My mother passed away Oct. 2011 splitting a CMA account between myself and my sister 50/50. I closed my account in march 2012. The IRS is now considering the money 35,808 as income and want to tax me for it and all penalties for not reporting it to them. I thought inheritance money was not taxable. Am I wrong

The amount that was in the account as of your mother's date of death is not taxable. Any growth in your account since then is taxable. But be aware that the IRS is likely operating on information they received form the brokerage house. Did they issue you a 1099-INT, 1099-B, or other document when you closed the account that stated the amount of earnings on the account and its cost basis? If so, did you report it on your 2012 tax return? You have the opportunity to provide an explanation to the IRS if you think the bank's document was wrong, but the worst thing to do is not report it at all. If the bank was unable to document your actual cost basis the IRS assumes it's zero unless yuo tell them otherwise, and if you don't report it properly on yuor tax return they assume that the entire amount is taxable.

All that ebaine posted is undoubtedly accurate, but it would help my analysis greatly if I knew what a "CMA" account was.

If it is a tax-deferred retirement account, then normal tax exemptions and step-up rules for inherited assets do NOT apply to the account. Similar to an inherited traditional IRA, the IRS collects the taxes on any inherited tax-deferred accounts when they are cashed in by the heirs.

We'll wait for the OP to answer, but I bet that "CMA" means "Cash Management Account," which is a form of brokerage account offered by Merrill Lynch or others that bundles stocks, bonds, mutual fund and cash investments into a single account. My speculation is that the brokerage house reported his mother's original cost basis, or perhaps even $0 cost basis, to the IRS when he sold. If the OP didn't properly report the sale of the assets on his tax return with actual costs as of his mother's date of death the IRS would not know that the cost basis should be stepped up.

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Originally Posted by ebaines

The amount that was in the account as of your mother's date of death is not taxable. Any growth in your account since then is taxable. But be aware that the IRS is likely operating on information they received form the brokerage house. Did they issue you a 1099-INT, 1099-B, or other document when you closed the account that stated the amount of earnings on the account and its cost basis? If so, did you report it on your 2012 tax return? You have the opportunity to provide an explanation to the IRS if you think the bank's document was wrong, but the worst thing to do is not report it at all. If the bank was unable to document your actual cost basis the IRS assumes it's zero unless yuo tell them otherwise, and if you don't report it properly on yuor tax return they assume that the entire amount is taxable.

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It was a cash management account from merrill edge I did not receive any 1099 forms at all at the time of closing nor have I since, I do have the original amount that the month of her death the account increased about 650 dollars by the time I sold the stocks

What steps did you take to distribute the assets from her account? Did you and your sister set up new accounts in your own names after she passed away, and then transfer her assets into your new accounts? If so, then when you sold off your assets Merrill Lynch would have sent you the 1099B. The IRS has to be working off something that alerted them to the stocks or other assets in that account being liquidated. Contact Merrill Lynch, or review your account on line and look for account statements and tax documents from 2012.

Was the estate probated or did you and your sister get this money as beneficiaries of the account?

Good call about the CMA, ebaines. I am in total agreement with you.