Hey Dave,
I got a CP2000 notice from the IRS. It says I owe $12,269 for securities I sold in 2013. I purchased the stock in 2005 and sold it at a loss of almost $10,000, which is why I didn’t include it on my tax return. Why did I receive this letter, and what should I do about it? Unfortunately, I just found out about your company and I don’t have a membership for my 2013 tax return.
Abigail
Abigail,
The letter you received is sometimes called a “mismatch” notice. The IRS issues these mismatch letters when the computerized information they receive from third parties − such as banks and brokerage firms − does not match up with the transactions you reported on your tax return.
When you sell stock, you are required to include the sale information on your tax return - even if the sale results in a loss. If you don’t report it, the IRS will have the information about how much you sold the stock for, but not how much you purchased it for. And while you may have sold your stock at a loss, the IRS will assume you have a short-term gain in the amount of your sales price if you do not report your purchase dates and “basis” in the stock, which is what you paid for it.
Since 2011, brokers have been required to include the adjusted cost basis of “covered securities” on the 1099-B Forms they send to their customers. The term “covered securities” generally means corporate stock shares purchased after 2010. Since you acquired this stock prior to 2010, your purchase records will be your best option for determining your cost basis.
And since the proposed amount due on the CP2000 Notice is not correct, you will need to send back the signed Response Form that comes with the notice along with a statement explaining the reason for the discrepancy – that you omitted the sale from your tax return. Along with your letter, include Form 8949 and Schedule D worksheets showing your sales price, cost basis, and purchase dates; this will enable you and the IRS to calculate the actual gain or loss on the securities sales and determine whether they should be classified as “short-term” or “long-term.”
Since capital losses are limited to $3,000 per year, you will have a carryover loss. In your letter, you should also state you understand that you have a carryover loss and that you will correct your carryover losses on your tax returns for future years. And be sure to put a note in your tax file reminding you to make this change next year when you do your taxes.
Deductibly Yours,
Dave