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I'm being audited by the IRS - help!

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So I got a huge bill from the IRS today. It says that I owe taxes for the gross profits of the securities I sold in 2007. But I should be taxed for the net income, not the gross profit!

I don't know much about taxes (I've always used free online services.), so I don't know how to respond.

Do I need to visit a lawyer, an accountant, a tax office or handle it myself? Any recommendations?

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For starters, I assume you should speak to someone who does personal taxes: maybe call up H&R Block or some such place. Perhaps you filed something incorrectly for 2007, and they can tell you what it was, and help you file a new return etc.

The IRS gets a report from your broker, telling them the gross sales proceeds. When you filed your returns, you would have had to list the sales you made, which would match those proceeds (with some exceptions if you did something more than simply buy/sell shares). However, along with each such sale, you ought to have filed the amount that each of those securities cost you: the cost-basis. If you did not do this, or did not report any of the sales at all, the IRS only knows your sales figure. They will make the most conservative (for them) assumption, that your cost-basis was zero. Did you file a Schedule-D based on the 1099-B that you received from your broker?

At any rate, you're best advised to have someone who knows about taxes look over this to see exactly what error you made, and how it can be corrected: someone from H&R Block or some such place -- maybe you know an accountant or "tax-guy".

Edited by softwareNerd
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Thanks, that's exactly what happened. I reported income on interest, but I didn't realize my investment income was taxable too. In hindsight, that was pretty dumb, but I just started investing and didn't realize it. I'm going to visit H&R Block tomorrow.

Edited by GreedyCapitalist
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A good rule of thumb is that if you get a tax-related form from a business-partner, employer, or financial institution, then there is some figure on that form that has to go somewhere on your tax-return. It is also safe to assume that some figure on that form has been reported electronically to the IRS.

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Thanks, that's exactly what happened. I reported income on interest, but I didn't realize my investment income was taxable too. In hindsight, that was pretty dumb, but I just started investing and didn't realize it. I'm going to visit H&R Block tomorrow.

Well, first off. Do not panic. I have been audited and handled it myself. Part of my audit included a large number of securities transactions. They disputed the information that I submitted and did exactly the same thing they have now done to you: gave me a ridiculous bill based on a 0 cost basis. Now that you are being audited, the first thing I would do is ask the IRS for a copy of your "information returns" or "IRMF." These are the reports that sNerd is talking about. This way you know what the IRS knows and you can be certain that you don't miss anything that will get you in trouble. After that, create and give the auditor an amended return along with proof (brokerage statements or whatever) and simply tell the auditor you made an honest mistake. Shouldn't end up costing you that much, depending on the amount involved. Even if you hire H&R Block to create this amended return, I would still ask for the information returns (edit: before you go to H&R, obviously.). Good luck.

Edited by Nate
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Thanks, that's exactly what happened. I reported income on interest, but I didn't realize my investment income was taxable too. In hindsight, that was pretty dumb, but I just started investing and didn't realize it. I'm going to visit H&R Block tomorrow.

If only you didn't. I’m a student and have a nontaxable income. However, because of my investments I actually had to pay this year.

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Off-topic, what is this nontaxable income of which you speak? I had to pay taxes on my stipend this year and it sucked. What kinds of income fall into the nontaxable category as a student? I thought that anything they give you not related to educational expenses was taxable.

If only you didn't. I’m a student and have a nontaxable income. However, because of my investments I actually had to pay this year.
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Off-topic, what is this nontaxable income of which you speak? I had to pay taxes on my stipend this year and it sucked. What kinds of income fall into the nontaxable category as a student? I thought that anything they give you not related to educational expenses was taxable.

I spent six years in the navy and I now have the GI bill with the navy college fund.

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I hate to tell you, but you're gonna owe with penalties and interest going back to the time it was originally due. I would get a referral to a CPA from a trusted/respected friend or family member and redo your return for that year just to make sure the amount owed matches what the IRS is telling you you owe. Unfortunately, the IRS is probably right.

This is one more reason I recommend a financial planner. They should review your tax situation and alert you to the tax consequences of sales, etc. Also, I would pay for a tax service, at least something like TurboTax online, which guides you through the process. It's not very expensive and well worth it. Most paid services also come with some sort of audit protection/help should you need it. It certainly would've been a lot cheaper than the penalties and interest you're going to pay now.

