Primary House Sale Reported As 1099--IRS Now Wants $533,000

[ibcoleman]

I filed my 2020 taxes through TurboTax / Intuit. Did the full House Sale Worksheets, etc... I just received a letter from the IRS claiming I owe them the full capital gains on the sale, plus something like $80,000 in penalties. When I download my 2020 return from the Intuit website, I see it includes the various worksheets, etc, but doesn't seem to include any breakdown of the sales (need a Schedule D?) I responded to them via their secure messaging platform and basically just attached my 2020 return as a PDF.

I'm not sure exactly what I'm supposed to do at this point. Anyone have any suggestions?

Thanks!

[fanfare]

@ibcoleman 

To avoid tax on the full amount you must report the sale on Form 8949.

If any of the gain is eligible for exclusion, TurboTax (or you) would put that on column(g) along with other expenses of sale.

Form 8949 also requires Schedule D.

Sending another PDF copy of what you already filed won't help you.

[JohnB5677]

You've done it exactly right.  You always have the right to challenge the IRS. 

 If you have further communication from the IRS I suggest you contact us to be sure that the return was posted correctly, and then contact a local IRS office and make an appointment.

Visit a Taxpayer Assistance Center Local IRS Office.

[ibcoleman]

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@fanfare wrote:

@ibcoleman 

To avoid tax on the full amount you must report the sale on Form 8949.

If any of the gain is eligible for exclusion, TurboTax (or you) would put that on column(g) along with other expenses of sale.

Form 8949 also requires Schedule D.

I'm curious, if it's required to include Form 8949 as well as Schedule D, why didn't TurboTax do that?

[JohnB5677 · Accepted solution]

As a follow-up to my previous message, I want to confirm that you did live in the home for at least 2 out of the last 5 years and that it was your primary residence. 

I agree that Schedule D and the 8949 should be included in the return.  Please confirm that these forms are included, and the sale was recorded on these forms.

If they do not look correct please contact us.  Explain that you do not want to amend your return at this time.  You only want to review what you have already posted.  

[ibcoleman]

Yes, our only residence for 6 years from 2014-2020. As best I can tell there's no Schedule D or Form 8949 in the PDF of the return that TurboTax generated. There's a "Schedule D Tax Worksheet" (also called a "28% Rate Gain Worksheet") that has an entry labeled "Enter the total of all collectibles gain or (loss) from items you reported on Form 8949, Part II" but that's the only reference I could find to a Form 8949. 

[fanfare]

I'm not sure exactly what I'm supposed to do at this point. Anyone have any suggestions?

Respond in writing that you dispute and you intend to amend.

Prepare Form 1040-X with Schedule D and Form 8949.

Do not include your old 1040 nor your revised 1040 because the Form 1040-X reflects any changes there and becomes your new tax return.

Send to the address in the Form 1040-X Instructions,

or, to the address in your letter if it says to do that.

[GeorgeM777]

Amending your 2020 return to include the sale of the home is the preferred option at this point.  Based on what you have stated, you may be able to exclude all or part of the capital gains from the sale of the home and thus, may not owe tax and/or penalties in the amounts indicated by the IRS.  

Even though you may not owe any tax from the sale of your home, it is still preferable to include the sale on Form 8949, and Schedule D because including the sale on your return starts the clock running on the statute of limitations.  What this means is that you are able to defer capital gains on the sale of a primary residence only once every two years.  This two year period is sometimes referred to as the "look back" test.  Now, a persuasive piece evidence you can use to prove you pass the look back test for any home sale in the future is your accurately filed tax return.  Therefore, you should amend your tax 2020 tax return to include the sale of your home. 

@ibcoleman