How do I remove/reduce IRS penalties and Interest?

Question

I got a letter in the mail from the IRS stating that I owed $10k from my 2005 tax return (with interest and penalties). Turns out that there was a reporting error from my bank which caused this problem. Apparently, I had some stocks that the bank sold in favor of more favorable stocks, but the purchase of the new stocks was never reporeted by my bank. So, in a nutshell, I was supposed to have paid taxes on the full amount of the sale - not the cost basis.

I contacted my bank and they are able to furnish the documents to me to fight this rediculous bill. So, back to my original question: How do I fight the interest and penalties??

Thank you from the bottom of my wallet! :)

Additional Info...

Thank you all for your great responces. I just wanted to address the comment that it wasnt my banks fault but my own.

The stocks are held in an account by my bank and they have the authority to buy/sell stocks when favorable to me. Since the bank sold my stocks and didnt not report that new stocks were purchased witht he proceeds - it was not my fault. The bank admitted this error to me.

In any case, I simply need to get the original price of the stocks and see what the were sold for. It is the difference between these two that I may owe some $ on.

Answer 1

The purchase price of the new stocks has nothing to do with the capital gains on the ones that were sold. The basis for the stocks you sold is what you paid for THOSE stocks. It's your responsibility to know when they were originally purchased, and the purchase price, plus any reinvested dividends. Many brokers report that info to you if the stocks were originally purchased through them, and many don't - I've seen it both ways in the broker statements to clients whose taxes I prepare (and I always bless the ones that include that info, makes filing SO much easier).

It sounds like you didn't report the SALE on your tax return. When that happens, the IRS sends you a letter assessing tax on the full amount of the sale, since they don't have info available on what your basis is, so they use zero. Don't panic, you probably don't owe anywhere near the amount that the letter says. And this is a very common situation, and when I've run into it, the IRS has been easy to deal with - you just have to go back through your records and find your actual basis, and respond to the IRS letter with a corrected schedule D and corrected 1040. If the bank can provide the info on your purchase price and reinvested dividends for the stock you/they SOLD, that would be great since it will simplify your task.

If you had a gain on the sale you'll owe some additional tax, but it probably won't be anywhere near what they thought it was - and any interest and penalties would be figured on the new, lower amount so if most of the tax goes away, so will most of the interest and penalties. If you had a loss on it, you might even get a refund.

But do NOT show the purchase price of the stock that was bought to replace the stock you sold - that has nothing to do with it.

Once you have gotten this letter from them, respond as directed in the letter, don't just file an amended return as some people have suggested. That will just confuse things. The letter says to respond saying you agree (you don't) or you disagree and why. Send them the corrected schedule D and 1040, and any amount really due if there is any, and you'll be fine. Send it to the address the letter tells you to.

And sorry to tell you this, but the problem wasn't caused by a bank reporting error, it was caused by your not reporting stock that was sold. For future info, if any stock is sold, you have to report the sale on that year's return, no matter what was done with the money. If you took the bank statement from the sale to a tax preparer and they didn't list it on your return, they screwed up, so go somewhere else next time.

Answer 2

The purchase of new stocks is never reported to the IRS, only the sale of stocks is. You should have received something from your bank indicating what stocks they sold for you in 2005, and you would have needed to report them on Schedule D. What the irs got from your bank was the sale amounts of the stocks, and since they weren't reported on your 1040 for 2005, the irs calculated a return for you with 100% gain on the sale of those stocks. What you need to do is file an amended return, 1040X, and include a corrected 1040 with the stocks reported on Schedule D. You will need to report the sale proceeds and the costs for the stocks that were sold in 2005. That will reduce the tax that you owe, and maybe even get you a refund if you sold those stocks at a loss. If you don't owe any additional tax for 2005 that will also eliminate the interest and penalties that the irs is seeking. If you live in a state that has a state income tax you should also see if you need to file an amended state return for 2005 as well.

Answer 3

While it is sometimes possible to have penalties reduced or eliminated, by law interest cannot normally be abated. There is an exception for affected individuals in certain Federally declared disaster areas where the interest relates to late filing or payment because of the disaster.

You may wish to consult with a tax pro on this issue. If the bank traded stocks on your behalf, the tax is only on the gain so what the stocks originally cost will matter greatly. The purchase of the replacement stocks won't affect the gain on the stocks that were sold.

Any time that stocks are traded, the IRS is only advised of the gross proceeds from the sale. If you don' t list the trades on Schedule D, the IRS will assume that the basis was zero and the total proceeds are taxable.

When it comes to the abatement of penalties, you must prove that the situation that triggered the penalty was beyond your control or that you have very limited resources. You also must substantiate that you used due diligence and were not negligent in not paying your taxes. A tax pro can probably help you build your case for abatement, however failure to properly report stock sales would probably be busted under the due diligence and non-negligence tests.

To clear up the tax debt you must file an amended return on Form 1040-X and attach Schedule D showing the stock trades. The net income from the trades will be taxable. The tax rate will depend upon whether the gains are short term (owned for one year or less, taxed as ordinary income) or long term (owned for over one year, normally taxed at 15%). The net will reduce any penalties and interest. If the shares were sold at a loss, you may be able to offset other income with the loss up to $3,000 (anything over that will be carried forward to next year) and that will also effectively eliminate any penalties and interest as well.

Answer 4

All you need to do is furnish all the information you have to the IRS.

What I see is that the bank sent the IRS information on the money they got for selling that stock & no allowance was made for your purchase of that stock. You would owe taxes on
any gain there was. If the stocks were sold at a lose you could get a deduction on your taxes.

This information could change what is owed to the IRS.

It may be as simple as filling a new form D

But what you paid for the new stock is in no way involved in what you owe. You will pay taxes on any gain on them when you sell them.

Answer 5

Tax adjustments are backdated to 4/15/2007. the laptop then backs out the corresponding penalty and pastime. If it particularly is the 1st time you have screwed up, basically ask the IRS in the event that they're going to waive the the rest effects.

Answer 6

You will need to file an amended return, which is basically a reconciliation of what you filed, what you should have filed, and the end result being the difference. Be sure to have all your documentation, because more than likely if the tax of 10K is not owed, your amended return will definitely trigger an audit.

Answer 7

The IRS has a dispute process that you should take advantage of. The paperwork should have been include with the letter they send you. If not, go to IRS.gov and find it.

Answer 8

You have to get amended tax form and amend your taxes. You only have a few months after you file taxes so i would do it fast so you dont have to pay penalties.