Were you issued an IRS CP 2000 Letter for stock sales or mutual funds? The IRS has new enhanced stock sales reporting, but this does not help taxpayers who purchased stock prior to 2011. The IRS only mandates that brokerage houses report cost basis on the sale of stock and mutual funds purchased after 2011. While this change helps millions of taxpayers who sold stock that they purchased after 2011 avoid the dreaded CP 2000 letter, this does not help people who sold stock purchased before 2011 and have had recent gains.
What is an IRS CP2 000 Letter?
A CP 2000 is a type of audit (although technically not a field or corr audit). The IRS sends the letter that proposes to increase your taxes. This increase is… "based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to us by employers, banks, businesses, and other payers. The CP 2000 also reflects any corrections we made to your original return when we processed it."
What is the big deal about CP 2000 stock sales, and mutual funds?
An IRS CP 2000 letter "audit" on the sale of stocks or mutual funds causes thousands of Americans each year to overpay their taxes. The IRS issues a Form CP2000 stating that shares of stock were sold and provides the taxpayer with an estimate of the taxes owed. If no action is taken, the IRS assumes that there is no cost basis and that the stock or mutual funds were purchased for nothing!
Say you sold $50,000 worth of technology mutual funds in 2012 that you purchased in 2000, and you believe you paid $100,000 for them. If you were issued a CP 2000 and don’t have the actual cost basis, it is very likely that the IRS assumed that you purchased the mutual fund for nothing! Someone in this circumstance is owed a capital loss and potentially lots of tax deductions and should not pay taxes on money not earned.
Another common situation is the IRS issues a CP 2000 for stock sold in 2012 and the taxpayer does not know the cost basis because the stock sold was purchased many years ago. Let’s pretend this taxpayer had a brokerage account at Merrill Lynch, DLJ, UBS, or Morgan Stanley and in 2005, they transferred or ACAT their account to Scottrade, e-trade or AmeriTrade to take advantage of $7 trades. In this transfer they sent over stock and mutual funds. Good luck finding the cost basis from accounts that were purged from brokerage house records. Its an excruciating process that rarely ends with success. Though it is likely that stock held for many years has appreciated greatly, the tax liability should not be based on the entire sale, only the gain.
This is what the IRS assumes with an IRS CP 2000 letter — all your stocks were purchased for zero!
The way the IRS calculates gains, it assumes the taxpayer has a zero basis. That is, someone was kind enough to just hand over a bunch of valuable securities for no consideration (the IRS sure has some sunshine assumptions about society, doesn't it?).
The way to fix this is by getting the cost basis information; your tax liability will go down dramatically. If you do not have a cost basis, or you are involved in mark-to-market accounting on mutual funds or PFICs, this is where things get more complicated. You need to uncover the cost basis or provide evidence to a reasonable estimate to the satisfaction of the IRS.
If you have received a CP 2000 and are feeling overwhelmed, contact us to set up a free consultation.