I had exercised Non-qualified stock options using a same day option. Taxes were withheld at the time of the transaction on the difference between the strike price and sale price and the income was reported on my W2 identified as code "V". I received a notification from the IRS stating I under reported income and is referring to an amount that appears to be the overall value of the shares not the actual gain I realized. I am [fairly] certain the IRS is incorrect. Done lots of research and everything I find steers me back to that I am correct. However, any feedback from the forum?
"I received a notification from the IRS stating I under reported income and is referring to an amount that appears to be the overall value of the shares not the actual gain I realized."
It would be most helpful if you described exactly what the IRS said, but I'm guessing that a 1099-B (or 1099-Bs) was generated, (1099-Bs aren't required for a "same day" sale, but sometimes the broker creates them anyway), and you didn't enter it, or them?
This is a frequent error on the part of people who do same day sales of options as they reason that entering the 1099-B(s) would double their income and they know that can't be right. The problem here is that the 1099-B(s) don't show the correct basis to use when reporting the sale but they still need to be entered as sales in your income tax return with an adjustment to the reported basis. Most same day sales show a small loss due to selling commissions and fees.
If this isn't your issue then a fuller description of exactly what the IRS thinks your error is might elicit a helpful response.
Thank you for your reply. This appears to be my issue in that I did not enter the 1099(B) as in my case the borker did create one. Since I don't agree with the assessment, would you recommend I file an amended return and notify the IRS of such on my response (and include any back-up) or provide them with the information and let them amend based on my evidence? Also, is there a specific form I would need to complete in order to amend?
Very helpful response, so again thank you.
Either approach should work but I'd probably opt for amending and - probably - getting a small refund for your effort. You can now e-file amended returns and I'd think that would put the problem to bed, but a belt and suspenders approach, (always a good idea when dealing with the IRS), would be to also mail a paper copy of the amended income tax return, along with a brief note of what happened, to where ever the letter from the IRS directs you to respond.
I would guess that since the law was changed to brokers only indicating your "out of pocket" cost of the stock instead of the correct basis on the 1099-B, the IRS has sent out hundreds of thousands of these "your 1099-B is missing" letters.