Turbotax Premiere screwed up my 2017 tax returns and I have a $18k underpayment penalty. The income is correct, but my returns don't list 1099B. What recourse do I have?

[masotime]

I just got a notice from IRS for underpayment on my 2017 returns. I don't understand the details, but the IRS claims that Schwab sold shares which weren't reported on my income.

I assume this is 1099-Bs from Schwab, but my W2s include this income and I have double-checked and it is accurate. It looks like Turbotax for whatever reason didn't classify my income correctly.

The IRS says I have until June 7th to settle this, which is very distressing. What recourse do I have at the moment? According to Turbotax, for Premiere they're supposed to pay any tax penalties due to inaccurate reporting. Does that apply here?

[TomYoung · Accepted solution]

This is user error, pure and simple, so fix your error and you won't have to pay a thing.  You might even get a small refund if you choose to amend.

The user error was that you didn't enter those 1099-Bs.  You probably thought "Oh, the profit from the sales is already on my W-2, so I don't need to enter those 1099-Bs.  If I did I'd be reporting double income". But, you DO need to enter those 1099-Bs, using the CORRECT BASIS for the sale.

The W-2 doesn't report "gain" it reports "compensation", and that compensation gets ADDED to your out of pocket costs, (maybe $0 for RSUs), to come to the correct basis.  But brokers are only required to report "out of pocket" costs, not "correct basis", (though they usually tell you the correct basis to use in some "supplemental information" that comes with the 1099-B), so it's up to you to report those 1099-Bs using the CORRECT basis.

If you don't report the 1099-Bs the IRS will pick up on that and bill you for taxes on those sales USING THE INCORRECT basis.

Do a search on "RSU" or "NQSO" or whatever employee stock incentive program is used by your employer and you'll find lots and lots of answers that point you in the right direction.

An FYI: most "same day sales" result in a small loss due to selling commissions and fees.

Tom Young

[masotime]

Hi Tom - thank you for the response. I believe you are correct - does this mean the correct course of action should be to file a 1040X (amended return)?

What confuses me is that I assumed Turbotax would make the correct entries for me after linking my Schwab account. It sounds like Turbotax is unable to perform this automatically for me?

IRS mentions that I should send "supporting evidence". Is it sufficient to send payslips with amounts and dates matching the ones listed in the W-2? The 1099-Bs I have only list RSUs sold to cover, and not the actual amount vested (and the associated value which matches what is in the gross amount in the individual payslips I receive). Is additional documentation required that was not mailed to me?

[masotime]

So I looked at a similar question - <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2713235-employer-stock-sales-on-both-w-2-and-1099-are-double-count...> - but I'm not sure how it applies in my case.

What's happening for me is that the company awarded RSUs as compensation  - technically those are with a cost basis of $0 since it is "free".

At the same time, Schwab does "sell to cover", and I think this sale is being recorded as additional compensation by the IRS. Does it make sense to update the cost basis to exactly match the sale price for "sell to cover" to reflect $0 additional income? That sounds weird to me.

I have not sold any of those RSUs or otherwise traded on the market in 2017 apart from the automatic sell to cover, so the situation is already at the simplest level of complexity.

[masotime]

I am looking at <a rel="nofollow" target="_blank" href="https://thefinancebuff.com/restricted-stock-units-rsu-sales-and.html">https://thefinancebuff.com/res...> and under 3. Sell to Cover, it looks like the cost basis is really the full price of the shares, or rather the price as recorded in my W2.

The W2 I have shows an aggregate amount under box 14 for the RSUs, rather than the 2 separate sales that are recorded on the 1099-B I got from Schwab. It sounds like I need to:

1. File a 1040X with the correct cost basis.
2. Send evidence to the IRS using Payslips that have the W2 withholding for the RSUs, and also the corresponding 1099-B slips.

Am I correct? Why didn't Turbotax warn me about this......

[TomYoung]

"I believe you are correct - does this mean the correct course of action should be to file a 1040X (amended return)?"

You probably don't need to amend, you should be able to simply write back and explain the situation - RSU vesting,same day sale, your mistake in not entering the 1099Bs, and reporting the sales would result in small loss - and put it to bed that way.  But it might be easier to simply amend, explain that these were same day sales of stock acquired via RSUs, and get a small refund.  Your choice.

"What confuses me is that I assumed Turbotax would make the correct entries for me after linking my Schwab account. It sounds like Turbotax is unable to perform this automatically for me?"

TurboTax has absolutely no idea that the stock you sold was obtained via an RSU and it was a same day sale because NOTHING ON THE 1099-B states that.  From TurboTax's perspective it's just another sale.  TurboTax just isn't that"smart".

"IRS mentions that I should send "supporting evidence". Is it sufficient to send payslips with amounts and dates matching the ones listed in the W-2? The 1099-Bs I have only list RSUs sold to cover, and not the actual amount vested (and the associated value which matches what is in the gross amount in the individual payslips I receive). Is additional documentation required that was not mailed to me?"

I'll bet if you look closely at the supplemental info provided by the brokerage all the evidence you need will be right there.  But I'd also think that amending might be easier with a clear explanation of the situation (and maybe a copy of the W-2 with the "RSU" information circled) because this kind of thing happens ALL THE TIME and I'm sure the IRS has seen thousands of them.

[masotime]

Thanks Tom, much appreciated. I wish taxes were more coordinated / synchronized between Schwab / my company / ADP without having to track all this manually.

Taking a much closer look at the 1099-B I received, I noticed there's a Box 1e: Cost or other basis, which Schwab has filled out, and I also notice a Box 4: Federal Income tax withheld, which has a blank entry. I assume this is why the IRS think I underpaid.

There is a line that says I need to report on "Form 8949, Part I, with box B checked.". Looking at the 2017 returns that Turbotax filed, I do not see any reference to a "Form 8949", but cross referencing my 2018 Tax returns where I did indeed do some manual trades, I see that Form 8949 is included. It looks like an amendment is needed with an 8949. And it also looks I need to amend my 2018 tax returns too to include the missing RSU sell-to-cover entries....

I will reach out to the Turbotax helpline and see if there's a straightforward option to deal with an amended return.

[TomYoung]

"What's happening for me is that the company awarded RSUs as compensation  - technically those are with a cost basis of $0 since it is 'free'."

NO.  THE VESTING CREATES COMPENSATION of:
(GROSS number of shares in the award x per share "fair market value").  You pay taxes on this amount"as if" you were paid in cash.  "Technically" your per share basis is the SAME AS that"fair market value" used by the employer to calculate the compensation.

"At the same time, Schwab does "sell to cover", and I think this sale is being recorded as additional compensation by the IRS."

Nope.  ALL the compensation is created by the vesting.  After that any sale of stock simply creates capital gain or loss .

[masotime]

Thanks Tom, what you said makes sense. If I re-interpret it as the company giving me cash and me purchasing shares with it immediately, the cost basis corresponds to FMV at time of purchase.

Sell to cover is, as you say, sold to generate cash with the cost basis at time to acquisition, along with its own capital gain or loss. I do not receive any of the cash that goes immediately to taxes, but it does not invalidate the capital loss or gain that results from the sale.

I can see why Schwab elects not to report the cost basis to the IRS ("Box B"), as there could be additional factors such as wash sales affecting the effective cost basis.

I have taken a look at the instructions at <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4251801-how-do-i-amend-my-2017-return-in-the-turbotax-cd-download-...> and will act accordingly by sending the Response form that came with the "Proposed Tax Changes" along with the 1099-B with Schwab and the 1040X as generated by the 2017 Turbotax software.

This has been educational, but also stressful and a real pain in the a**.....