RSUs shares withheld for taxes no sold. IRS letter received showing those shares as a sale

[svme]

Upon vesting of shares, the company withheld 41% of shares. They did not sell them. So no 1099-B. 

I must have missed something when doing our taxes.  We got a letter from the IRS stating that a 1099-b showed the shares as sold. There is no 1099-B.  There is no letter or any documentation that I can find showing these shares were simply withheld.  

How do I explain this to the IRS with no supporting documentation? This is for 2017. The letter says that we do not need to amend. 

[Critter]

Some of the shares had to be sold to pay the taxes on them ... that would have been reported on your W-2 and a 1099-B from a broker. The rest would have been "banked" for selling later. The IRS got a copy of the 1099-B showing the sale and you had to report it on your return ... usually the sale would be a loss in the amount of the brokers transaction fee since your basis in the stock was what was paid thru the payroll system. Ask your employer for the 1099-B or get the brokers name so you can get one from them.

[svme]

The shares were definitely not sold.  An employer has the choice of selling them or holding on to them as shares. They chose to hold them.  Will sell them when my husbands sells his. This generate a 1099-B. 

I have checked with the broker and the above is correct.

[TomYoung]

Your blanket statement as to "what happens" when RSUs vest doesn't cover all possible situations. 

When RSUs vest, that vesting creates compensation based on the GROSS number of shares vesting.  "Compensation" requires "withholding", and there's 4 ways of getting the cash to pay those taxes:

1. The company may "withhold" some of the shares, paying the taxes with the company's money.
2. Some amount of the shares can be sold via a "same day" sale, through a broker, and the broker sends a 1099-B to the employee.  (The instant the RSUs vest the employee owns the stock and only the employee can sell the stock.
3. Some amount of the shares can be sold via a "same day" sale, through a broker, and the broker doesn't send a 1099-B to the employee, but is obliged to prepare a "statement" providing the same information.
4. The employee reaches into his pocket and pays the taxes.

In situation 4. the employee actually ends up with the GROSS amount of shares vested.  In all the other situations the employee ends up with a "net" number of shares, the difference being the shares withheld/sold for taxes.

The ONLY way the IRS can be alerted that shares were sold for taxes is in situation 3., a 1099-B is issued.  If that happens and the employee doesn't report the sale then the IRS will make inquiry about the missing 1099-B, and I'd expect that's the situation you face.

Although you could amend and maybe garner a small refund due to a (typically) small loss on the "same day" sale, if you don't want to do that simply explain the situation to the IRS - RSU vesting/same day sale/booking the trade would show a small loss - and that should be the end of it.

[svme]

Thank you, TomYoung!

• This al makes sense.  When you day "simply explain the situation to the IRS - RSU vesting/same day sale/booking the trade", do you mean write them a letter? Should I be asking the broker for that "statement" to add to the letter?

[TomYoung]

First, make sure you have your fact situation figured out.

WERE shares sold "for taxes"?  I assume the IRS letter says something along the lines that the income tax return is missing a sale reported on a 1099B?  You said that no shares were sold and if that really and truly is the case then that IRS letter is just dead wrong and you have to respond to that. 

If shares were sold, then was a 1099-B issued?  As I said, if no 1099-B was issued then the IRS has no visibility to the sale so I'm guessing a 1099-B WAS issued.  With your new understanding of how these things play out perhaps talk to the broker again and ask that specific question. 

The compensation created by the vesting is (GROSS number of shares vesting) x (per share "fair market value" used by the employer).  This figure is typically disclosed in Box 14 of the W-2 and "RSU" is usually included in the very brief description.  The "per share" basis of the stock is the same as the per share fair market value the employer used.  That's why a "same day" sale typically generates a small loss because the amount received from the sale is less brokers commissions and fees.

If the IRS has said it's not necessary to amend - although you may if you wish - a simple letter explaining the shares were sold the same day the RSUs vested and resulted in a small loss, maybe accompanied by a copy of the W-2 with the Box 14 amount and description highlighted, should put things to rest.  I'm sure the IRS sees thousands and thousands of errors of this sort.