wrote ... I just skimmed the "tax implications" document from Johnson Controls, grimaced, and didn't figure it out.

From the google above, looks like plenty of other people were confused on how to report the taxes for the merger, so you might find wisdom there.

And, eventually, if you are really, really nice, sounds like it would be worthwhile for someone to figure out the *new* cost basis for the new Johnson Controls (and, apparently, a spin-off of Adient immediately after the Tyco merger, which will also affect cost basis for the new Johnson Controls and the Adient that probably appeared in your relative's portfolio.) Would be sad for your relative to hit this "I don't know the cost basis" situation again sometime in the future, even though the cost basis was apparently re-set with this taxable Tyco merger.

3. Broker statements (historically and especially the ones right before and after the merger) might give insight into acquisition date(s) and broker-tracked cost basis (even if it was non-covered) of the old Johnson Controls. (You are sure she owned Johnson Controls pre-merger and not Tyco?) If you live too far away to see if your relative kept paper statements, maybe the broker statements can be accessed online (if your relative will let you log in to his/her broker account.)

livesoft
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by livesoft » Sat Apr 14, 2018 6:51 am

privateID wrote:
Fri Apr 13, 2018 10:23 pm
$37,000 of the proceeds came from uncovered shares, meaning that the broker did not know the cost basis.
"uncovered shares" does not mean the broker did not know the cost basis. It just means the broker did not have to put the cost basis on the 1099-B.

So go to the broker and request the records of all the purchases made (date acquired, number of shares, amount paid). That's the first step. The broker could put up road blocks, but one has to at least try that first. And at the same time, get all the records for any other investments at that broker. That is, get old statements from the broker.

Note that even old tax returns might tell one about dividends from this investment. Knowing the dividend amounts each year could tell one the number of shares owned each year, too.

Another thing: If the cost basis gets figured out, then the gain is lowered and the AGI is lowered. Since shares were held long-term, the capital gains tax rate is lowered. Just altering the capital gains tax rate will save money.
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spectec
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by spectec » Sat Apr 14, 2018 7:12 am

Are you saying she has absolutely no records on how she acquired the older shares, or does she have incomplete records? It's interesting to see what can be reconstructed with incomplete records, an excel spreadsheet, and public information on stock prices. There are other potential sources of basis information, such as account transcripts from plan administrators for employee stock purchase plans, etc. It will take some time, but it is possible to do a basis reconstruction.

If dividends in the stock purchase plan were reinvested over the years, that presents a gold mine of info. A knowledgeable person can do a considerable amount of reconstruction by looking at old tax returns and working backwards by calculating the number of shares owned and acquired each year based on the dividend history alone. (This is one of the best ways to reconstruct, BTW. It also provides sold data for increasing the basis) The end result could yield anything from a minimal basis all the way down to a loss, so the final result could be a decrease in the tax liability or even an additional refund. Also, keep in mind that every dollar of decrease in the capital gain also carries with it an embedded decrease in the associated penalty & interest.

Should you hire a tax pro? It depends. How adept are you or your relative at running the numbers and doing a reconstruction along the above lines? (Keeping in mind that the IRS is going to need to see your documentation in a form they are familiar with or find acceptable). The right tax pro who knows what they're doing can quickly evaluate whether there's significant potential savings. The wrong one will flounder around and keep demanding that you give them basis info without doing anything significant to help you. The cost could be anywhere from a few hundred dollars up to a couple of thousand (or more). But on the other hand, if you do nothing then there's that $11,000 check to write to IRS. And that bill won't go away. Some tax issues are not cut & dried, require work, and can't be resolved by looking up a regulation in a book.

Finally, here's a good article from Forbes on the subject, and it offers some additional ideas & resources. https://www.forbes.com/sites/baldwin/20 ... 08785b6a37
Last edited by spectec on Sat Apr 14, 2018 7:41 am, edited 6 times in total.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

cherijoh
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by cherijoh » Sat Apr 14, 2018 7:17 am

Did you relative purchase the stock through the brokerage that sold the stock? Does she have any Idea how long she has owned it? If it was purchased through a different brokerage or if she has owned it for a really long time, she may not be able to access old records through the brokerage. FWIW I just checked and my VG account will let me access transactions online dating back to 10/01/1998.

Does she have any old tax returns? I file my prior year brokerage statements with each year's tax returns. If someone else was doing her taxes that may be why she doesn't know where to find her records to determine the tax basis. But a lot of people ditch their tax returns after 7 - 10 years.

