Received CP2000 letter from 2018 for Sell to Cover sale

[lokidoki]

Today I received a nice CP2000 from the IRS saying that I owed an additional $10,000 in taxes due to a $30,000 income difference reported under Securities by Morgan Stanley. 

I did some digging and found that both the securities that were listed as the reason for the difference were RSUs that were sold to cover taxes on those dates because those were the dates that my RSUs were vesting. I received like $80,000 worth of stock and this $30,000 of stock was sold immediately to pay for taxes. I guess I probably misfiled something but I never received any documentation for this and wasn't aware that I had to do anything separately for this if I selected "Sell to Cover". I figured it would be covered in my W-2 as income received and tax paid since the taxes were withheld from me. 

Is that not the case? 

I was planning to send over the form disputing their proposed amount due of $10,000 and explaining that the sale was for sell to cover (and providing documentation from Morgan Stanley). Is that the right thing to do? What should I do next time so this doesn't happen again? 

[Anonymous]

you really need to send the IRS an amended return with a corrected 8949 & Schedule D.  that's where the sale should have been reported.  but you also need to get the cost basis of the stock sold which should be about the same as the proceeds. either your company or Morgan Stanley should be able to provide that.

if you have a loss on sale, you might be entitled to a refund whereas if there was a gain you'll likely owe the taxman.  Either way I'm sure the IRS will want the forms. 

in future years you need to report the sale and the related cost basis on form 8949 which carries to schedule D.   if you sell as soon as the day you acquire them, there will be a small gain or loss.  

M 

[lokidoki]

@Anonymous At the very least, I shouldn't be taxed on it as if I got $30,000 as income right? 

[Anonymous]

you sold stock and got $30K. on your W-2 in some year there was income added for the RSU that gives you a cost basis in the stock.  since there is a cost basis the full $30K is not taxable.  what happened is the brokerage, as required by law,  submitted to the IRS a 1099B showing the $30K as the sales price but with no cost reported - result the IRS thinks you have a $30K gain. you should have gotten a 1099B from MS to match the one they sent to the IRS. it may have a cost basis on it.  it may be that under the goofy tax laws we have, they are not required to submit the cost basis to the IRS even if they have it. 

For RSUs, the cost basis should be the fair market value (FMV) of the shares on the day they vest.

[Critter-3]

First don't panic ...  this is a common error where you fail to enter the sale from the 1099-B that was also reported on the W-2.  Using the amendment process add the missing sale so the program can recompute and populate the 8949 & Sch D which is what you need to respond to the IRS notice.  Call the number on the notice if you don't understand how to respond or what the IRS will need to be sent to resolve this issue.  

[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!

[lokidoki]

@blizz11  Sounds a lot like me when I first ran into the issue! I wish I could have more news, but basically I ended up doing an amended return which resulted in newly updated forms like what some other users reported above. I sent them in the mail to the IRS address along with a letter stating my disagreement for the CP2000 and the response form. 

I EVENTUALLY got a letter back from the IRS (maybe around a month later?) saying they received the letter and that they’d get back to me with a response regarding my disagreement within 3 months! So... I’m still waiting! 

[lokidoki]

@blizz11  I’m not sure if my response went through but it’s not showing up on my phone so let me try again:

I used TurboTax to create an amended return and input the 1099-B form I was missing which let me say what was acquired and sold on the same day for sell to cover, which in turn updated some of the other forms which some of the responses above responded about.

I had to mail it along with the response form and my letter and the IRS got back to me about 1 1/2 months later to say they received my response but that they’d get back to me in like 3 months with their actual response. So I’m still waiting...

[Critter-3]

All you can do is wait ... the ball is in the IRS's court and due to the covid situation and the ensuing backlog of paperwork the wait may be a long time.   Call the number on the last notice you got to see if there is any update on your situation.  

[lokidoki]

@Critter-3 I’ve tried to call, but unfortunately after a few minutes of menus and staying on hold, I get an automated message saying they can’t handle the call volume and to try again another day (then it disconnects). So not much that I can do here. I just hope I get back a mailed response before we move (since we will be moving soon). 

[blizz11]

@lokidoki Sounds good. Thanks for the update. As next steps, I'll be amending my 2018 tax form, writing an explanatory letter to the IRS, and likely sending these off tomorrow.

Do you have any step-by-step guides (even high level) of how you amended your 2018 tax form to address the RSU "sell to cover" issue at hand?

I also tried calling 3-4 different numbers + phone-tree combinations this morning, but always reached the dead end of "call volume is too high to process, please hang up and try again later".

[lokidoki]

@blizz11 Unfortunately, I didn’t have a whole lot about what I did since I just stepped through the process from TurboTax online.

I had used TurboTax online the previous 2 years (the edition that includes forms for stocks etc) so it allowed me to select that I wanted to amend a previous return so I selected the year I got the letter for and basically followed the screens until I got to the screen showing all possible inputs. I found the place to input my 1099-B and selected to input each sale one by one so I could specify the cost basis and the sale value and the date etc. (I ended up losing $15+ from sale to cover) and adding it automatically updated the forms like the 1040-x etc. I printed the amended return they generated and sent it all in. Though, I have heard conflicting advice on various threads about this - one place said that you might not need to submit a full amended return and just need to send it the supporting documentation. Another place said you need to amend your return and send in everything. I might have erred in the direction of sending too much.

Good luck to you! 👏

[lokidoki]

@blizz11 oh, and since I had a capital loss technically, I overpaid my taxes by a few dollars and the forms reflect that. Probably won’t even cover the cost of mailing this in though 😅

[DaveF1006]

No, you did not err in sending the amended return and supporting documentation. Your letter may have directed you to send only supporting documentation, i recommend clients to send in an amended return plus supporting documentation. This way you and the IRS have a clear idea what your tax return should be once the corrections were made. In a sense, by sending in an amended return, you saved the IRS some work.