IRS Letters with Brokerage and Stock Activity

An IRS letter with a balance from stock or other brokerage trades can arrive with a nasty balance. Much of the time, however, you will not owe as much as the pending adjustment if you include your “cost basis” in the activity. Check it out.

Disclaimer: We strongly recommend that you hire a professional to deal with your IRS letter. This guide is only meant as a general introduction and it does not include all of the possible situations that might require actions specific to your situation. Failure to take the correct actions could result in a high tax liability, more interest, and greater penalties. If in doubt, hire tax pro.

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Simple guide to responding to IRS letters

Why did you receive and IRS Letter with brokerage and stock activity?

Maybe you forgot to include your stock, dividend, and interest activity on your tax return.

Is it possible that your broker or financial adviser didn’t send your 1099B tax statement?

Perhaps you gave it to your tax preparer and he or she forgot to add it to your tax return.

Or, maybe you have two accounts and only received one statement and didn’t think much of it.

These are the likely culprits when it comes to figuring out why the IRS would send you such a letter. Almost always, these letters are received because stock and brokerage account activity was mistakenly omitted from your tax return.

The broker reports the activity to the IRS and they send you a copy. If you do not file what the IRS has in its computer records, you get an “automated” adjustment letter. It’s calculated and sent by a computer.

IRS letter scam alert – don’t trust a phone call

Don’t send money blindly by mail either – but in most cases “phishing” scams happen on the phone.

We all know that the technology and smart phone age has a slimy dark side and most of us are used to it by now.

I’m sure that you probably don’t even answer calls in which you do not recognize.

Still, it pays to mention that IRS phone calls asking for money are scams.

They can be very scary and very convincing. Do not pay anything over the phone. Ever.

Don’t trust the caller ID, either. They cloak these now a days and they use obscure numbers that, when looked up, show that they are from the IRS, etc.

They’re not.

If you are worried that you truly might be in trouble with the IRS, hang up, and call them at 800-829-1040. Here is a link to how to contact the IRS (opens in a new tab).

Is the IRS adjustment correct?

If it’s possible that you omitted a brokerage tax statement on your tax return, then an adjustment was probably necessary. These adjustments, however, are not always accurate! Sometimes, these adjustments do not consider your “cost basis” in the activity, which is extremely important.

It’s also possible that the information that was filed with the IRS by your bank or brokerage was incorrect. Note that this is possible but very rare. If you suspect this to be the case, call your broker.

If an omission may have been the case, the next step is to figure out  whether the IRS  adjustment is correct or not.

If you review your activity and see that all cost basis was reported correctly, then it’s likely that the best course of action is to agree with the adjustment and pay the balance.

Before you do that, and if it’s a big  balance, it might be wise to hire a tax professional to look at it for you – just to make sure it’s correct.  If you had a professional prepare your taxes, you could ask them for help. If you did it yourself with online software, perhaps you can chat with them about it.

You can contact us here for help and advice with your letter, though we do charge a fee for non-clients to examine the letter and to provide advice on how to deal with it. If you need an amended return, that fee goes toward the amendment.

If the adjustment does NOT look correct, however, then the best course of action is probably to “amend” the tax return to show the activity correctly once and for all.

Cost basis of stocks (and other investments)

I’m not going to bore you with a long, drawn out explanation (too late, you’re thinking, I know).

To put it very simply, If you buy an investment for $5000 and then sell it at some point for $8,000, you have a capital gain of $3000.

Also, depending on how long you hold the investment, the tax rate on the gain will be different.

Simple, right?

The problem is, the IRS computers might now know that you bought the investment for $5000.

So what does the IRS computer do?

(you’re going to love this)

It sends you an adjustment letter assuming that the entire $9,000 proceeds are gains, and taxes you on a $9,000 gain at the highest rate.

It’s not funny to see a letter saying you owe like $35,000 in taxes (and more in late penalties).

It is funny, however, to see that when you include the correct amounts that the IRS owes YOU money.

IRS letter stock cost basis

Amend your tax return to include basis

If you are facing a large balance that you do not think to be correct, and you are savvy with reading brokerage tax forms and preparing tax forms, then you should consider preparing an amendment to file as a response to the letter. You might also include a statement with the letter explaining the situation.

Amended returns are a bit tricky, and it might be worth your money and save a lot of time to hire a tax professional. If you would like to hire us to prepare an amended tax return for you, please see our home page here.

Thanks for reading, please leave a comment.

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