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Sat Apr 14, 2018 7:43 am

I did see the 1099B and her taxes (she doesn't live near me, but she scanned and sent them to me). The 1099B shows the covered and uncovered shares. On her taxes she clearly just showed the covered shares. So, it really is clear what happened. She said she was confused at the time. She used Turbotax to do her own taxes. In all fairness to her, it was a confusing situation although she should've realized that she needed to do something with that section of the 1099B.

The only information she told me so far is that shares were bought a long time ago through a drip program. My knowledge of drip programs is limited, but if the shares were bought directly from the company and the company made all these changes, I wonder how helpful they would be getting information from 10,20,30 years ago. I will definitely advise her to call the broker, as well as get any other past statements she might have. I have a feeling that may uncover some more information but not all the information. Sounds like the next step would be to reconstruct the best she can based on old tax returns. I understand the point about how old tax returns shows dividends and through dividends paid you can figure out how much she owned. Historical prices can then be used to reconstruct. Certainly sounds like some leg work but that may be the only way.

Sounds like step one would be to send a letter back to the IRS explaining the situation and referencing the complicated Johnson Control corporate action. She should also explain that it will take some time to get the cost basis. Step 2 would be to do the leg work herself or hire someone else to do it. That becomes a cost/reward question. For example, if she does as someone mentioned above and simply use the lowest share price over the period owned, which would certainly be a long-term gain, that would establish a floor for her cost basis. Then it just depends on how much she is willing to pay someone to figure out the cost basis given the worst case scenario is that floor and the best case scenario would be unknown but certainly a range of possible share prices could be guessed.

Thanks for the replies.

spectec
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by spectec » Sat Apr 14, 2018 7:57 am

One other thought on this. It may or may not be relevant in this situation. You could run scenarios on the return, changing the cost basis incrementally to see how close she is to zero capital gains tax. That becomes your target basis. If you can get to that basis using solid, supportable data, you could stop counting at that point and just send that info to IRS (unless of course she still holds any shares which might be sold in the future).
Last edited by spectec on Sat Apr 14, 2018 8:35 am, edited 2 times in total.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

Chip
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by Chip » Sat Apr 14, 2018 7:59 am

You may be able to dig up some historical information to limit the amount of reconstruction you have to do. Though I suspect you'll have to pay for it.

From the JCI web site:

Historical Account Information

Johnson Controls does not have access to or the ability to provide historical account information. Our transfer agent, EQ, maintains account history from 1998 forward.

For historical account information prior to 1998, please contact our former transfer agent using the information below:
US Bank Corporate Trust Services
60 Livingston Avenue
BHC, 2nd Floor
St. Paul, MN 55107
800.934.6802
*Please note that US Bank may assess fees for historical account research.


And I agree with spectec's other suggestion about finding "enough" info to get to zero capital gains tax. But don't forget that there will likely be state taxes as well.

cas
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by cas » Sat Apr 14, 2018 10:26 am

privateID wrote:
Sat Apr 14, 2018 7:43 am


The only information she told me so far is that shares were bought a long time ago through a drip program. My knowledge of drip programs is limited, but if the shares were bought directly from the company and the company made all these changes, I wonder how helpful they would be getting information from 10,20,30 years ago. I will definitely advise her to call the broker, as well as get any other past statements she might have. I have a feeling that may uncover some more information but not all the information. Sounds like the next step would be to reconstruct the best she can based on old tax returns. I understand the point about how old tax returns shows dividends and through dividends paid you can figure out how much she owned. Historical prices can then be used to reconstruct. Certainly sounds like some leg work but that may be the only way.
In addition to, or in combination with any old tax returns or statements you/she can find or obtain, Yahoo Finance has historical information that might be useful if you find some old document that gives a baseline # of shares (or if you can reconstuct a baseline # of shares from some combination of information). E.g. Yahoo Finance has date and rate of every dividend going back to (looks like) 1985, plus the high and low price of the stock on that day ... the IRS would probably accept the average of high/low on that day as an acceptable reconstructed reinvestment price. Or you could use the low as the reinvestment price, and they couldn't complain about that.)
(https://finance.yahoo.com/quote/JCI/history?p=JCI then click on the Historical Data tab, then play with the date range and possibly restrict on just "show dividends only" to see dividend rates.) (Unfortunately, there seem to be quite a few stock splits in JCI's history, and I'm not sure how those affect the data that Yahoo Finance shows.)

