CP200 for share sale to cover taxes

[sandyandpaddy]

Hi forum,

I am hoping someone can help me soon with my question.

I received a CP2000 yesterday for my 2018 tax return showing that I did not report shares sold and includes a huge penalty and interest. However, the shares sold were to cover taxes on the vested RSUs. I did not sell any of the vested RSUs in 2018. What is the best way to address this with the IRS? Do I have to pay taxes, penalty and interest in this situation?

Thanks in advance for your guidance.

- WorriedTaxPayer 

[Anonymous]

you got x units on exercise some were sold to cover the taxes. thus the need to report the sale. from your company or broker get the basis.  since the RSU's were sold to cover taxes the basis should be about the same as the sales price.   get the basis from the company or perhaps it was shown on the 1099-B you should have gotten. the sale was reported to the IRS.  you should send along an amended return reflecting the sale and cost when responding to the notice. include the 1040-x and related forms and schedules that are printed out for the amended return. make sure you sign and date it. mail using a method where you get proof of delivery. if you owe send a check for the balance due shown on the 1040-X. 

FYI if you exercised RSU's in 2019 and didn't report the sale file an amended return to cut off the portability of getting a notice for that year.  

[sandyandpaddy]

Thanks Hackitoff. My question is I would owe any taxes only on any potential gain between cost basis and price sold for the portion of the shares sold to cover taxes right? Also, what forms would I have to file for the amended return and is this something for which the penalty and interest would be applicable. Right now, they have sent me a notice saying I underreported $58,000 abs levied a penalty of $5000 and interest of $2500 from 2018 till now. Do you recommend going to a tax professional or I should it be ok to handle by myself.

thanks

[Critter-3]

What you failed to do on the original return is report the sale on the Sch D & 8949 as required so the IRS doesn't know of the stock  basis and they are assigning a ZERO basis and that is where all that tax/penalty/interest is coming from. 

All you probably  did was report what was on the W-2.  To fix this amend the return to add the stock sale and the BASIS and mail it to the IRS to refute their conclusions.    Usually the stock sale will show as a loss of the amount of the broker's fee and NOT a large gain as they contend.  

[Anonymous]

I'm assuming the RSU's were sold to cover taxes on the date of exercise or within a few days. there shouldn't be much of a gain or loss. the thing you missed is that the wages on your w-2 were increased for the value of all the RSU's exercised.  example: say you paid $5 on exercise per share when the FMV was $30. $25 would have been added to your W-2 as compensation. that's part of your basis. in addition the $5 you paid is also part of your basis. so your total basis is the $30. since prices can fluctuate during the day you may have sold for $31 giving you a $1 gain per share or if sold for $29 you got a $1 loss per share.  The $58K should be the sales price of the RSU's sold to cover your taxes. like I said previously get the basis from your company or it may even be on the 1099-B you should have gotten for the sale. the sale gets enter as a Short-term transaction on schedule D through form 8949. with amended return may also send along the 1099-B if it shows cost or letter from the company specifying your cost basis.  with TT the amended return you prepare will have all the needed forms. as a minimum in addition to 1040-X there would be form 8949 and schedule D.

if you know how to enter the transaction you don't need a tax advisor.  just make sure the schedule d makes sense.  the sales price probably s/b the $58K and costs almost the same. so a small gain or loss.

[blizz11]

I'm incredibly relieved to have found your post. Thanks for sharing!

I'm in the exact situation you were in, and have spent the past 4 hours frantically searching for an answer. Similar timing for IRS notification as well. How did you end up resolving this? Would you mind sharing the exact steps you took? I'll be (hopefully) following in your footsteps to get this resolved ASAP. Thank you!