IRS Audit advice

[MOXJO7282]

So much to my chargrin, I received an audit notice for $13k today. I believe it to totally be an error, but I'm trying to figure what to do.

Here are the details;

Bought company stock over the course of 4+ years, from an after-tax stock plan. Left the company 4 years ago, with the stock in a Fidelity account.

Motorola then bought out my old company and gave me cash for the stock, about $35K worth. That $35k represents very little appreciation from what I put in over time, because the company execs had a scnadel and the stock went way down, but I probably did profit about 5%overall.

I then took the entire $35K and put it into another Fidelity acct, and has since lost about 25% of the money.

I never did receive a 1009b from my previous company or else I would have known then something was amiss.

Luckily I get free legal services from my company now so I've consulted a tax attorney, but I'm just wondering if anyone can provide me with some insight.

So I made very little on the stock to cash transaction, rolled it into a brokerage acct, and have loss 25%, but the gov't says I owe $13k.

I don't understand how I owe anything. I bought the stock with money that was alreadt taxed, I made very little, and have since lost alot.

I have to believe it will wash out, but I'm nervous I'll haver to pay taxes on money that I've done nothing but lose on.

 

[Pit]

You sold the stock to Motorola (not that you had any choice) and made a profit. What happened to the money thereafter is irrelevant. I would expect that the small profit you made (5%) is taxable income (cap gains).

 

[Icarus]

What kind of stock plan was it?

If it was just like a normal non-qualified stock purchase plan, without any discounts, etc, it sounds like when you got cash for the stock, that was a sale. You deduct your basis in the stock from the sale proceeds and that is your net profit or loss, which has to be reported to the IRS. Depending on how long you held the stock, it will either be a long term or a short term gain or loss, or you might have some of each.

What happened after that is irrelevant. And it doesn't matter if you got a tax form for the sale or not.

So, if it was a non-qualified plan, and there were no discounts on the execution price, you will need to gather together all the information from each stock purchase and the information from the sale when Moto bought it. If you only had a 5% gain, you won't owe much, but if it wasn't reported they might tack on some penalty and interest for not reporting it.

If it's an audit by mail, you can probably do a modified tax return for the year when the sale occurred. Are they asking for information at this point?

You might want to consult with a tax pro at this point. There's many different types of stock purchase plans out there, and they all tend to have some differences in how you report them and how much tax is due on them. For example, in an ESPP where the purchases are discounted, depending on when you sell, some of the proceeds are income and some can be long or short term cap gains or losses. The amount of income depends on if you held the stock long enough. If you sell during the "holding period", there's usually more income to report. In other plans, you might get annual income even if you don't exercise or sell the shares.

If you really only netted a 5% profit and it's a typical ESPP or after-tax non-qualified plan, I wouldn't worry about it too much. You shouldn't owe very much. But you need to take care of it.

-David

 

[cpamomma]

I don't know all the facts in your case, but maybe I can help shed some light.

When stock is disposed of, the IRS is notified of the selling price. The IRS has no way of knowing the amount you paid for the stock, so they treat the entire selling price as gain unless you tell them what the basis is in the stock. Your basis is dependent on the type of stock option you had and how it was treated originally. The amount you paid to exercise the stock option plus any income you recognized at the time of exercise is your basis. The difference between the selling price reported to the IRS and your basis is the amount of your gain. That is the amount that you should be paying tax on.

Good luck with this!

 

[Kal]

You need to provide documentation to show the purchase price then provide an amended return.

 

[PigsDad]

I don't know all the facts in your case, but maybe I can help shed some light.

When stock is disposed of, the IRS is notified of the selling price. The IRS has no way of knowing the amount you paid for the stock, so they treat the entire selling price as gain unless you tell them what the basis is in the stock. Your basis is dependent on the type of stock option you had and how it was treated originally. The amount you paid to exercise the stock option plus any income you recognized at the time of exercise is your basis. The difference between the selling price reported to the IRS and your basis is the amount of your gain. That is the amount that you should be paying tax on.