If your relative is over some age ... started investing in the '60s,'70s, maybe early 80s ... the investing landscape was very different. There weren't IRAs or 401ks for much that that time. Vanguard and index funds didn't exist until the mid-70s. Mutual funds existed, but it was a tiny business sector compared to now. Brokerages were very expensive. As far as I can reconstruct from my elderly parents' finances, DRIPs in a blue chip company were considered (and probably were) a smart, relatively low-cost way for people of limited means to invest and save for retirement. For someone (and, societally, this was probably especially the case for a woman, especially in the earlier part of that timespan) to show the initiative to get a DRIP set up was actually quite a praiseworthy thing. (Just consider how much difficulty companies have getting people to sign up for 401ks where the whole process is comparatively spoon-fed.) Of course, then probably a lot of people apparently missed the fact that careful record keeping for the DRIP was necessary in order to establish cost basis. Don't know if the above scenario is remotely the situation for the origin of your relative's DRIP, but thought I would mention it, just it case it does apply.

sophie1
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by sophie1 » Sat Apr 14, 2018 11:40 am

I had to do this once. It's not that hard actually; also I believe there is some written guidance in IRS forms on how to deal with cost basis when records are not available. Note you can request an extension if more time is needed. Here's what you have to do:

1) First, call the broker and request copies of old records - paying fees to get them if needed. I was able to get most of the records I needed that way. If that leaves date gaps and the shares were purchased by check, contact the bank and request copies of statements. If your relative has saved cancelled checks and/or checking registers, you can also go through those. I think in some cases the statements gave me a time window rather than exact date, so I just picked one in the window, making sure it wasn't a weekend or holiday. Of course, any statements/checks/etc that are unearthed should be copied to provide to the IRS; purchases where the date is estimated could simply be reported that way to the IRS.

2) For each purchase, figure out total amount spent including commission. If all you have is #shares, you need to find out what the commission was on that date - in the 1990s this was as high as $200 so it's worth contacting the broker to find out. Then look up the stock price for that date on Google/Yahoo Finance to get the actual dollar amount.

If you truly are stuck and can't find any evidence of cost basis, then you could fall back on proving that the $37,000 came from shares held more than one year, in which case the tax bill is $5,550 and the penalties/interest will be correspondingly less. Not completely painless but better than the $12,000.

talzara
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by talzara » Sat Apr 14, 2018 12:40 pm

privateID wrote:
Fri Apr 13, 2018 10:23 pm
Johnson Controls had some kind of merger in 2016 and all shares of Johnson Controls got automatically sold. Relative did not understand what happened. I believe all the shares went to buy the new parent company - Johnson Ctls Intl, but that detail is not important.
Shareholders were given a choice. They could cash out all of their shares in the old Johnson Controls. Or they could take a one-time cash dividend and get shares of the merged company.

Johnson Controls has taken the position that the cash and shares were both paid out as a dividend.
If this interpretation holds up, then you do not need to determine the cost basis. Dividends do not have cost basis, since they're 100% taxable. You do need to determine whether the dividends were qualified.

What did your relative receive from the share transfer agent? Did they report it as dividends or capital gains? I'm surprised the company's own transfer agent didn't report it correctly.
Last edited by talzara on Sat Apr 14, 2018 12:51 pm, edited 1 time in total.

not4me
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by not4me » Sat Apr 14, 2018 12:51 pm

I didn't read all of all of the post & I will apologize in advance if this is redundant. I didn't notice it being mentioned.

In addition, regardless of whether it is dividend or long term cap gain, it sounds as if she owes $5500 or so at a minimum. I'd go ahead & pay that now. She may or may not end up getting penalties/interest waived, but if not the clock is ticking on paying interest. I think on many of those letters, they give an amount of interest up to a certain date...but this may not be resolved by that date & she'll ultimately have to pay

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Sat Apr 14, 2018 4:17 pm

She got a 1099B from the broker and on the 1099B it was specified as noncovered shares.

talzara - interesting reading. She never actually got the money from the action, but instead got shares in the new company. Not sure if that affects it being considered dividends. If it is dividends, wouldn't that be worse because the whole amount would be considered dividends? But it clearly was not reported as a dividend.

not4me - I believe it's $5500 or so at a maximum - cost basis is zero but whole thing considered long term gain. Assuming the cost basis is not zero (I'm sure it's not), than what she owes will be less than $5500 (plus fees and interest).

