If the sales price exceedes the purchase price of tax exempt municiples is the differential amount taxable ?

Question

The 1099 from my broker shows the "cost basis summary" for these municipals. The paragraph heading reads "THIS IS NOT A 1099 FORM AND IS NOT REPORTED TO THE IRS". The dividends (short term) for these muni`s is shown under another paragraph titled "DIVIDEND INCOME -TAX EXEMPT".

This question is related to a recent notice that I received from the IRS asking me to provide the cost / sale information for these muni`s that another party had provided to them (I assume that was my broker supplying them the same 1099 that I received). This IRS notice is related to my 2005 1040 which did not include a Schedule D ( Capital Gains and Losses).

The "notice" is asking me to provide a Schedule D showing the cost/sale information. There is only about $91.00 difference.

The IRS says that I owe a large amount ( over 5k) because they took the sales price and added interest and penalties going back to 2005.
Is my broker to blame,should I send money along with copies of the 1099 to the IRS ? ?

Answer 1

The cost basis summary is not the 1099. Look at all the pages from the broker's report, and it will show the dividends and the sale on different pages.

The dividend income from the municipal bonds is tax-exempt for federal income tax. However, if you sell the bonds at a gain, the gain is capital gain, and that is taxed.

The sale of the municipal bonds is reported to you on a 1099B which you received from your broker. The 1099B is reported to the IRS. As you note, the cost basis is not reported to the IRS, so the IRS assumes the cost basis is zero and is figuring tax accordingly.

The 1099B will show the sales price for the Schedule D. You use the cost basis summary to enter the basis on the Schedule D.

Take your broker report, your 2005 tax return, and the IRS letter to a tax preparer and have your capital gains tax figured. Then send in the Schedule D and the taxes owed asap. Hopefully when the Schedule D is prepared the taxes owed, and the related penalties and interest, will be less than what the IRS figured.

Answer 2

^^^ I'll second that. ^^^

Once the IRS has the cost basis figures, your tax bill will shrink dramatically. There will still probably be a small penalty and a bit of interest due, but it will be a boatload less than $5k!

Answer 3

Ninasgramma knows her onions (and her taxes). Please give her the ten points and follow her advice. You're not going to get any better on this occasion.