Correction Proposal Letter from IRS (SLV iShares ETF)

[cesvilmal]

First of all, I am certain that this letter is legit so no worries about scams.

Background: I got a letter from the IRS regarding my FY2020 return. The letter states that my return does not match with information supplied to them by my broker. After reading the whole thing, they are correct. When I filed my 2020 return, my broker (Merrill Edge) sent out my 1099 in February 2021 so I used those to do my taxes. However, said 1099 did not include 2 trades I made (both for SLV iShares ETF), which I now know is treated differently than regular stocks or ETFs. I made enough trades that I assumed all my trades were there.  They did provide an additional 1099 in March 2021, but I had not seen it until I went looking after receiving this IRS letter. This late 1099 is ONLY for those trades which the IRS is highlighting.  The problem lies in that for this particular type of security, Merrill only reports the proceeds and NOT the cost basis, so the IRS is calculating a large owed amount. I actually lost money in those trades (whomp whomp) so I think I should be getting a refund. I did my 2020 taxes using TT. I know that I have to respond / do something about this.

Question: Should I,  a) respond to the letter disagreeing to the correction and providing the 1099 with those trades so they can capture the cost basis (and theoretically issue me a refund), OR b) Submit an amended return thru TT to add those trades and respond to the letter with a copy of the 1040X and missing 1099, as this would directly mean I am expecting/requesting a further refund. 

I just find it hard to believe they will correct the math in my favor (cost basis larger than proceeds) and issue me an extra refund unless I amend. 

[Bsch4477]

You should respond to the letter providing documentation of the correct cost basis for the stock sale. 

[Mike9241]

SLV reporting is the same as any stock or ETF form 8949 which flows to schedule D.   

The iShares Silver Trust (SLV) does not hold physical silver. Instead, the performance of SLV reflects the holdings of a custodian on behalf of the SLV. That being said, the prices of SLV mirror the Silver Market very closely.

if the notice gives specific guidance on what to do if you disagree, I would follow that. otherwise, the 1040-X is appropriate. be sure to include a copy of the notice and a letter of explanation.   something like. i disagree with your proposed adjustment.  I have enclosed a 1040-X, form 8949, schedule D (also include any other form or schedule that changed) to reflect the proper tax basis for the sales of the SLV that you question.  (if you can include a broker statement or confirm to support the tax basis that would be great - mention it).  please adjust your records accordingly.  sign and date the letter. use a method where you can track delivery.

you say that the 1099 from ML did not show cost/tax basis so I see no purpose in including it.   

not sure why ML omitted the sales from the original 1099-B.   as a minimum, they should have (are required to) report the sale even if they do not report cost basis 

[cesvilmal]

Mike- As it's clear by my original question, a silver ETF is not my expertise. But I do believe iShares SLV holds physical silver which is backed up by my quick googling and the iShares prospectus... 

https://www.ishares.com/us/products/239855/ishares-silver-trust-fund

I believe this is why the separate 1099 from Merrill with only the SLV transactions, there is something there about collectibles. The 1099s (2 separate accounts) have the sale of my shares of SLV plus 4 monthly tiny sales that cover fund costs which is consistent with what I have learned about how SLV works (ie its technical a trust that passes thru expenses to shareholders in the form of sales to offset fund expenses). Hence, Merrill only reports proceeds to the IRS since my cost basis is adjusted as the fund sells silver, although in my 1099 they do have the cost basis. Weird and confusing but that's besides the point. 

The letter from the IRS has 3 options: "Accept", "reject", and "this income belongs to a different taxpayer". So I will choose "reject". My question is about what the most effective way to do this is (ie, easiest, less prone to become a nightmare).

The letter says that the following (paraphrasing as I don't have the letter in front of me right this second):

"If you disagree, provide evidence etc etc.... you do not have to submit an amended return, but if you do, attach your 1040x to this letter and provide evidence etc etc"

So again, my question is: Send the 1099 that shows my cost basis OR amend return and send the 1040x plus 1099 as evidence? My goal is to not bodge this and make it a months long ordeal but it would also be nice to get my 2020 return adjusted down and get some extra refund bucks. 

[fanfare]

@cesvilmal 

If IRS gives you the option to dispute and file form 1040-X, you should do that.

Form 1040-X becomes your new 2020 tax return.

As you must know, it will take a long time to process 1040-X.

you have to dispute in writing by the specified date indicated on your letter from IRS to avoid paying immediately.