I received an IRS letter today about tax year 2024 that I owe like $7.4k in taxes and $2.1k in penalties and interest. I stupidly failed to report 2 1099-B’s that had about $32,067 in proceeds.
I went on freetaxusa to act as if I were going to amend my taxes for that year and it resulted in only $372 taxes owed. How the heck did the IRS get $9,550 due!? I submitted my response online and also used the secure messaging to explain that and I provided a copy of the 1040 showing amended for demonstration purposes and I’m praying they reduce the tax owed and remove penalties and interest since the amount owed is under $500. Has anyone encountered this before? If so, what is your experience dealing with the IRS on this matter?
Thanks!
Posted by cheetopop18
3 Comments
When you fail to report stock sales, the IRS often will assume that your basis in those stocks was zero. (Your basis is usually what you paid to buy the stock – you only pay tax on your profit, not the total sale proceeds.) You have to prepare and submit forms showing how much tax you should actually owe for them to take your basis into consideration; that’s normal. In general, when you fail to file or fail to file *correctly*, the IRS will take the most aggressive position against you, and it’s up to you to respond to that explaining why that’s incorrect.
They’ll agree to reduce the tax, and they’ll recalculate the penalties & interest based on that lower amount. They won’t remove the penalties & interest entirely just because it was a low amount, not when they’ve already assessed them.
It sounds like you’ve taken good steps. You should go ahead and pay the base $372 that you owe via the IRS website, and then when they send you the updated penalty & interest amount, you should pay that as well.
Because you were suppose to report the basis. They don’t have that info. That’s why they sent you the letter. If they didn’t send it, then it would have been highly unlikely you were going to fix it on your own. The letter worked and did its job.
First, was this a CP2000 letter (in top right corner)? If so, read the letter very carefully. The CP2000 is a proposed change. It tells you what to do if you agree with the proposed changes, if you disagree, and usually tells you not to amend.
Either way, you didn’t tell the IRS anything about the transactions. You may have sold 5 shares of ACME in at $10,000 each for $50,000. But you did not tell them you paid $8,000 for each share, so they assume you acquired them for zero.
And sine you didn’t tell them about the transactions, they assume you owned the shares for less than a year, which is taxed at ordinary incomevrates. Had you reported the transaction, you may have told them that you actually held the stocks for 14 months, making them eligible for the more favorable capital gains rates.
Read the letter and follow the direction there.
If you missed the CP2000 when it was first sent and they already made the change, then you can look at audit reconsideration or possibly an amendment.