At this point, she's looking into anything she has about shares purchased and will get back to me. My gut is a large purchase was made some time in the 80s (maybe 70s) and everything else is reinvested dividends. If that is the case, I'm leaning toward suggesting explaining the situation in a letter and taking the best guess we can using historical prices. Hopefully, the IRS will not be too hard on her given the complicated corporate action thrust upon her. Otherwise, maybe she will call a place (one was referenced in a link above) that does this kind of detective work and see what they can do to help figure out the basis. Seems to me the worst case scenario (and maybe the path of least resistance) would be to pick the lowest price around the time she bought the stock, reclassify it as a long term gain and just pay it.

talzara
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by talzara » Sat Apr 14, 2018 5:42 pm

privateID wrote:
Sat Apr 14, 2018 4:17 pm
talzara - interesting reading. She never actually got the money from the action, but instead got shares in the new company. Not sure if that affects it being considered dividends. If it is dividends, wouldn't that be worse because the whole amount would be considered dividends? But it clearly was not reported as a dividend.
The Additional Information says that dividend treatment depends on "the application of the tests set forth in Section 302 of the Code in light of such holder’s individual facts and circumstances."

Maybe the transfer agent was right after all, and it really is a capital gain. Or maybe they reported it as a capital gain for everyone.

These tax situations are tricky. You could spend a lot of time figuring it out, or you could just pick one and wait for the IRS to challenge it. Maybe they never will.
privateID wrote:
Sat Apr 14, 2018 4:17 pm
At this point, she's looking into anything she has about shares purchased and will get back to me. My gut is a large purchase was made some time in the 80s (maybe 70s) and everything else is reinvested dividends.
Does she still have her tax returns from the 1970s and 1980s?

Schedule B will show how much was paid in dividends. That would tell you approximately how many shares there were. The year the dividends start would be the year the shares were purchased.

Also, the stock is going to be a tax headache in the future. Johnson Controls International is now an Irish company, so there are Irish withholding taxes. Does your relative have to file a form 1116, or can she squeeze in under the limit for the simplified foreign tax credit?

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Sat Apr 14, 2018 9:54 pm

talzara wrote:
Sat Apr 14, 2018 5:42 pm
Does she still have her tax returns from the 1970s and 1980s?

Schedule B will show how much was paid in dividends. That would tell you approximately how many shares there were. The year the dividends start would be the year the shares were purchased.

Also, the stock is going to be a tax headache in the future. Johnson Controls International is now an Irish company, so there are Irish withholding taxes. Does your relative have to file a form 1116, or can she squeeze in under the limit for the simplified foreign tax credit?
No, she does not have those tax returns. I do understand the dividend point if she had them.

I have always found Turbotax handles foreign tax credits well (I usually knock the things they don't do well, so I have to give them credit on that).

trueblueky
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by trueblueky » Sat Apr 14, 2018 10:12 pm

Go to IRS.gov and look for "Get Transcript". You should be able to get the last three years quickly that way. See if there are more than three, as transcripts are free. Then submit Form 4506 to request copies of older returns at $50/each.

talzara
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by talzara » Sun Apr 15, 2018 11:14 am

trueblueky wrote:
Sat Apr 14, 2018 10:12 pm
Go to IRS.gov and look for "Get Transcript". You should be able to get the last three years quickly that way. See if there are more than three, as transcripts are free. Then submit Form 4506 to request copies of older returns at $50/each.
Schedule B is how you work out the cost basis for free. If you don't have the tax returns, then it's probably not worth paying $50 per transcript.

If you're going to be spending money, then you might as well pay the stock transfer agent to pull the account history. That's direct evidence of cost basis, which is much better than the indirect evidence you get from the tax returns.

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Sun Apr 15, 2018 12:34 pm

talzara wrote:
Sun Apr 15, 2018 11:14 am
trueblueky wrote:
Sat Apr 14, 2018 10:12 pm
Go to IRS.gov and look for "Get Transcript". You should be able to get the last three years quickly that way. See if there are more than three, as transcripts are free. Then submit Form 4506 to request copies of older returns at $50/each.
Schedule B is how you work out the cost basis for free. If you don't have the tax returns, then it's probably not worth paying $50 per transcript.

If you're going to be spending money, then you might as well pay the stock transfer agent to pull the account history. That's direct evidence of cost basis, which is much better than the indirect evidence you get from the tax returns.
Seems like this could take some time. I think the first step here is to respond to he IRS tomorrow with the following:
1) Stating she disagrees with the amount claimed by the IRS.
2) Explain the situation - made a mistake, confusing 1099B, complicated corporate action, etc
3) Make an estimate as to how much she owes with as much detail as she has right now. If she knows the year the stock was initially bought, she can certainly pick the worst share price that year. Assuming it went up from that point, maybe she uses that share price for all the reinvested dividends as a start. That way will seem like she's coming in with a generous estimate.
4) Write a check for the estimate.
5) Ask for the penalty to be waived given the situation.

