Of course I can only speak to my experience here, but I received a similar letter some years back (maybe $10k instead of $41k but same idea.) The IRS was very willing to work with me, I explained what happened, provided some supporting documentation, and the whole thing-- every last penny-- just went away. It was a very stressful time of course but it was actually fairly easy to remedy.
Oh, I totally get that part. The onus rests on the taxpayer to ensure his accountant has the relevant information and if he does not, then he suffers the consequences. My point is whomever made the errors, the accountant can guide the taxpayer. Mine is very good for that and I can’t say as I’ve ever “accidentally” withheld 90 grand in income information from my accountant. I tell him everything and then he decides what needs to be reported.
Sure, if your accountant made a mistake he’s likely on the hook for penalties over and above the tax you owe.
I had a similar, though much smaller issue, with my taxes about 5 years ago. The IRS claimed I miscalculated something, so I owed additional money.
It turned out that the IRS didn’t understand its own rules in this case. I sent a letter back with a rebuttal. First I quoted their rules for this particular case. Then I showed that I had followed the rules to the letter.
A while later I got another letter saying I was right, and I didn’t owe anything.
Did the letter “actually” say “you’re right, we’re wrong”? Or more to effect of “we’ve recalculated…etc, etc, etc”
If you had any other stock transactions outside of the ESPP, were they included on the IRS list as being wrong?
If you did, and they weren’t, and you input everything correctly into TurboTax, it sounds like the administrator fucked up and transposed the cost basis and sales amount fields. So if you know who the administrator of the ESPP is, you can take a peek at their website and see if they’ve posted anything about it.
Which is a good move. You should have gotten a statement saying that the 40% was paid in withholding. But they are not a part of the cost basis. The company selling them and paying the IRS is no different from you getting all of them, then selling 40% and sending the money to the IRS.
I’m still curious as to whether what you actually reported matches what you think you reported. It is possible that the company screwed it up, but then they probably screwed it up for everyone which you would soon hear about.
My general rule is I try to save money by doing taxes myself. But if I ever get threatened with a major bill from the IRS, it’s time to turn my taxes over to the pros.
I’d find a reputable CPA in your area that deals with this sort of thing and go from there. “Reputable” would mean ideally someone that maybe a good friend or family member knows and trusts, and who’s actually handled this kind of work.
To be honest, I don’t remember the exact wording. But the bottom line is, they acknowledged I was right.
Five years ago I got a “Your tax return doesn’t match the information we have on file” letter. It turns out that the agents who handled a house sale for my father’s estate had incorrectly told the IRS that I personally, rather than the estate, had received the money. I sent back documentation of the correct information with a cover letter review of what actually had occurred, and received a response of “Your Form 1040 inquiry is closed. Amount due: $0.00”.
To make sure I follow:
Let’s say you got 100 shares at 100 dollars apiece - that’s 10,000.
40%, or 40 shares of those were immediately sold, for 100 apiece - that’s 4,000 remitted to the IRS (flagged as federal tax withheld?)
So you took possession of 60 shares, worth 6,000 total.
Let’s further imagine you sold those a few weeks later at 110 apiece - or 6,600 dollars.
Your basis is 10,000. Your total sale is 10,600 (4000 from the first transaction, 6600 from the second).
So you’ve got a gain of 600 dollars.
Does that about sum it up for that part of the issue?
That’s pretty much it exactly. And the IRS letter seems to say my profit was 10,600.
Ouch!!
Sounds like whomever handled that side of it reported zero basis. If that stock had magically appeared in your account, then they might be right - but you have proof (paystubs or whatever) showing that you bought it fair and square. Hopefully a letter, with appropriate statements and maybe even a spreadsheet or two, will make them go away.
Did your W2 at least include the “4,000 dollars” (or whatever the actual figure was) as having already been paid?
Well, it’s hard to tell, since my W2 is filled with things like “ESPPG 17527.07” and other things I can’t interpret easily.