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... just to make sure the amount owed matches what the IRS is telling you you owe. Unfortunately, the IRS is probably right.

No. The IRS number isn't right. As it has already been stated numerous times, the IRS bases their figure on only your sells. Its up to you to deduct your purchase price (cost basis) for those sells. The figure he was given is based on a cost basis of ZERO. Certainly, he paid SOMETHING for those shares? Isn't it great when people give advice about things they don't know about?

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I don't care if you disagree with the factual essence of K-Mac's statement, I care that you found it necessary to engage in sneering at her as part of posting a correction. If you can't be polite, don't post.

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Isn't it great when people give advice about things they don't know about?

Nice hostility. It sounds like you don't know what you're talking about either. I've been in the financial planning business for over 14 years now.

Obviously the cost basis has to be prepared, hence my advice to get a tax advisor and/or financial planner. I just meant that when the IRS comes to you and says you've made an error, or you owe them such and such an amount, based on info they've received about your investments, they're usually right.

I also know this from experience, unfortunately. Many years ago, I thought I had given my CPA a 1099R for my husband and then I found the original in my file box after the IRS contacted me. Not fun, especially since I am in this business and knew the importance of getting that form to my CPA. Unfortunately, the IRS could care less about honest mistakes. They raped us for penalties and interest for years before we could pay it off.

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If you can't be polite, don't post.

Frankly, I'm getting used to it. It's almost impossible to post anything here without regretting it later. Why do I even bother? Chat is where it's at anyway. :lol:

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Frankly, I'm getting used to it. It's almost impossible to post anything here without regretting it later. Why do I even bother? Chat is where it's at anyway.
Not that it's much in the way of consolation, but I always appreciate the contributions made by the women on this site. You, Jennifer and several of the others consistently make reasonable comments and raise the level of civility in the conversation.

By the way, I echo your advice regarding having a CPA represent you in matters involving the IRS. I’ve had several such issues arise over the years and it’s well worth it to get someone involved who is experienced in dealing with their agents.

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  • 1 month later...
I am curious as to why my post on this thread was deleted. Anyone?
If you believe that a post was deleted, a good first start is to see if it actually was, by checking the deleted bin. Another thing to check is recently added posts (since your original) in other topically relevant threads, to see if your post was moved (since actually your question was off topic but was appropriate for the thread that it was moved to). Deletions generate a notification.
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So I got a huge bill from the IRS today. It says that I owe taxes for the gross profits of the securities I sold in 2007. But I should be taxed for the net income, not the gross profit!

I don't know much about taxes (I've always used free online services.), so I don't know how to respond.

Do I need to visit a lawyer, an accountant, a tax office or handle it myself? Any recommendations?

Dealing with the IRS in almost any capacity is about the most frustrating thing you will ever go through. I know this from first hand experience.

I also know a businessman who was audited once, but the way they did it was they raided the business, and the agents came in "guns a blazin'" (guns drawn actually) and kept everyone hostage in the building. A family member had died that day, and they were not even allowed to go to the funeral until the IRS had all the paperwork.

Edit: they actually missed the funeral due to the IRS not allowing them to leave the building.

In the end, it was discovered that the IRS had made a mistake, the business had done nothing wrong. They (the IRS) didn't even give so much as an apology.

If you decide to go it alone, good luck. These people do not give a rat's a** about you is my understanding.

I hate to tell you, but you're gonna owe with penalties and interest going back to the time it was originally due. I would get a referral to a CPA from a trusted/respected friend or family member and redo your return for that year just to make sure the amount owed matches what the IRS is telling you you owe. Unfortunately, the IRS is probably right.

This is one more reason I recommend a financial planner. They should review your tax situation and alert you to the tax consequences of sales, etc. Also, I would pay for a tax service, at least something like TurboTax online, which guides you through the process. It's not very expensive and well worth it. Most paid services also come with some sort of audit protection/help should you need it. It certainly would've been a lot cheaper than the penalties and interest you're going to pay now.

I second K's recommendation.

Edited by prosperity
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