IRS Letter

so, I get a letter from the IRS stating I owe $15k from my 2017 taxes. After reading the details, I think 2 things are going on:

1) they have a large sale of mutual funds/ money market account. It shows around $50k. But these were just funds moving from one thing to another. No gain realized and the cost basis was actually listed on my annual statement as around $47000. Am I correct in my thinking that if the cost basis roughly equaled the selling price, there’s no actual gain? Why would Etrade report the sale to the IRS but not the cost basis? I never had this come up before.

2) HSA withdrawals. I only take $ out of it to reimburse valid medical expenses. It’s showing the $2500 or so I withdrew as income. I thought if it went to valid medical expenses it couldn’t be taxed?

I will follow up with TurboTax (I did buy audit production past few years) but curious if anyone has these answers readily?

Call the IRS and ask them the basis for the 15K underpayment allegation if that information is not included in the letter you received.  Then take that information to an accountant.  Depending on the type of account from which you took the funds, difference in value between purchase price and sale price, where the funds were reinvested, and other factors, you may owe taxes on the fund sale even if the funds were immediately reinvested.  I'm not sure Turbo Tax can help you here if you did not provide this information when you computed your taxes.

What are the conditions surrounding your HSA?  Depending on the way in which the plan is structured, even if the money is used for what it is intended, the funds used could be construed as income.  Check with whoever issued the policy (employer or insurance agent). Again, Turbo Tax wouldn't be able to help you if you did not provide this information when you computed your taxes.

One observation regarding when you say  “But these were just funds moving from one thing to another. No gain realized“

Moving funds from one thing to another entails selling something, so unless this all occurred within a tax-deferred account such as an IRA, the sale would be a taxable event - doesn’t matter that it was immediately reallocated. In the eyes of the IRS, you don’t have to walk away with cash to realize a gain.

But, from the 50k - 47k numbers you provide, your tax liability would be a whole lot less than $15k, so I don’t know how that number was reached. 

my last experience using an accountant for something like this was a disaster. I wound up,owing the IRS MORE than I started out owing and the guy charged me over $5000 for his time. I’d rather do it myself.

It says on my brokerage statement “cost basis not reported to IRS” so I am pretty sure this is the issue. They see it as $50k in earnings but they have 0 as the cost basis so it’s seeming like it’s pure profit.

No, my HSA is not supposed to work like that. It’s not supposed to be taxable if used for valid medical expenses so I’m not even sure why the IRS is asking about it.

Last year I had a situation with New York State where they pointed out a small calculation error and said I owed north of $5K. I did in fact make a calculation error but it was about $300 — their $5k bill was way off because it included miscalculation plus the assumption that I paid $0 in NYS taxes all year, when in fact I had paid more than $5k, through standard payroll deductions. I appealed through the website — it took a few months for them to respond but they acknowledged I was correct and owed only $300.

Apples and oranges to your situation but my point is that tax folks can be way off base in their automated send-outs. Once you get through to a real person I imagine you’ll be able to resolve this fairly easily and for a lot less than $15k.

HSA defaults to income unless you explicitly say that you used the withdrawls for medical purposes.  Check your turbo tax answer.  You likely didn't check it off properly.   

whats going on should be listed in the notice  ( proposed changes)

I went through an audit...found they are stupid or engaging in willful attempts to defraud taxpayers...

i had to keep sending them copies of their own rules, eventually went up against their lawyer...and won.

jmitw said:
I went through an audit...found they are stupid or engaging in willful attempts to defraud taxpayers...
i had to keep sending them copies of their own rules, eventually went up against their lawyer...and won.

 This!!  I have had to do this for several years now ( with the exception of fighting their lawyer).  

I get audited every year and I get the same letter every time.  They say I didn't pay taxes on a certain income, which is true, but that is because I am not required to by their rules.   Yet every year I have to submit a copy of their rules. (27 pages)

This year I didn't even put that income down.  I figure I am going to get audited any way.

The way the IRS enforces income tax is a clear violation of your 5th Amendment rights. 

oots said:
whats going on should be listed in the notice  ( proposed changes)

 No, not really. They say I owe $ for the reasons I said. I think they are wrong for the reasons I said.

See if this helps:

1) You should have included form 8949 with your return.  Generally this is automatically generated when turbo tax asks questions about any stock, bond or mutual fund transactions that were reported on your annual 1099 from E trade.  Your broker may report "Cost basis not reported to the IRS" if the fund was transferred into E trade from another brokerage account and they don't have the cost basis in their records.  In that case when you answer the turbo tax questions about stock sales you'd be responsible for providing that information along with date of acquisition, date of sale, proceeds and cost basis.  It's a little surprising that they would question the basis that you reported.  Is there a chance you didn't report this sale assuming it wasn't taxable?

2) If you have a distribution from your HSA you should have included form 8889 with your return and at a minimum filled out Part II Lines 14 and 15.  Line 14 is the total of the distributions you received and Line 15 is your total qualified medical expenses incurred.  If your expenses on Line 15 exceed your distributions on Line 14 there is no tax due.  If the form wasn't filled out or there is  Line 15 is blank the distributions will be carried over to Schedule 1 and be treated as additional income to you.

 Hope this helps.

it helps very much. Thank you. I have to look,back in TurboTax but it’s quite possible I didn’t fill anything out for the HSA because I just thought it wasn’t taxable. I didn’t realize you had to “prove” to the IRS it wasn’t taxable. I now know for the future. As for dividends, interest, stock profit- I did have the brokerage statement/tax statement and it showed a profit of $6250 which is exactly what I reported. The other $45000 or so is there but not shown as a profit. My form says taxable interest/ dividends of the $6250.

