Auditing Schedule D

[ticksandtax]

I have a client who in 2008 during the stock market collapse liquidate his portfolio in his brokerage account. Total proceeds around $245,000 he then bought and sold some stocks to try to get even on his long term loss of 50,000. Naturally this didn't work so well and he lost another $10,000. He never sold a stock before as he intended on holding them until retirement. When he looks at his schedule D he sees $245,000 in proceeds from the long term sales and another $150,000 from his short term trading. He is scared he will be audited because he thinks the IRS will now think he has $395,000 Short + Long and wonder how he had so much money. I told him that on the short side it could have been a million if he traded 50 more times and the IRS would know this and not to worry I also told him that they would be more likely to audit you if you showed $40,000 in MTG interest and only made $50,0000. He is 55 years old a one man S corp and makes around 100K a year. He has had this brokerage account for 15 years. I told him I never had an audit like this before with the exception of when someone doesn't show all the trades that are on the 1099. He was also told In addition the IRS doesn't know if someone borrowed money to buy stock on margin. Although I have not had an audit with the IRS fishing these waters I though I would ask a few others in his behalf. I am relatively sure he is not the only one in 2008 who liquidated their portfolio.

[JohnH]

Tell him he doesn't have any choice in the matter - he has to report all the transactions no matter what the total may be. Beyond that, there's no reason to think the IRS will audit him just because there's lots of activity in the account. His odds go up a little, but chances are nothing will happen PROVIDED he reports all his trades per the 1099-B.

IRS sees this stuff all the time and their computers won't "think" anything about him one way or the other. Chances are no person will even look at his data beyond the clerk who enters it in a computer if it's paper filed.