Wednesday, April 09, 2008
Last week, my 76 year-old father called me up in a panic. I thought something might have happened to my mother or someone.
Instead, it turned out that he received a letter from the IRS saying that he had not accounted for a 1099-B statement on his 2006 tax return.
My father had sold a mutual fund worth about $36,000 and, since the IRS did not have the cost basis, they included the whole amount as unreported income. The additional tax, along with penalties and interest, came to about $9,700.
My father has never touched a computer in his life, and does his taxes by himself, on paper. He is used to 1099-INT and 1099-DIV forms but, because my parents are conservative, they just buy and hold and are not familiar with 1099-B's.
Anyway, I told my father that he will probably have to file an amended return, and I would come over on Sunday to help him.
When I got there, I found out that he was OK.
The IRS had included two response forms with the letter - one to use if he wished to send a full or partial payment, and one form to use if you are not going to make a payment.
During the week, my father had called the IRS and talked to an agent on the phone. My father ended up pleasantly surprised - the agent was patient with him and explained that all they were after was the cost basis. All he had to do was send the form, along with documentation of what price he paid for the shares.
Since my father had originally paid $32,000 for the fund, he only had a $4,000 gain - which did not result in him owing any additional tax.
1. It reinforces my view that the U.S. desperately needs tax simplification.
2. Make sure you always account for all 1099s - a copy does go to the IRS.
3. If you make an honest mistake and are confused, don't be too intimidated by the IRS to not ask for help.