You’ve probably heard the expression that every cloud has a silver lining. Sometimes you can even find a silver lining in an IRS correspondence audit.
One of our Boca Raton tax resolution specialists met with a taxpayer who had been notified of a correspondence audit relating to securities he sold in 2018. The taxpayer was seeking tax relief from the proposed addition of tax, penalty and interest of approximately $18,000 contained in the notice.
As required by law, the taxpayer’s brokerage company reported the sale to the IRS and it attempted to match the sales proceeds to the taxpayer’s income tax return. Unfortunately, the taxpayer forgot to include the stock sale on his return, thereby triggering the IRS correspondence audit. The IRS matches all 1099s received from banks and brokerage companies to taxpayers’ returns. When there is a discrepancy the IRS will send Notice CP 2000 detailing any differences they have found, calculate the tax, penalty and interest due on the proposed adjustment and give you a period of time to respond and explain why the adjustment is incorrect.
Currently, when the IRS makes an adjustment for an unreported securities sale they do not consider your cost basis in the security nor whether it is a short-term or long-term transaction. This normally results in overstated gain and may tax the transaction at the wrong rate.
Since the taxpayer did not have records to show his cost basis in the securities we advised him to contact his brokerage company to obtain the information. The information indicated that the taxpayer paid more for the securities than he received on the sale, resulting in a capital loss.
We provided the IRS with these facts which required them to cancel the correspondence audit proposed adjustment and resulted in a refund due the taxpayer. But wait, it gets even better. Because the tax law limits the deduction of capital losses in excess of capital gains to $3,000 per year, the taxpayer had a capital loss carry forward to the next year. Since his 2019 tax return had already been filed, we amended the return to include the loss carry forward and got him an additional refund.
If you receive Notice CP2000 and are subject to an IRS correspondence audit, don’t panic, pick up the phone and call our Boca Raton office today for tax audit representation and relief services.