How do I prove to the IRS I don't owe them?

Question

I inherited a bunch of stocks when my grandfather passed away in 2003 and I sold them all and did not report them on my tax return. The IRS is now saying I owe them thousands of dollars. I have proof that I sold the stocks at less value than I got them for. What do I file, how do I file, what do I do?

Answer 1

Inherited property is not included in your income for tax purposes. Inherited property is taxed (if necessary) before it is distributed from the decedent's estate.

When you sold the stocks, the broker reported the entire amount of the sale to the IRS. With the information the IRS has, it looks as though you sold the stocks and had a capital gain of the entire amount of the sale. The fair market value of each stock on the day of death of the decedent forms the basis of the stocks you received. You need to find the value of each stock on that day. There are websites you can go to for this information, or you can find the stock price by looking at the financial section of the newpaper like The Wall Street Journal on the day that you need. Or maybe you were provided with the information by the estate when you received your inheritance. If the estate filed a tax return, the value of the stocks on that return is the value you would use.

http://www.fairmark.com/resource/historic.htm

You need to provide the IRS with the value of the stocks, or basis, when you inherited them. You do this with form 1040X Amendment for the year 2003. You should complete Schedule D, and list each stock you inherited.

You show the date you acquired the stock, and the value on that day. On the same line, you show the sale date and the value at which each stock sold, then show the gain or loss for each stock.

Add up the final column, and report the loss on Form 1040 X.

On your letter is a telephone number to talk to an IRS case worker. You can explain your situation and explain it will take some time to find the fair market value of the stocks, and complete the Amendment, but are working to provide the information. In your conversation, explain that you did not have a gain, but instead sold the stocks at a loss. The IRS understands that this is a very simple thing to prove. It just takes some time to get the correct information together, and organized.

If you sold the stocks at a loss, you should not owe any tax, interest or penalties. Instead, the loss could lower your overall tax liability and produce a refund for you.

It would probably be a good idea to visit a tax professional experienced in stock sales, and IRS letters. Talk to a tax professional to see if the loss can be carried forward into 2004, 2005, or 2006 and produce a refund for those years.

While some suggest seeing a CPA for tax help, it can be surprizing to find out how little tax training some CPA's possess. If you go to HRBlock, or other "storefront" tax prep companies, ask to see an enrolled agent, and ask to see someone with experience in stock sales.

It is possible that the IRS case worker will just ask for documents showing the basis of the stocks you sold. It is possible they will compute the amount of your refund for you, and you won't need to send in an amended return Form 1040X.

The IRS is doing you a favor by contacting you now because generally, you must claim a refund for tax year 2003 within three years, or by the end of the tax year 2006 filing date.

Answer 2

Brian G gives good advice to see a tax accountant. Note that storefront operations like H&R Block or Jackson Hewitt are NOT tax accountants - see a CPA.

The IRS only has a record that you sold the stock. They don't know what your basis is (what they were worth when you got them) so they assume it's all profit. You should have reported them when you sold them - I guess you know that by now. As long as you have the info on their basis, a CPA should be able to help you get this straightened out.

Be sure to respond to the letter you got from the IRS before the time limit that the letter states - otherwise you could lose your right to appeal, even though you can prove that you don't owe. You could respond right away saying that you inherited the stock, and that you have records of your basis for them and that you had a loss, not a gain, and enclose copies of the documents showing your basis.

Answer 3

By failing to report them on your tax return the IRS assumes that your basis is zero and will assess tax based upon that assumption.

You need to file an amended return for that tax year on Form 1040X and list the stock sales on Schedule D. Your basis is the value of the stocks when you inherited them. Copies of the paperwork from the executor of his estate will establish the date of ownership transfer and a copy of the Wall Street Journal for that date (or the prior business day) can be used to establish your total basis for the stocks. You'll need those if the IRS audits you; do NOT attach them to the amended return.

If the sale shows a loss, you may be able to deduct all or part of it for the tax year in question. The limit on capital losses is $3,000 but you can carry any remaining loss forward to following tax years until the loss is used up. You'll need to file amended returns for those years if you already filed and had a capital loss carry-forward.

The good news is that if this was for tax year 2003, you can still get a refund for any allowable loss, but only if you file the amended return by April 17, 2007. Any loss carried forward to 2004, 2005, etc. will require amended returns for those years as well but you have more time to get those returns filed AND get refunds due to the loss carry-over.

The bad news is that you brought this all on yourself by failing to file a proper tax return and you need to move quickly on the amended return(s) to stop the IRS from harassing you. The other bad news is that if this is for tax year 2002 or earlier, you've lost any refund that you would have been eligible for but you still need to file the amended return(s) to show the IRS that you don't actually owe them any money.

Answer 4

You can do it yourself. Respond to the IRS notice with copies of the documents, which prove the basis of your stocks, e.g., the lesser of the cost of the stocks to your grandfather (the carry over basis) or their value on the date his estate was closed (the stepped up basis). The executor of your grandfather's estate has this information.

In essence, you are filing an amended return by responding to the IRS inquiry.

It is important that you don't put off responding to the IRS.

Answer 5

Go to a good tax accountant. He or she will be able to help you sort through the mess you have. A tax accountant is also experienced in dealing with the IRS and will have much better luck than you would have.

Answer 6

go talk to a CPA. Go to your local express tax service