Can you go back in TurboTax and do these forms? Do I have to file an amended return? Do I just respond in writing with any documents I have or do you recommend I complete and also send in those forms you mentioned?

Honestly, it’s an organization of of idiots. They get “recognized”/ measured on the money they collect so I think they make stuff up and hope many people will just get scared and pay it.

Keep in mind that AGI is used in some cases in the next year's return.  If you use Turbo Tax every year and carry over the numbers, you may get some faulty calculations for 2019 return.

Regardless of what  you do in terms of filing (amended or responding in writing), make the corrections in TT and save the file.

conandrob240 said:
it helps very much. Thank you. I have to look,back in TurboTax but it’s quite possible I didn’t fill anything out for the HSA because I just thought it wasn’t taxable. I didn’t realize you had to “prove” to the IRS it wasn’t taxable. I now know for the future. As for dividends, interest, stock profit- I did have the brokerage statement/tax statement and it showed a profit of $6250 which is exactly what I reported. The other $45000 or so is there but not shown as a profit. My form says taxable interest/ dividends of the $6250.
Can you go back in TurboTax and do these forms? Do I have to file an amended return? Do I just respond in writing with any documents I have or do you recommend I complete and also send in those forms you mentioned?


Honestly, it’s an organization of of idiots. They get “recognized”/ measured on the money they collect so I think they make stuff up and hope many people will just get scared and pay it.

 I apologize in advance if this is sounds simplistic but just trying to make sure I know exactly what your situation is.  In your response you mention 6,250 as profit and then you state that your "form" (1099?) reports 6,250 as interest and dividends.  Is it coincidence that the two are the same?  As I'm sure you're aware interest and dividends are usually reported on page one of the 1099.  Somewhere else there is a line that reports "proceeds from the sale/exchange etc. of stocks, bonds etc." then later on the additional pages of the 1099 provide the details of those sale/exchange transactions.

If the 6,250 is truly interest and dividends they are separate and apart from any profit from the sale of stocks/bonds etc.  They go on different schedules on your return.  Interest and Dividends (depending on the type of dividends) get reported on Schedule B.  Profit/loss from the sale/exchange of stocks etc. go on Schedule D (as do any dividends related treated as capital gains).  The form 8949 mentioned above then provides the IRS with the details for the amounts flowing up to schedule D.  After completing this form the total in the proceeds column should agree with the aforementioned Line on the 1099 reporting "Proceeds from....."

Generally included in the pages providing additional detail mentioned above the brokerage will calculate any gain/loss on the sale of the stocks/bonds etc.  That is different than the interest and dividends and needs to be reported.

Your best and safest bet, once you figure out the capital gain issue, is to file an amended return using Turbo Tax.  Typically there is the ability to prepare a 1040X and the process is as follows:

https://turbotax.intuit.com/tax-tips/amend-return/how-to-correct-federal-tax-returns/L67t0F7il

You generally cannot efile an amended return so what I would do is write a letter to the address on the letter you received and state that attached is a copy of an amended return along with a check if a balance is due.  It may get processed quicker this way rather than just mailing it to a generic IRS address.

Don't forget to at least check your state returns too.  Changes to federal taxable income often result in changes to your state tax too.

conandrob240 said:
so, I get a letter from the IRS stating I owe $15k from my 2017 taxes. After reading the details, I think 2 things are going on:


1) they have a large sale of mutual funds/ money market account. It shows around $50k. But these were just funds moving from one thing to another. No gain realized and the cost basis was actually listed on my annual statement as around $47000. Am I correct in my thinking that if the cost basis roughly equaled the selling price, there’s no actual gain? Why would Etrade report the sale to the IRS but not the cost basis? I never had this come up before.


2) HSA withdrawals. I only take $ out of it to reimburse valid medical expenses. It’s showing the $2500 or so I withdrew as income. I thought if it went to valid medical expenses it couldn’t be taxed?

I will follow up with TurboTax (I did buy audit production past few years) but curious if anyone has these answers readily?

When you sell investments there are different categories for different situations (with alphabetic codes that I don't completely understand) and some of them require reporting of basis information by the investment firm to the IRS and some do not. It should all have been shown on your 1099-B (part of your complete tax statement along with 1099-INT/1099-DIV/etc.) from eTrade.  

But, in any case, the basis information should have been included on your return.  If you use Turbotax you may well have downloaded the information from eTrade, but then you needed to review the downloaded information and if it was in the category where basis was not included, then you (or whoever prepared the return) needed to add that basis information in.  I suggest you take a look at your schedule D (where this is reported) to see if the basis information was included.  If not, you may need to submit an amended return or it's possible that you may be able to respond to the IRS letter to provide the basis information.   (But, as I think about it, if the basis wasn't included in the return in TurboTax, then that larger balance due should have shown up on your return as it was being prepared.)

If you paid for the Audit protection, then definitely call them up and take advantage of that.  Also, if TurboTax made a computation error, then I believe they cover any penalty/interest associated with the error.

Good luck!

yes, I understand. I was simplifying. Total gains of all kinds were $6250. That’s what I filed and that’s what’s on the brokerage/banking summary

I use H&R Block online and they are super diligent about making sure your return is analyzed and all applicable schedules are attached. I almost missed one this year and they reminded me to add it. 

Good luck worth the IRS! I had an issue one year when they had a data entry error. An extra zero was added to my home sale proceeds and I got a HUGE tax bill. And worse yet, because of the balance due (erroneously) my case was had to be handled by a special IRS unit on the west coast. And they were IMPOSSIBLE to reach. It was maddening. When I finally got someone on the line and the error was realized, the woman laughed. I’m so glad she found it funny.

yeah, my last experience was maddening compounded by a crooked accountant I hired who billed me for $5000+. It was a horrible experience. That one was around the sale of my SO house.