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bbspeterlee · Jun 4, 2012, 08:33 AM

My 2010 Tax return got audited (Notice Date: May 21, 2012)

Here is my situation:

When I filed the 2010 Tax, I misunderstood the 1040 Instructions, so I did not fill the 2010 Schedule D (Capital Gains and Losses), although I had 3 pairs of buying-sale transactions of stocks.

The total amount of sales of stocks is about $31,000, and the cost basis is about $29,500, so the total profit is about $1,500.

I got audited for my 2010 Tax return. In the Explanation Section of the Audit Notice, the total change of my taxable income is +$31,000, the amount of sales of stocks. They used 0 for "cost basis of stock sold". So they told me that I have a very big amount of "Net Tax Increase" (about $7000).

When I filed the 2011 Tax, I realized that I made a mistake for 2010 Tax. I should have filed 2010 Schedule D to include the stock transactions occurred in 2010. But I might have used a wrong way to solve this problem. I added the stock transactions occurred in 2010 to 2011 Form 8949 (and 2011 Schedule D), in order to pay the tax I owed for the tax year of 2010 (because of the missed 2010 Schedule D).

The IRS did not realize that I reported this in my 2011 Tax when they audited my 2010 Tax.

In the audit notice letter, I'm required to response by June 20, 2012.

So what should I do?

Should I recalculate my 2010 Tax and 2011 Tax, and file 2010 Form 1040X and 2011 From 1040X to correct this issue in my response to this notice?

Thanks.

Peter

AtlantaTaxExpert · Jun 4, 2012, 08:47 AM

Peter:

First, you need to amend the 2010 return and add the specific stock data to Schedule D, thus showing the capital gains of $1,500 and paying the appropriate tax. You will need to file Form 1040X and attach the Schedule D to it, along with a copy of the audit notice, plus the check for the calculated added tax. That should take care of the 2010 audit notice.

THEN, you must amend the 2011 return and redact out the 2010 stock transactions.

If you need professional help doing this, email me at the email address in my profile.

bbspeterlee · Jun 4, 2012, 09:54 AM

Hi AtlantaTaxExpert,

Thanks for your reply.

Your answered with "First" and "THEN". In order to response to the audit notice ("The "The " part), I need to file Form 1040X for 2010 Tax (with Schedule D) with the notice copy. So I will use a mail for this response.

The " part), I need to file Form 1040X for 2010 Tax (with Schedule D) with the notice copy. So I will use a mail for this response.

The " part is to fix the 2011 Tax. Should this fix be in the same mail for notice response?

In a word, " part is to fix the 2011 Tax. Should this fix be in the same mail for notice response?

In a word, " and " and " should be done separately or in the same mail?

Thanks.

Peter

ebaines · Jun 4, 2012, 10:26 AM

Originally Posted by bbspeterlee

Should I recalculate my 2010 Tax and 2011 Tax, and file 2010 Form 1040X and 2011 From 1040X to correct this issue in my response to this notice?

I think since the inquiry is already underway for tax year 2010 it's too late to file a 1040X for that year. You should respond to the IRS inquiry stating what the error was, document what the cost basis was, and calculate the additional taxes owed. Send the response along with your payment to the address indcated on the notice. You will also owe interest for late payment of those taxes - the IRS will figure that for you. Also file a 1040X for 2011 to back out the 2010 transactions. These go to different mailing addresses - your response to the 2010 inquiry goes to the return address they provided in the notice, and the 2011 1040X gets filed using the address in the instructions for filing 1040X.

AtlantaTaxExpert · Jun 4, 2012, 10:57 AM

I have to disagree with ebaines on this.

I deal with this specific issue routinely (at LEAST ten times each year), and have dealt with it BOTH ways, and the submission of the amendment (Form 1040X) (rather than just answering the notice) has historically produced less problems than just answering the notice.

It IS important that you attach the notice to the amendment AND cite the notice as the reason for the amendment, plus mail the amendment to the office that sent out the notice. If properly prepared and packaged, usually the only added correspondence my clients get from the IRS is either a bill for the interest due, or (about half the time) a refund.

ebaines · Jun 4, 2012, 11:34 AM

Originally Posted by AtlantaTaxExpert

I have to disagree with ebaines on this.

I deal with this specific issue routinely (at LEAST ten times each year), and have dealt with it BOTH ways, and the submission of the amendment (Form 1040X) (rather than just answering the notice) has historically produced less problems than just answering the notice.

You are the true expert here, so I will defer to your judgment. All I know is I had a similar issue as the OP a few years ago (failed to include a sale on Schedule D and an interest payment on schedule B), and resolved them by responding to the IRS's notice without filing a 1040X, no problem.

AtlantaTaxExpert · Jun 4, 2012, 12:20 PM

Ebaines:

I agree that answering the notice CAN be a way of resolving the issue, and if it just one or two stock transactions, it can be a quick and painless process, especially if the stock sales showed a small loss or gain and there are no added taxes or a small refund.

