Cost basis copied into CP2000 as gross proceeds

[OtisMozzetti]

My client just received a CP2000 notice in which transactions in all 3 stocks he sold had the income reported in his return explained as insufficient because the numbers from the "cost or other basis" column on Schedule D were copied into that notice as the income reported on the return. Since he had a gain on each of those 3 stocks, each of which he sold in one transaction each on a different date, there was therefore a good amount of unreported income according to the CP2000.

A small amount of additional background: the client had self-prepared his originally filed return with that software whose name I just cannot utter. He came to me when he received an earlier CP2000 which reminded him that he hadn't included sales of stock connected with stock options exercises. Therefore, I prepared him an amendment in response to the earlier CP2000, with the stock options transactions added to the Schedule D and incidentally with the $20 brokerage commission he had neglected added into his cost or other basis on the other 3 stock transactions. The latest (second) CP2000 evidently came in response to that 1040X inasmuch as the numbers from the additional transactions connected with the stock option exercise were correctly copied into the latest CP2000.

My question is this: how would the entire column of "cost or other basis" end up copied into a CP2000 notice instead of the other column "gross proceeds of sale, or amount of income shown on the return"? The 1040X included a copy of the return as originally filed, and the changed Schedule D. I confirmed that all the numbers on both of those Schedules D had been correctly shown, other than a $20 increase in the cost basis on account of the brokerage commission he had paid on each of the three stocks.

[Corduroy Frog]

Bad CP2000

No real answer Otis, unless it can come from someone within the IRS who knows how these things get screwed up. Every July I brace myself for the CP2000s which invariably come to some 5-10% of my clients.

It is my experience, and I expect it can be corroborated by others on this forum, that over 50% of all CP2000s are wrong, either totally or in part. I'm not surprised by the experience of Otis' client.

I also believe the basis as shown on Forms 1099-B should include any commissions, whether on the purchase or on the sale. Of course, that doesn't guarantee that this happens properly, especially since the requirement has only recently been placed on the issuer of the 1099-B. Many securities purchases dating back to the '80s and '90s and even further have pre-dated this recent requirement, so the better records the client can keep, the less chance of omitting a commission.

[Burke]

A
[B]My question is this: how would the entire column of "cost or other basis" end up copied into a CP2000 notice instead of the other column "gross proceeds of sale, or amount of income shown on the returnbasis on account of the brokerage commission he had paid on each of the three stocks.

If it was a paper-filed return (1040-X), it was easy. The processor simply picked up the figures off the Sche D and popped them into the computer under the wrong column (or field). The computer automatically produced the letter and NO ONE looks at these things before they go out.

[S T]

Schedule D

Whether it be the original filing or an amended 1040X, I have had IRS representatives on the phone advise me that they wished the "staff" that processes these issues would refrain, particularly on a Schedule D - Statement was those "people" pretty much don't know what they are doing or how to read a Schedule D.

Good Luck

Sandy

[joanmcq]

Otis, what is the tax due on the new notice? The second notice (response to first notice) will have the sale proceeds in the 'as reported to IRS' column, the basis in the 'as reported on return' column, and the gain or loss in the 'difference' column. It sounds as if the notice is agreeing with your changes.

second, did you or client send the 1040X to the AUR unit (an X really isn't required or wanted, just a Sch D and I always send a new 1040 with the tax computation if necessary), or did he file it at the service center where he filed the original return?

[Burke]

Whether it be the original filing or an amended 1040X, I have had IRS representatives on the phone advise me that they wished the "staff" that processes these issues would refrain, particularly on a Schedule D - Statement was those "people" pretty much don't know what they are doing or how to read a Schedule D.Sandy

I had one once where the processor put the Sche D in twice. Of course, the TP got letters saying there was an underpayment. It took 6 months to straighten it out. They tried to fix it and made it worse. I finally lost it and told them to delete the return and reprocess it, which they may have done, because after that, everything was fine. IRS letters had the guy so scared he went down to bank and took all his money out so they could not put a lien on it.