Big Mistake on 2005 Tax Return - Please Help - Expertise Needed?
Answer:
If you did NQ options, your W-2 does NOT have the gross proceeds but it does have the net gain (Difference between the sales price and option price).
A 1099B was probably sent to the IRS. They are thinking you did not report a significant stock sale. The Box 12 code will not do anything. What you need to do is complete a Schedule D.
You need to do an amended return including a 2005 Sch D. Show the gross sales price LESS the trade fees as the net selling amount. Show the gross sales price as your cost. (The gain is in your W-2 so your cost for Sch D purposes is that gain plus the option cost; the gross sales figure). Show the purchase and sale dates as the date of exercises. Use "NQ stock option sale" as the description.
Because of the fees you actually should get a refund.
Since you're not definitely sure you should first call the IRS 800-829-1040 and ask what the discrepancy is. The IRS may ask for an amended return (Form 1040x). You would probably just need to include the additional income. You would first need to prepare another Form 1040 adding the additional income, then you would report any differences between the original and the corrected 1040s on the Form 1040x.
The first thing to do is to not panic. Redo the tax form and submit an amended return. If you use a tax program and follow the prompts you will find that a NQ stock that is bought and sold on the same date will have in the sales prices for example a 1,000 and the purchase price will be 1,000 plus the fees and commissions so it might be 1025 total, giving you in reality a net short term loss of 25.00. Anyway check out the IRS.gov site and search for Stock options, in the upper right hand corner for a more detailed explanation. When you are satisfied this is correct, make the changes on the form you were sent. include any requested paper work from them and send it back.. Good Luck
You need to get more specific instead of having people guess at what happened. They proceeds from the exercise of the stock options where included in box 1 and therefore I don't believe that is what is adding to your tax.
However, did you exercise and sell the stock? Did you report that on sch. D. You should have gotten a 1099-B that had the sale if that is what you did?
Is it alt min tax? The difference between the market and the strike price of the option is an add back for alternative minimum tax calculations.
Call the IRS, ask them what the change is for exactly if you letter doens't clearly state what it is. Than write a response.
I would hire a CPA to deal with this.
zudmelrose nailed it.
By the way, don't panic. My friend got the same notice from his 2004 return, for some reason they didn't have his schedule D. So they come back with "you didnt report this, blah blah blah, you owe 9 grand unless you can show us where you took this income. I photocopied his Schedule D, drafted a letter for him and his wife to sign, shipped it off to the lazy bureaucrats at the IRS and a few weeks later all was well.
The Gross Proceeds are NOT included In box 1 of W2.
What is included is the difference between the Fair Market Value on exercise date and the option price. This is ordinary income.
Schedule D must be filed to so the Sale Price and your basis.
Your basis would be the Fair Market Value on exercise date plus any commission or fees that the broker charged for the transaction. This would show a net loss and increase your refund due.
You need to file 1040X and Schedule D
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