I received a proposed due letter regarding my 1040A form from 2015. It states I owe 4200$ in taxes from my Morgan Stanley account, despite never having taken out income.

[spoelst4]

Have only added to my account, can attach paperwork as necessary.
I thought capital gains were only taxed when funds were withdrawn?

[MiriamF · Accepted solution]

You may be thinking of a qualified retirement account. The rules for those are different.

In a regular investment account, investment income is taxed in the year it is accrued, whether you take it out of the account or not. This applies to interest, dividends, and the sale of securities.

If you are buying and selling stocks, you have a "realized" gain or loss in the year of sale. You can then invest that money in something else. The IRS taxes that money even though you just let it sit in the account.

The only situation in which this is not true is for qualified retirement accounts. In that situation, the income is only taxed when you take the money out. If it is a Roth account, you put after tax money into the account, and it is never taxed again, so your investment profits accrue tax-free.

This article has more information about the tax treatment of investments.

[spoelst4]

So in the case I didn't file a 1099, I've obtained it and resubmit the realized gains for the year?  Basically refiling for that year?

[MiriamF]

See what your letter says and compare it to your net gain for that account for 2015. If the IRS has it right, then you really don't have an argument except to pay the tax they are demanding. If they want to charge you tax on something other than the net gain - for instance, if some of your entries on the Morgan Stanley form are missing the basis, or the basis is incorrect - then it would be worth your while to do your own calculations by entering this form in 2015 software and correcting the basis. You do that by clicking on one of the buttons to "add additional information," and put the corrected basis there. Boxes 1a through 1e should contain the info printed on the 1099-B.

Generally, the IRS does not ask you to amend your return if you agree with their assessment. If you don't agree, though, you will need to submit documents to prove your case. Either way, you are not submitting a new 1040 or 1040X - but if you don't agree with their assessment, you will need to submit a revised Schedule D and Form 8949.