Unaddressed Stock Capital Loss in 2022 Tax Return

[little woo]

Last year, I sought assistance from an accountant to prepare my 2022 tax return. However, upon reviewing the documents today, I was unable to locate the Schedule D and realized that my stock capital loss of approximately $10,000 for the year 2022 may not have been reported. Despite my attempts to reach the accountant, I discovered that he has resigned and is untraceable. I am uncertain about the next steps to address the stock capital loss for 2022. Any guidance or assistance would be sincerely appreciated.

[rjs]

You say the accountant "has resigned." Does that mean that the firm or practice where he worked is still in existence, but he is no longer there? If that's the case, the firm should take care of the problem for you.

If the firm no longer exists, you first have to determine whether the loss was reported. You seem to be uncertain about that. It's not clear whether it actually was not reported, or if you for some reason just can't find the Schedule D. It's also not clear whether you had any capital gains, or only the loss.

If there is an amount on line 7 of your 2022 Form 1040 or 1040-SR, and the box next to the amount on that line is not checked, then there was a Schedule D in the tax return. If line 7 of your 2022 Form 1040 or 1040-SR is blank, then the loss was not reported.

Either you, or any tax professional, with your permission, can get a transcript of your 2022 tax return from the IRS. The transcript will show whether Schedule D was filed, and if so it will show the information on the Schedule D.

If you determine that the capital loss was not reported you will have to file an amended return, Form 1040-X, for 2022 to add the capital loss.

Do not file your 2023 tax return until you have resolved the issue, because the capital loss on your 2022 tax return is likely to produce a capital loss carryover to 2023.

[Mike9241]

A way to check to see if schedule D was included is to look at line 7 of the 1040. that should show a loss of $3000. another way to see if schedule D was included is to look for a form that has attachment sequence "12" in the upper right at the top.  (that's Schedule D). if it wasn't included you'll need to amend 2022 because you'll have a capital loss carryover to 2023.

[little woo]

Yes, the firm no longer exists, and I'm unable to reach the tax professional. After downloading the tax transaction from the IRS, I noticed that line 7 was blank. I will definitely fill out Form 1040X now. However, I still have some questions:

1. Will there be any late penalties for filing Form 1040X? I've already completed my 2022 tax return, and the IRS may owe me $3,000 for capital loss.

2. If Form 1040X is approved, will the IRS issue a $3,000 refund for 2022? Additionally, can I still carry over $3,000 for 2023, $3,000 for 2024, and $1,000 for 2025?

3. You mentioned holding off on filing the 2023 tax return until the issue is resolved. But if the IRS hasn't resolved it by April 15, 2024, would I need to file extension Form 4868?

I truly appreciate your response."

[rjs · Accepted solution]

Will there be any late penalties for filing Form 1040X? I've already completed my 2022 tax return, and the IRS may owe me $3,000 for capital loss.

If the 1040-X shows that you get an additional refund, there will be no penalty. (There would be a penalty if you owed additional tax, but that is not your situation since you are adding a capital loss.) The IRS will not owe you anywhere near $3,000. See the next question.

If Form 1040X is approved, will the IRS issue a $3,000 refund for 2022?

No, you will get a refund, but not $3,000. The capital loss will reduce your taxable income by $3,000. It does not reduce your tax by $3,000. The amount of the refund will depend on your other income, what tax bracket you are in, and possibly side effects of the change involving other things on your tax return. The refund will be much less than $3,000. It might be only a few hundred dollars.

Additionally, can I still carry over $3,000 for 2023, $3,000 for 2024, and $1,000 for 2025?

The amount of the capital loss that is used each year is not necessarily $3,000 every year. It depends on what else is on your tax return each year. If you did not have any capital gains in 2022, the carryover from 2022 to 2023 will be the entire remaining loss, after using $3,000 of the loss in 2022. TurboTax will calculate the carryover to 2023 when you do your 2023 tax return. But you may not be able to use the entire carryover on your 2023 tax return. How much you can use in 2023 and how much gets carried over to 2024 or future years depends on what else is on your tax return each year. TurboTax will do the calculations for you each year until the entire loss is used up.

You mentioned holding off on filing the 2023 tax return until the issue is resolved. But if the IRS hasn't resolved it by April 15, 2024, would I need to file extension Form 4868?

Filing an extension would be the best course of action. The IRS definitely will not process your 1040-X by April 15. It is currently taking at least 20 weeks for an amended return to be processed.

[little woo]

I apologize for reaching out again. I have a question regarding line 18 on Form 1040X. In tax year 2022, I owed the IRS $2000, which I have already paid. However, after including a -$3000 capital loss on Form 1040X, I'm unsure what number to put on line 18. If I enter 0 on line 18 and my updated "amount you owe" is $1700, do I need to attach a cover letter to explain that I already paid $2000 on my original tax return and should receive a $300 check for the included capital loss? Alternatively, should I put -$2000 on line 18, then input $300 on lines 21 and 22? Thanks!

[rjs]

You don't need to explain what you paid. The $2,000 that you paid with your original tax return should be on line 16 of Form 1040-X, which includes "tax paid with original return." Line 18 should be blank. You did not have an overpayment on your original return, you had an amount due. You don't "input" anything on line 21. Line 21 has to be calculated as specified on the form.

If you use TurboTax to prepare your 1040-X it will fill in the form for you.

How do I amend my federal tax return for a prior year?