Good luck with this!

Bingo! This is exactly what happened to me a few years ago. A fairly large stock sale didn't get reported on my schedule D (actually due to a bug in TurboTax). Since the total gross sales figures on my return did not match the total gross sales reported to the IRS on my 1099's, I was flagged for an audit. The IRS said I owed taxes as if the complete sales amount that was not reported on my schedule D was 100% gains (i.e. $0 cost basis).

I had to correct my schedule D and ended up not owing any addition taxes as the gain was exactly $0 for that sale (and that is what screwed up TurboTax -- it thought that since there were no gains on that particular sale, there was no reason to include in on my schedule D ).

I am guessing that the OP's $35K sale was never listed on your schedule D and the $13K is the capital gains that the IRS thinks you owe based on a $0 cost basis. Once you provide your updated cost basis, you will owe much less but I'm sure there will be some amount of penalties / interest.

Good luck!
Kurt

 

[teepeeca]

One other thing. Do NOT vounteer any information on anything else than this particular "item". If the "audit" is only for the stock "transactions", keep it ONLY for that.

Tony

 

[GadgetRick]

Did you use a CPA? If so, speak with them. This is one reason I use a CPA for my taxes. If something ever happens, he'll be there to help.

 

[Kal]

...(actually due to a bug in TurboTax)....Kurt

If the taxpayer didn't tell TurboTax the cost basis of the transaction, how could it be a fault of the program. The default value is zero on cost basis. It certainly shouldn't be any other value.

 

[Kal]

One other thing. Do NOT vounteer any information on anything else than this particular "item". If the "audit" is only for the stock "transactions", keep it ONLY for that.

Tony

The audit could very well be by mail where the taxpayer provides clarifying data, an amended return and payment.

 

[MOXJO7282]

Thanks for all the insight.

I bought this stock over the course of 4+ years in small increments through payroll deductions, so how do I figure cost basis? As I alluded there were fraud issues with the stock, so the price went way up, where I bought, and also way low where I continued to buy, but overall, I know there wass very little appreciation, if any actually. The problemm is, how do I show that?, with all those transactions.

Also, doesn't it help that I should be able to show that I rolled entire amount into another "fund".

Now I'm really nervous, because I'm not sure what /I can document and how.

I do have an attorney, but not sure how good.

 

[Kal]

Every stock purchase is a unique transaction. If you purchased some small number of shares every week for 4 years, you will have a list of transactions with 208 line items. Make sure you check to verify you do not have a record for each transaction. If not, do some research to identify the closing stock price on the day of the each purchase (or payroll deduction). There are some assumptions in so doing, but it would be a reasonable approach. Write up the approach used to purchase stock and include all the unknowns, lack of documentation and methodology used to re-create the cost basis. Demonstrate the basis for reasonableness in creation of your "paper trail".

The fact that there may have been fraud doesn't matter. You bought shares and eventually sold shares. The whole issue is the fact that the IRS assumes the cost basis is ZERO. Once you establish a reasonable paper trail, the numbers are just arithmetic.

What you did with the proceeds has nothing to do with the primary issue.

 

[Icarus]

That's why I asked you what kind of stock plan it is. If it's an ESPP, you should have received statements every time they did a purchase, typically every 6 months. Was the stock plan held and administered by a brokerage? If it was, they should be able to help you. But you should have received statements from the plan too.

I also have an ESPP. They deduct the percentage of my salary that I elected to contribute to the plan out of each paycheck, and then at the end of the period (every 6 months for my plan), they buy stock, at a small discount to the market rate on the day of the purchase. The discount is considered income when you sell the stock, but any gain or loss on top of that is treated as a capital gain. They also send me a statement showing all that. You have to keep track of it. You could have done it in quicken. We had a choice of e-trade or Solomon Smith Barney Citicrap as the brokerage.

If the stock was held by a brokerage, they should be able to give you at least a history of all the stock deposits, and you can reconstruct the buy prices from historical stock prices on the internet maybe? But your best bet would be to find all the statements from that plan.

