Required to File

[Gary]

I have a client that has about $50000 in capital loss carryovers. She doesn't have enough income from other sources to have to file a tax return. If she sells stock, say for $20000, and the 1099-B does not have the basis, does this change her requirement to file?

[Nashville]

Advised to File

Gary, this lady should file, even though income threshholds don't force her to file.

If she doesn't, she could lose her capital loss carryforward.

Example:
1) TP has $50,000 capital loss in 2010 and can use only $3000. $47,000 is carried forward to
2011.
2) TP does not file in 2011.
3) TP has income sufficient that must file in 2012. The amount of loss carried forward comes
from her 2011 return, not her 2010 return.

Of course, the problem is easy to rectify, but it will still involve filing a return for 2011.

[ChEAr$]

With no stock sales, or any other taxable income, no filing required. Just keep copies of the worksheets calculating the loss carryover. The 3,000 loss ordinarily used in such a year is not lost of course.

[Burke]

I have a client that has about $50000 in capital loss carryovers. She doesn't have enough income from other sources to have to file a tax return. If she sells stock, say for $20000, and the 1099-B does not have the basis, does this change her requirement to file?

Yes it does. And I am not sure the basis showing on the 1099 would have anything to do with it. You don't give age, or marital status. Single woman, under age 65, would have to file if gross income exceeded standard deduction and exemption amts; i.e, $9,750. So $20K would do it. And the state may be even lower. IRS does not know marital status. (It might know DOB). IRS only knows what gross proceeds she got. Not what she paid for it. And they don't know when she bought it either, so they are going to assume short-term, ord income rates. And if she has $20K in stock to sell, what about dividends?

[FEDUKE404]

Should file a return!

I have a client that has about $50000 in capital loss carryovers. She doesn't have enough income from other sources to have to file a tax return. If she sells stock, say for $20000, and the 1099-B does not have the basis, does this change her requirement to file?

Not sure where you are coming from on the "enough income" observation or the relevance of whether the basis is/is not shown on the Form 1099-B.

Without filing a tax return, rest assured the IRS will start with the assumption that your client has $20k in capital gain (cost basis = zero) and then that "other income" will also be added to their list of the missing income.

Aside from any tax liabilities, you need to file an annual tax return to preserve/adjust any capital loss carryforwards.

FE

[Nashville]

Difference in Post

ChEAr$, it's obvious we are taking different positions for Gary's situation, and I can respect your knowledge on the matter. But assuming you are correct, how do you get the software to accept the carryforward from the previous year without overriding it? Might be a moot point since if you had a NEW customer, you would have to prompt the software to take it afresh anyway. I just wonder if I'm talking about a software problem or a statutory problem.

I do know the instructions for Sch D do not mention a carryforward from any previous year except the one immediately preceding, but that doesn't mean the Code prohibits it.

[Burke]

I do know the instructions for Sch D do not mention a carryforward from any previous year except the one immediately preceding, but that doesn't mean the Code prohibits it.

No the Code does not prohibit it; but the c/o loss may not be carried over in full. You would have to go thru the process to determine if all of it was allowed from the previous year. If a tax return is done, and there is no tax liability, it still might have used up some of it, even if gross income did not require one to be filed for that year.

[ChEAr$]

ChEAr$, it's obvious we are taking different positions for Gary's situation, and I can respect your knowledge on the matter. But assuming you are correct, how do you get the software to accept the carryforward from the previous year without overriding it? Might be a moot point since if you had a NEW customer, you would have to prompt the software to take it afresh anyway. I just wonder if I'm talking about a software problem or a statutory problem.

I do know the instructions for Sch D do not mention a carryforward from any previous year except the one immediately preceding, but that doesn't mean the Code prohibits it.

Yep, override works if need be. Somewhere I recall reading that in this such case, if no return needed during an intervening year, just keep the worksheets for the next possible usage.

I've a client who probably still has 50,000 unused carryforwards, but he hasn't had to file in maybe 10 plus years. Now IF he ever needs to again, we'll simply resume the 3,000 max loss per year.

[Gary]

Thanks

Thank you all.

[New York Enrolled Agent]

Yes it does. And I am not sure the basis showing on the 1099 would have anything to do with it. You don't give age, or marital status. Single woman, under age 65, would have to file if gross income exceeded standard deduction and exemption amts; i.e, $9,750. So $20K would do it.

While it might be advisable to file a tax return with gross proceeds of $20,000 (to avoid possible IRS correspondence), there may not be any requirement to do so.

§6012 requires a tax return when a taxpayer's gross income exceeds the filing threshold. §61(a)(3) defines gross income to include gains from dealings in property. Thus if the basis for the $20K proceeds was large enough, there would be insufficient gross income to trigger the need to file a return. See IRS SCA 200018051 for confirmation.

[FEDUKE404]

Another perspective

From Publication 501:

Gross income. Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. If you are married and live with your spouse in a community property state, half of any income defined by state law as community income may be considered yours.

I generally try to avoid the "you DON'T have to file rules" when there is a reasonable chance that not filing a return could lead to potential problems for the client.

In this case, I would definitely expect a CP2000 notice from the IRS for the unreported $20k income from the stock disposition. Why risk it?

Also, even though there may be "enough" capital loss carryforward to negate the current year sales, without tracking those numbers through the intervening years there always exists the strong possibility that some of the loss may have been "used" along the way. Something as simple as the amounts of short term and/or long term dispositions could even modify the number. I don't have enough spare time these days to tilt at this windmill, but I would personally prefer to have a viable loss carryforward number from each prior year tax return versus simply pulling an old number out of the tax file. That's why all tax software generates a worksheet each year showing the prior short term/long term capital loss carryforwards to be used AND any remaining short term/long term loss carryforwards for the following year.

Just my 2¢ worth.

FE

[joanmcq]

My 2 cents agrees with Feduke's. Just because there is no filing requirement does not mean none of the 3K is not used up, and any sales are going to generate a CP notice.

[ChEAr$]

To file or not to file

Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune (file a return)
Or to take arms against a sea of troubles
And by opposing end them." (answer the CP notice)

One might approach it thusly: If I prepare a return for her, I will charge her "X" dollars.
If not, and a CP2000 notice does arrive I will have to answer it, and I will charge her "Y" dollars.

Hmmm, let's see now, is X more than Y? Or.........?

(apologies to the bard of Avon)

[Burke]

§6012 requires a tax return when a taxpayer's gross income exceeds the filing threshold. §61(a)(3) defines gross income to include gains from dealings in property. Thus if the basis for the $20K proceeds was large enough, there would be insufficient gross income to trigger the need to file a return. See IRS SCA 200018051 for confirmation.

Under the law and the code, that is correct. But you can bet your sweet bippy, the TP will get a notice from the IRS about non-filing and a tax liability will be calculated for the reasons listed in this thread. And there is always the TP who thinks anything the IRS sends is absolutely correct, and he pays the amt due. Then you are looking at a 1040X.

[taxea]

If your client received a 1099b so did the IRS and they will be looking for a filed return to match the 1099 to. If not filed she will receive a failure to file and possibly a failure to pay notice. Just because the 1099 doesn't show the basis does not mean their isn't one. She needs to provide the documentation/statements of purchase so you can determine the gain/loss on the sale/s. Either you charge her for the research to get the info or she gets the applicable statements from her investment people.

The days are long gone that allowed us to ignore reporting third party info to the IRS.