What can I do about Turbo Tax leading me to pay hundreds of dollars in taxes on tax-free money for my 2017 return?

[richard-alexande]

The profit from the sale of my house was tax-exempt. I invested some of this tax-exempt money in a pair of oil wells being drilled by an oil company. When the oil company said the wells had failed and would be closed, my expert advisor at Turbo Tax told me that I would have to pay taxes on the formerly tax-exempt money that I lost in the oil wells. As a further plot twist, now the SEC is taking the oil company to court for fraudulent securities sales related to some of the oil wells it sold. I don't believe I should have to have paid taxes on that money in the first place, but especially not if the sale was fraudulent.

[VolvoGirl]

Don't know about your investment situation but it doesn't matter what you did with the house sale tax exempt money.  Being tax exempt for the sale doesn't make it exempt for anything else.  Each thing is a separate transaction.  

[dmertz]

As VolvoGirl said, with regard to taxes, the purchase and sale of the house is completely independent of the investment in the oil wells.

When reporting any distribution from the oil-well investment, are you failing to account for your cost basis in the oil-well investment?  If the amount you got back (or will get back) from the oil-well investment is less than the amount you put into that investment, you have a net loss, not a taxable net gain.

[richard-alexande]

My situation seems simple to me. I invested $25667 from the sale of my house into this oil company. I received back NOTHING! Absolutely NOTHING! I never will receive anything back from my investment! The SEC has filed a lawsuit against the oil company alleging fraud, representing 144 other investors, all who received NOTHING! The Turbo Tax expert said I was still on the hook for taxes due on the oil wells, and I had to pay more than $300 in taxes for those oil wells.

[richard-alexande]

What is the basis for the claim that I owed more than $300 in taxes? I lost all the money I invested! I got NOTHING back! I never will get anything back. The SEC has filed a lawsuit claiming fraud against the company, due to 144 investors who lost a combined $2.2 million, but will get nothing back. How is it that I had to pay taxes on tax-free money that I lost?

[dmertz]

What you describe does not suggest anything having to do with the performance of TurboTax.  With $25,667 of basis in the oil-well investment and nothing back, you have a loss, not a taxable gain.  Entering that correctly into TurboTax would not result in any increase in taxable income.  Instead would generally result in a $25,667 loss that would generally reduce your taxable income.  If a similar entry error was made in any other tax software, the result would be the same.

In 2017, if the sale of the house qualified to have the gain excluded from income, that would have been reflected on your 2017 tax return with the house sale not adding any taxable income on your 2017 tax return.  That sale has nothing to do with the tax treatment of the subsequent oil-well investment.

One other thought:  Did you receive a Schedule K-1 (Form 1065) showing Unrelated Business Taxable Income (UBTI) with code V in box 20?  UBTI in excess of $1,000 is taxable income to you regardless of the performance of the investment itself.  That's an often unanticipated negative side-effect of this type of investment.  However, if the investment was terminated, the reduction in income tax due to the loss on the investment itself would offset this.

[VolvoGirl]

Only the house sale was tax exempt.  Not the money you got from it.  

[richard-alexande]

I entered the information into Turbo Tax software at the advice of their expert advisor. I hope that was right.

I spoke with a Turbo Tax advisor by phone a day or so ago. She suggested that perhaps some other income from other sources might have lost tax coverage when the wells shut down. She said that Turbo Tax won't look at this now, as it has been too long, unless I get audited. She did say that if a tax preparer I hire finds an error, Turbo Tax guarantees the accuracy of my return and would refund the difference.

I can't find anything called a Form 1065 in my collection of records. I got a PDF attachment to a letter that had a subject line, "Year End Tax Report for 2017." It appears to contain information that is similar to the form you describe. The first line of the letter states, "The purpose of this letter is to relay information relating to your investments in well(s) drilled and operated by...." Number Five of the instructions says, "Operating expenses incurred from the operation of the well during 2017 should be listed in Part V of Schedule C and carried to line 27 of Schedule C as Working Interest Expenses." Apparently, they sent a 1099, but I don't see that, either, right now. I can only say that I received NO money, at all, in any way from this company.