Comment by Ozarkian | Hacker News Reader

Comment by Ozarkian | Hacker News Reader

I hear all kinds of complaints about the IRS. But my experience with them is that they are reasonable.

I had a tax situation when I did a same-day sale of some nonqualified stock options. What happened is that my employer put the net gain as income on my W2. In addition, the stockbroker sent me a 1099 for the total value of the options sold. This wasn't quite correct, because the income was already reported on my W2 and the broker should have known that and not 1099'd me for it.

I filed my tax return correctly, only including the W2 income and disregarding the 1099.

The IRS added the 1099 back into my income on their end after I filed, and sent me a bill for around $190,000 for the tax on the 1099 income.

I sent them letter with a clear and correct accounting for the difference. They agreed and sent me back a letter admitting that I was correct and that my tax due was now $0.

It was a bit nerve-racking, but I'm glad they did the right thing in the end.

The California Franchise Tax Board, on the other hand, is a whole different beast. Those people are a bunch of idiotic uncouth goons.

> the broker should have known that and not 1099'd me for it.

The broker is obligated to 1099 you for it. The issue is that brokers who handle NSOs are not obligated to set the correct cost basis, so they set it to 0, making it seem like you owe tax on the entire NSO's value for cap gain, on top of the income recognized on the W2. Setting the correct cost basis after importing the 1099 is a tricky, manual, error-prone process, and companies that grant NSOs often don't warn you about it, either. Brokers should be required to set it (they seem to already know this information from your employer in most cases, but don't want to take responsibility for reporting that value to the IRS).

I'm sure you're right that the broker is obliged to 1099 me for it.

Are you saying that I should have imported the 1099 and overridden the basis of those shares to be exactly what the sale price was? That seems like an odd thing to expect the end user of tax software to know to do. It's not clear to me that doing that would not also set off a flag when the IRS evaluates the return. There ought to be some solution between employers, brokers and the IRS that doesn't put such a burden on the taxpayer.

> Are you saying that I should have imported the 1099 and overridden the basis of those shares to be exactly what the sale price was?

Yeah, you never leave income forms out, you always provide them and correct them if needed. My broker provides a separate, non-standard form with the cost basis for each transaction. Yours may or may not. Once you have the correct cost basis, you provide it on Form 8949 (column E plus code 'B' in column F), which then gets accumulated into Schedule D to provide the true gain/loss for the transactions.

> That seems like an odd thing to expect the end user of tax software to know to do.

Yeah. It's one of those things where I think doing your own taxes is an advantage over using the software. The problem becomes obvious when you understand how income tax works: tax applies to income --> the shares are part of my income, so were taxed as such --> but if cost basis is 0 then the entire sale price will also be considered income --> I'm being taxed twice?? Something is wrong here. The tricky bit is figuring out how to solve it :) But the IRS's instructions are quite thorough, and some googling can point you to the right instructions if it's not obvious where to start.

Correct and I agree. TurboTax flags zero cost basis values for you and gives you some basic instructions on where to look for the correct ones, but it's quite tricky. I think the issue is brokers don't want to take responsibility for setting the value.

Yeah I've had similar encounters. Had several run ins with the IRS. All via mail, and the way the system worked and their responses were all very straightforward and professional.

The IRS "you owe us this much" mail is kinda scary, but if you read the letter it explains how to dispute / communicate with them and I found they were more than willing to follow the facts.

I've been audited twice by the IRS due to me being young and stupid, but yeah I just read the mail, followed the directions, and everything was perfectly professional and not scary at all.

Yeah. I think the tax prep companies try to spread the image of the IRS as some giant evil fiend who will steal all your money and/or apply the death penalty to you if you file your taxes wrong. But no, they just want what they're owed, no more and no less. Some years back, I accidentally used the "single filers" tax table instead of the "married filing jointly" tax table, and the IRS actually mailed me a check returning my overpayment amount out of the blue some weeks later.

I had the exact same thing happen w/ IRS. Also corrected their mistake with a brief letter. Honestly the whole 1099-without-basis thing should not be allowed.

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