Why are my mutual funds being taxed at 100% of sale of funds?

Question

My 2010 Taxes are being audited, I forgot to include the income of the sale of mutual funds 1099-B. The sale was for 17k. The IRS is essentially saying I need to include all 17k like I had bought the funds with tax differed money. But I was under the impression that if I bought the funds with taxed money for say 12k that I only had to include in my income from the profit. 17k-12k, so it would be 5k to add to my income. Is this correct?

Furthermore these funds were created in 1990 by my wife's parents for her college fund, we don't know the details on how they were bought, but they were bought in my wife's name. I am unaware of any vehicle that is a mutual fund that can be bought with tax differed monies aside from a 401k or IRA. These were clearly not in a retirement account. I am looking for any hints on how the IRS could tax us 100% on the sale of a mutual fund, it wasn't like a gift, it was an investment over time.

Answer 1

IRS doesn't know what they cost so it presumes zero. It is your responsibility to provide that information.

Answer 2

No, no, no, you don't get it at all.



"OK yes, technically it was a gift, but since all investing was done in my wife's name"

It was a custodial account. These are gifts to the child, so of course it looks like your wife was doing the investing--after all as of the gift, it was her asset. It was probably an UGMA or an UTMA, but the tax treatment is the same.



"The reason I mentioned the source is cause my wife had no idea how her parents set it up."

So she goes and asks. My accounts issue annual statements. My accounts show the cost basis of each asset because I've got to the trouble to ensure the brokerage house had the values. The end of year statement, however has 2 parts. 1 part is the copy of the 1099-B the IRS got showing gross proceeds only and a 2nd part showing how much was long term, short term, basis, etc. FIND THAT STATEMENT. Expensive brokerage houses like Merrill Lynch, Smith Barney, etc. will have this.



" But if this were a gift we would still be paying less since there is a 13k gift tax deduction."

The $13K gift exclusion does NOT affect your wife. That only applies to her parents. You do NOT get to deduct it fro the proceeds as it is NOT the cost basis.



Let's say you can't get the basis. At least point out to the AUR group that this is long term capital gain income, not short term gain. That will drop the tax rate to a maximum of 15%.



To get the basis, you must find all of the records. For all we know, her parents already owned the stock and gifted the stock to her. In that case her basis is THEIR basis unless the FMV of the funds at the time was lower.

Answer 3

You include the cost basis and the sale price. It's not added to your income, it's a long term capitol gain.



The brokerage can tell you the cost basis. You then fill out Scedule D. Done.



They are trying to tax you 100% b/c since you provided no cost basis, they assume a cost basis of ZERO. That's how they do it, happened to me before.



EDIT: The gift tax is not a deduction, it's an EXCLUSION, as in the first $13k (much less than that in 1990) gifted would not be taxed on IF YOU WERE THE GIFTER. Gifts are neevr taxable to the recipient. The gift or non-giftedness of the money does not affect your tax situation one iota.

Answer 4

Chances are good that when you get the numbers crunched there will be no tax as long term gains in the 15% bracket are taxed at zero-zilch-zip-nada-squat-bupkus. Contact your broker and find out what the dollar value of the funds were on the date your wife received them; you can even go online and do this yourself if you have the patience. Then fill out a Sch D showing the basis and the sales price for the net gain or loss. It may even be that there will be a loss on the sale which will reduce any tax owed and increase your refund; plus give additional loss to carry forward until it is used up.

Answer 5

Alright so now that the IRS has sent you the changes to your 2010 income tax return because you did fail to correctly report the sale of the mutual fund securities using the information that you did have available to you after the end of the 2010 tax year that was reported to you and to the IRS on the Mutual fund consolidated 1099 and the 1099-B information for this purpose.

So now you will have to fill out and file a 1040X for this purpose using the 2010 schedule D and the instruction that are available for your use line by line using the www.irs.gov website search box for this purpose.

Use the search box at the www.irs.gov website for Prior Year Products



http://www.irs.gov/app/picklist/list/priorFormPublication.html



Prior Year Products

Use the box FIND and TYPE 1040 and choose PRODUCT NUMBER click on SEARCH and then choose the 1040 tax year form and the instructions that you will need for your use at this time in your life.



http://www.irs.gov/app/picklist/list/priorFormPublication.html?value=1040&criteria=formNumber&submitSearch=Find



Check our the pages of the 1099-B to see if you can FIND any cost basis listed for any of the securities that were sold during the tax year 2010 for this purpose.

Check with the payer of the funds to see if they can help tp determine any kind of cost basis with some written proof for this purpose.

When the taxpayer is unable to establish prove the cost basis then the IRS will assume that the cost basis is -0- ZERO at that time in your life.

Use the search box at the www.irs.gov website for the Instructions for Form 1040X (12/2011)



http://www.irs.gov/instructions/i1040x/index.html



Lines 1 - Through 31—Which Lines To Complete



http://www.irs.gov/instructions/i1040x/ch02.html#d0e645



Before looking at the instructions for specific lines, the following information may point you in the right direction for completing Form 1040X.

Payments and refundable credits Lines 10–22

You are changing amounts on your original return or as previously adjusted by the IRS. Because Form 1040X can be used for so many purposes, it is sometimes difficult to know which part(s) of the form to fill out. Unless instructions elsewhere in this booklet tell you otherwise, follow the rules below.

Always complete the top of page 1 through Amended return filing status.

Complete the lines shown in the following chart according to what you are changing.

Check a box in Part II, if applicable, for the Presidential Election Campaign Fund.

Complete Part III, Explanation of changes.

Sign and date the form.

Hope that you find the above enclosed information useful. 08/08/2012

Answer 6

To pay tax only on the $5000, you'd have to show what her parents' basis was. Since you say you have no details on the purchase, unless you can show the auditor their basis, you owe tax on the whole sales price. If you can prove what their basis was, you wouldn't pay tax on that part. But you sound really vague about their basis. Where are you getting that $12K number?



And as to the $13K you mention, that doesn't mean you get to claim that against your gain, just means her parents don't have to file a gift tax return if the total given per year is under that. It has nothing whatsoever to do with what part of the sale is taxable.

Answer 7

Because you did not include the income.



If YOU include the income YOURSELF, then you only have to include the profit.



However, if YOU do not include anything, and the IRS has to do it, then they treat it as though you had gotten the funds for free and had not bought them with any money.



It does not matter whether the money was tax deferred or not, because you did not include the money. The money that it cost to buy the funds is only consider if you include it. The IRS does not do that for you.

Answer 8

They are assessing tax on the gross proceeds from the sale because they don't have the cost basis information.



Complete a Schedule D and send it to the address on the CP2000 notice. You'll need the original cost basis and the fair market value of the funds when they were transferred to your spouse. The cost basis is the lesser of the two values. Hopefully the fund can provide that information for you. If you cannot establish your cost basis, then by law you must use a basis of $0.

Answer 9

if your wife's parents started the mutual accounts on her behalf that is a gift, not investment your wife, she did not invest anything

and it would be incumbent on the fund manager to give you a basis since mutual funds are continually changing so that any original cost of the original mutuals is long gone

what $13K gift tax deduction, certainly not on the part of your wife, she is not taxed on gifts and she has no deduction for a gift