-David

 

[cpamomma]

Did you use a CPA? If so, speak with them. This is one reason I use a CPA for my taxes. If something ever happens, he'll be there to help.

Good advice

 

[PigsDad]

If the taxpayer didn't tell TurboTax the cost basis of the transaction, how could it be a fault of the program. The default value is zero on cost basis. It certainly shouldn't be any other value.

The taxpayer (me) DID enter in the sale properly into TurboTax. TurboTax just didn't transfer that sale into the schedule D from the "worksheet" as they called it. I never bothered to double-check that all the sales that I entered actually made if over to the final Schedule D that TurboTax created. After the error was found, I could still see the transaction in the worksheet, but not on the Schedule D!

Believe me, I had a few choice words to say to Intuit's customer service over that one!

Kurt

 

[Jennie]

You can easily find out the cost of a stock on any given date, even going back 20-30 years:

www.bigcharts.marketwatch.com/historical/

 

[MuranoJo]

I have a very similar situation, where I contributed to a stock-purchase program over several years, and every 6 mos., my investments would be used to purchase stock for a discount. This is a stock purchase plan, not stock options.

I have never sold any of this and I do have records of the purchase price of every transaction. What I don't understand is, what if I sell a bunch (or all) in one transaction, how could we figure 'income' vs. 'capital gains' taxation? How is this handled?

 

[Icarus]

I have a very similar situation, where I contributed to a stock-purchase program over several years, and every 6 mos., my investments would be used to purchase stock for a discount. This is a stock purchase plan, not stock options.

I have never sold any of this and I do have records of the purchase price of every transaction. What I don't understand is, what if I sell a bunch (or all) in one transaction, how could we figure 'income' vs. 'capital gains' taxation? How is this handled?

If you are using quicken, they handle ESPP plans now (for at least several years, they have it), and if you entered all the data from each confirmation slip, it should handle it for you.

If not, at least in my case, when I get the record of the purchase, it tells you the FMV on the date of the purchase, and the discount applied to that, if any. It also tells you when the holding period ends, and how much income you get (depending on the sale price, if it's above or below FMV), based on if you sell before the holding period ends or after). Don't your records show that? If you didn't enter all that into quicken (or don't want to now) you would have to calculate it manually.

If you are using the "captive broker" they may show you the info on their web site, and calculate it for you.

-David

 

[Icarus]

actually, I take it back, they aren't showing the holding period and income amounts any more. They just show something like this:

Deposit Date - ESPP Shares - Plan xxxxx

Date of Deposit:
	

Monday, 18 May 2009

Share Access Date:
	

Monday, 18 May 2009

Plan
	

xxxxx

Offering Period
	

1 November 2008 – 15 May 2009

FMV at Close on 3 November 2008
	

$4.85

FMV at Close on 15 May 2009
	

$9.00

ESPP Purchase Price – 15 May 2009 (85% of FMV at Close 15 May 2009 )
	

$7.65

All the info you need is there, but they no longer tell us how to calculate the income.

 

[Icarus]

I found an explanation on how to calculate the income. The example in this article is extreme, but there are 2 links at the bottom that explain it. Maybe Dave M can provide a simpler explanation.

http://www.fairmark.com/execcomp/espp/dispositions.htm

It's much easier to do when your confirmations include all the information like ours used to. I didn't check e-trade to see if the rest of the info is online or not. It might be there too.

The other thing you need to know is that if you use the captive broker and sell during the holding period, the income (but not the cap gain or loss) will likely just be reported on your W2, because there are some tax advantages to the company in that case.

-David

 

[MuranoJo]

My cumulative statements just show:
Transaction Date
Transaction type (purchase, contrib,dividend reinvestment)
Amount local currency (amt I had there for the 6 mos to make purchase)
Exchange rate
Amt. US dollars (they used all I had in there each time)
No. of shares (for the transaction)
Price per share

It was a captive broker, but now they've now moved our options all to another (and provided the option to move stock purchase there as well, and I intend to do that).
Thx for the advice!