However, if there are large sums involved (anything over $3,000), the amendment method is the best way to go, because then the IRS has a signed legal document from the taxpayer with all of the required tax calculations in one neat package.

dogdeville · Jun 4, 2012, 01:03 PM

Trust me and hire a tax Lawer it will be the best 2000 you spend otherwise they will find all sorts of problems and send you a very large bill and place a tax lien on you

AtlantaTaxExpert · Jun 4, 2012, 01:22 PM

A tax attorney is NOT required; any competent tax professional (RTRP or EA) can handle this problem, and their fee will be a TENTH of what a tax attorney would charge.

dogdeville · Jun 4, 2012, 01:57 PM

Originally Posted by AtlantaTaxExpert

A tax attorney is NOT required; any competent tax professional (RTRP or EA) can handle this problem, and their fee will be a TENTH of what a tax attorney would charge.

I agree with that

bbspeterlee · Jun 5, 2012, 06:42 AM

Originally Posted by AtlantaTaxExpert

I have to disagree with ebaines on this.

I deal with this specific issue routinely (at LEAST ten times each year), and have dealt with it BOTH ways, and the submission of the amendment (Form 1040X) (rather than just answering the notice) has historically produced less problems than just answering the notice.

It IS important that you attach the notice to the amendment AND cite the notice as the reason for the amendment, plus mail the amendment to the office that sent out the notice. If properly prepared and packaged, usually the only added correspondence my clients get from the IRS is either a bill for the interest due, or (about half the time) a refund.

Can I figure out the penalty and interest rates by myself (from the audit notice) and add them to the amount I owe? And then, I will have a total amount I owe (with penalty and interested added), include the check with this amount and send the check along with the response?

Or I should not figure out the penalty and interest rates by myself, just include the check with the amount from 1040X (for 2010 Tax)? (IRS will do it?)

Thanks?

AtlantaTaxExpert · Jun 5, 2012, 08:30 AM

When you complete the amended return, specifically ask that they waive all penalties and interest.

Then let the IRS make the decision about the wiaver. They will bill you for any interest and penalties once that decision is made.

If the Schedule D shows a LOSS, no penalties and interest will be due, and in fact you SHOULD get a refund.

bbspeterlee · Jun 13, 2012, 07:59 AM

Originally Posted by AtlantaTaxExpert

When you complete the amended return, specifically ask that they waive all penalties and interest.

Then let the IRS make the decision about the wiaver. They will bill you for any interest and penalties once that decision is made.

If the Schedule D shows a LOSS, no penalties and interest will be due, and in fact you SHOULD get a refund.

Hi AtantaTaxExpert,

I sent the response to them about a week ago, and today I found out that they have cashed my check, but I have not received any officially reply.

Does this mean they have accepted my response/explanation?

Thanks.

AtlantaTaxExpert · Jun 13, 2012, 08:43 AM

If they want extra money, they will bill you for it in which they will explain in detail what penalties and interest you are pay, and how it was calculated. You will probably get that notice in the few weeks.

bbspeterlee · Jun 13, 2012, 01:32 PM

Originally Posted by AtlantaTaxExpert

If they want extra money, they will bill you for it in which they will explain in detail what penalties and interest you are pay, and how it was calculated. You will probably get that notice in the few weeks.

Thanks for your reply. If I do NOT have to pay for the penalties or interest, will I still get a notice?

When or how can I make sure that this audit issue is resolved?

AtlantaTaxExpert · Jun 13, 2012, 01:46 PM

The IRS is notoriously SLOW about such things, so you need to wait for about 90 days for a ny notice.

If you get NOTHING in the mail, after 90 days call the number on the notice and ask if the matter has been closed.

bbspeterlee · Jun 13, 2012, 02:50 PM

Originally Posted by AtlantaTaxExpert

The IRS is notoriously SLOW about such things, so you need to wait for about 90 days for a ny notice.

If you get NOTHING in the mail, after 90 days call the number on the notice and ask if the matter has been closed.

Hmmm, but they did cash my check very quickly...

AtlantaTaxExpert · Jun 14, 2012, 06:27 AM

There is a BIG difference between reviewing and processing a return and cashing a check. The check is deposited usually the day AFTER the envelope is opened.

ebaines · Jun 14, 2012, 06:35 AM

Originally Posted by AtlantaTaxExpert

The check is deposited usually the day AFTER the envelope is opened.

As a tax payer I'd be upset if they didn't cash it so quickly - the deficit is big enough already, no use in letting cash sit around idle. I imagine that there are probably clerks who do nothing but open envelopes, log receipt of the return, and separate out the checks for deposit. It's an entirely different group that actually reviews the returns and do the follow-up.

bbspeterlee · Jul 23, 2012, 10:25 AM

Originally Posted by AtlantaTaxExpert

The IRS is notoriously SLOW about such things, so you need to wait for about 90 days for a ny notice.

If you get NOTHING in the mail, after 90 days call the number on the notice and ask if the matter has been closed.

YES, you are right.

Today is July 23, 2012, 6 weeks after I sent out my reply.

I was very excited to receive a mail from IRS, but when I opened it, it says:

Thank you for your correspondence received June 11, 2012.

We will contact you again within 60 days to let you know what action we are taking. You don't need to send us anything further or take any other action now on this matter.

...