Since folk upthread are curious how my Turbo experience goes:
TaxAudit (Turbo’s audit protection service) called me and I have an EA assigned now. I was reassured that they’d see this through with me, regardless if I mistakenly misreported or it was some other party’s fault. His description was “oh, yeah, we handle this stuff all the time, very common. You’ve already paid for the service, no need for another EA to look at it.” I’m promised action in 5-7 days, and was told that the October 8 deadline in the CP2000 has an additional 30 day grace before the IRS starts demanding things in a less pleasant way.
I got one of those a few years back. A combination of things, I could document 99% of what they were disputing (mostly college expenses paid out of a 529) and what I couldn’t (my files aren’t the best and it was 3 years back from the current tax year) I just wrote them a check for, since it wasn’t a lot of money relative to the expense of hiring someone to talk to them and the stress of having it hanging over my head.
In post 9 you said the cost basis of this was 0, which I took to mean it was an employer stock grant, and not an ESPP transaction where you pay for the stock, perhaps at a discounted rate. (That was item 1, the withholding was item 2). 40% seems pretty high for withholding, but that’s irrelevant.
I get one of these about every other year, same reason. I go to my year-end brokerage statement and check the basis. If they caught my error, I send them a check. If I caught their error, I send them a highlighted copy of the brokerage statement. Sometimes we go a few rounds. It’s no big deal, but then again I’m never on the hook for more than 3 figures.
Edited: The reason this happens is that in 2011, brokerages were required to start reporting cost basis to the IRS. If you sell a security you bought before 2011, there’s a good chance your brokerage helpfully reported a basis of $0 for 100% profit. So you just need to dig out old statements and prove you didn’t get the stock for free.
Yes, and I’m probably slinging these terms inconsistently. For my RSU sales the cost basis was $0 and they withheld 40% of the stock (“sold for taxes” or something displayed in my ETrade). For the ESPP sales there was no withholding (I think; that ESPPG entry on my W-2 makes me wonder otherwise), but the gain was small, just the amount the stock could have gone up since my ESPP price locked (which in some cases is a lot, in most case quite little) and I was paying for the shares with after-tax $$$, so the gains are pretty straightforward.
Ah. That sounds VERY familiar.
Some years back, my company gave every employee a certain number of shares (though you had to still be there 4 years later to actually GET them). 4 years later, I was still there, so I received the stock. They sold off about a third of the shares to cover the income tax withholding - which makes me think I should check to see what they consider the basis to be.
I’ve already paid taxes on the value of the stock - so presumably my “basis” is whatever the stock price was at the time I received it.
I just looked at my records in Quicken and I show 4 shares at about 140 dollars apiece (total of 560). My pay stub from around then shows “paid elsewhere” 980. Which suggests that the original gift was 7 shares (consistent with my memory), and they sold 3 to cover Federal and State income tax. The pay stub from just afterward has some extra numbers being withheld for Fed, State, and Social Security - that pretty much add up to the difference.
So - to help decipher all that, maybe look at the price of the stock on the day the transaction happened, and your paystubs before and after that date. With what I saw (and this makes me think I’d better make sure I have an electronic copy of those pay stubs). the shares I did not receive do add up to the withholding.
I don’t think those 3 shares were reported to the government as a stock sale. I certainly never did a Schedule D for them.
But I’m comfortable that the 140/share I logged in Quicken is a valid basis for the price of the 4 shares I still own. It’s now with about 10 bucks more than when I received it. I’ll try not to spend it all in one place!
So getting back to your situation: Definitely check to see if the value of the stock grant was already treated as income. It should have been. If you report the 40% of shares they grabbed off the top, then your purchase/sale date and prices would match for those shares - and you have no gain. The basis for the other shares would be the same per-share price as the 40% - so your gain is whatever you got back above THAT price. You might not need to even report the sale of those 40% though.
That’s great!