 

[Charlie D.]

OP,

My guess is the attorney will contact your payroll department for a printout of your gross and net pay, taxable pay and payroll deductions for the years involved. Hopefully the stock that was sold was the only ones you were buying through payroll deductions. Those added up would be your cost/basis in the stock. If you sold all the stock you do not have to try to match the particular shares bought with the shares sold.

Before I retired from my government job, we could have payroll deductions for our TSP (401K) which were pre-tax deductions which we did not have to pay tax on and thus the basis in those for tax purposes was -0-. You or your attorney will have to prove yours were after-tax payroll deductions. Once again your payroll department should be able to help with that. Gross minus pretax deductions equal taxable income for W2 purposes.

Your final statement with your last paycheck of every year hopefully had a summary of all the payroll deductions to arrive at your net pay for the year. You are correct in taking this pretty seriously and getting an attorney involved. The IRS is interested in your tax basis in the stock. Selling it and then transferring the proceeds to another retirement fund triggers a taxable event. I think if you or whoever had transferred the stock itself it may have been considered a roll-over and not been taxable.

It may be good that the basis is being brought up now rather than years down the road when establishing the basis would be harder. You have got to come up with some documentation. You can tell us here on TUG all day long that your gain could not have been more than 5% but the individual on the other end of that letter/audit is starting out at 100%. Oral testimony when collaborated with documentation can be taken into account to establish the tax basis. Get as much documentation as you can!!

Charlie D.

 

[Icarus]

My cumulative statements just show:
Transaction Date
Transaction type (purchase, contrib,dividend reinvestment)
Amount local currency (amt I had there for the 6 mos to make purchase)
Exchange rate
Amt. US dollars (they used all I had in there each time)
No. of shares (for the transaction)
Price per share

It was a captive broker, but now they've now moved our options all to another (and provided the option to move stock purchase there as well, and I intend to do that).
Thx for the advice!

You have almost all the info you need. You need FMV (fair market value) for 2 dates for each purchase. The FMV on the date the plan started and the FMV on the date the purchase was made. You can use the historical value link somebody provided earlier in this thread to get that info.

FMV is the price at the close of the regular session on that date, I think.

I'm not 100% positive about this, but if your plan is the same as ours is now (we only get the discount on the FMV on the date of the purchase, which is every 6 months on a 6 month plan), then you probably only need the FMV on the date of the purchase.

The difference between your actual purchase price and FMV on the date of the purchase is income when you sell the shares. (Lot's of rules there, about the 1 year - 2 year holding period though. For us, the holding period on the 6 month plan ends up being 18 months from date of purchase.)

-David

 

[MOXJO7282]

The EPP I bought the stock in was managed exclusively through Fidelity, so I called them and they said they had all the cost basis info I need, going back to 1999, so I'm hoping its easy enough to be rectify with the IRS.

The free attorney service I have is going to help me complete the paperwork right. I'm curious to see what I did make, but I know it wasn't much.

 

[rapmarks]

Glad to hear everything got straightened out. Keep all that paper work, you will probably be getting a letter in the mail a bout a class action suit someday. i get them constantly. I just got one last week about a class action suit against Met Life Insurance Company, which gave out stock a few yers ago. I got a form to fill our for my deceased mother in law for Agilent stock, and i no longer have the supportng paper work or use that brokerage firm. she died in 2000.

Back before Turbo Tax came out,in the early nineties, we had zero coupon municipal bonds. One was called early and when it came to tax season, my broker, Merrill Lynch, would not supply me with the cost basis, said I had to figure it out from every statement over the years. i went to a CPA, he couldn't figure it out either, he spent more time on that one item than the entire rest of the tax return.
I have several utility stocks thru dividend reinsvestment going back to 1975, the holding company has changed hands over the years. Keeping track of that is a bear, especially if I get lazy about it.