Stock Transactions Can Complicate Taxes If Not Properly Reported

Submitted by admin on Fri, 3/2/2018 - 10:31 pm

Stock transactions can complicate taxes if not properly reported, and dealing with the IRS can be complicated trying to resolve it. There are many little things that you really have to learn to navigate, that can really impact a taxpayer’s ability to get IRS past dues removed from their books.

To illustrate this issue, I recently had a case where a client had been hit with a thirty thousand dollar tax bill due to not reporting the sale of stock. The IRS will receive 1099’s from all the brokerage houses, so it is never a good idea to not report a stock sale.

What was interesting to me was that the brokerage statement did not show any basis of the stock so the entire amount was reported as a gain. There is almost no case where stock has zero basis, unless it is a partnership, in which case it is possible if all the distributions were a return of capital until the basis hot zero. That usually takes a while, at least 10 years.

So even though in this case it was a publicly traded partnership the holding period was not nearly long enough for it to be at zero basis.

After investigating further it turns out that the stock was awarded by his employer which was this publicly traded partnership.

What is really interesting is that on his W-2 it did not show his compensation was in stock, it just gave a total amount of his compensation.

A phone call to the general counsel’s office of that company was really helpful. Turns out that the details of the stock award is not on the W-2 but on the pay stub. I requested the pay stub, but they did not have it. However they did give me an official letter on the company letterhead detailing the stock awards, the fair market value of the stock at the time of the award…and the number of shares withheld by the company for his taxes.

As the company withheld shares, the remaining stock has the full basis of the FMV at the time of the award. With this information we were able to successfully challenge the IRS’s determination sand we got a $30,000 headache removed for our client.