Maybe the IRS will say that's enough if the estimate seems reasonable. By at least paying capital gains on that amount, hopefully any interest or penalty will be lessened.

spectec
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by spectec » Sun Apr 15, 2018 3:35 pm

I'd omit #2 and #5. They really don't care about the reasons. The penalty and interest will automatically adjust proportionally as the tax goes down.

Give them only what they need to close the matter and hope they accept your figures. If they disagree, there will be plenty of time to offer up more information. What you want to do on the first response is make it as easy as possible for the reviewer to check it off their list and move on.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

MarkNYC
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by MarkNYC » Sun Apr 15, 2018 6:05 pm

privateID wrote:
Fri Apr 13, 2018 10:23 pm
The IRS realized the mistake and sent her a bill this week.

Gross proceeds not reported: $37,000
Taxes owed: $9,100
Tax understatement penalty: $1,800
Interest: $440

I assume the IRS used a cost basis of 0 and assumed everything was a short-term gain. She's in the 25% tax bracket and that seems to make sense with these numbers.
These numbers appear to be rounded but demonstrate an important point. The IRS is asserting that $37,000 income has been omitted from the original tax return, resulting in $9,100 additional tax, and yet the IRS is NOT assessing any late payment penalty, which would be approximately $546 ( 1/2 % per month for 12 months). That's because the late payment penalty only applies to the tax amount shown on the original return that is not paid by the due date.

What is being assessed is a flat 20% penalty for "substantial understatement of tax" because the additional tax exceeds $5K. So if the taxpayer here can reconstruct basis that results in a long-term gain of $33,300 or less, the additional tax will be less than $5K and the 20% penalty should be fully removed. All that will be owed is additional tax plus interest.

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Sun Apr 15, 2018 10:34 pm

So I was able to find out some more information. Wells Fargo has shares owned going back to Dec 15, 1992. Unfortunately, the bulk of the shares were purchased a couple of years earlier. I made some estimates and it turns out that a large percentage of the gains are accurate. In other words, the cost basis is maybe $2,000 out of the $37,000. So, the gain is close to $35,000 and the difference not really a huge deal. What is a huge deal is the long term vs short term capital gain. That alone should decrease the tax bill to 60% of the amount the IRS had (15%/25% = 60%). So, that is going to be the focus of the letter. I plan to just mention the cost basis was about $2,000 and maybe it is so small they will be willing to use it.

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teen persuasion
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by teen persuasion » Mon Apr 16, 2018 7:58 am

You mentioned this was a DRIP, did you include all the reinvested dividends in you basis estimates?

privateID
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by privateID » Mon Apr 16, 2018 8:45 am

teen persuasion wrote:
Mon Apr 16, 2018 7:58 am
You mentioned this was a DRIP, did you include all the reinvested dividends in you basis estimates?
I was aware of them. All the dividends from 2011 and on were reported on a 1099B with cost basis. So, we're talking about 20 years of reinvested dividends (roughly 1991 to 2011). Initially about $800 of stock was bought. The reinvested dividends over the 20 years was somewhere in the $1,000-$2,000 area. So, if I round up to about $3,000 basis that can deducted from the gross proceeds, that would save, at 15% capital gains, $450. I can do alot of leg work to get an actual number. I think I said I estimate $2,000-$3,000 basis in the letter I wrote for her. I'm hoping the IRS uses the low basis estimate ($2,000), drops the penalty and we call it a day.

livesoft
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Re: HELP - IRS says I owe close to $12,000 for 2016 taxes

Post by livesoft » Mon Apr 16, 2018 9:07 am

This is a classic thread of why one should not start DRIP plans anymore without knowing to keep meticulous records. I do recall all the financial magazines of the 1970s and 1980s touting these DRIPs, but I don't recall those same articles telling one to keep meticulous records, so I wonder if we only see questions about the situations where meticulous records were not kept and the vast majority of investors kept meticulous records.

Did everybody notice that I used the words "meticulous records" many times here?

My post doesn't help the OP who seems to have a handle on this situation, but does serve as a bookmark for me since I can search on "meticulous records" and link this thread whenever someone asks about starting a stock DRIP.
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