tax questions about capital income

johnN

Hello folks, sorry to ask this stupid question. I just got an IRS revision from 2010 for our taxes from our mail today and I almost fell off my chair. For some reasons the turbo tax did not link it to zionsdirect and most of my taxes did not get process from all the bonds. Now they are saying I owe IRS another ~ 10000 dollars from capital gains + interests that I did not pay last year. I did remember fill every forms out from zions bond last year.

Here's the question: For example, if you buy a bond in 2009 @ 5K [all monies after tax from non-IRA private account], then you sell it in 2010 @ 6K, should you only pay 1K for capital gains. IRS are trying to RIP me off and gave me bunch of new capital gains and they are trying to make me pay the 6K [not 1K which makes a hugh difference]. Am I missing anythng here? I probably have to call them and make a major revisions to these tax forms. They are charging that I did not pay couple of bonds from capital gain incomes. This does not make sense to me.
Thank you for your help. I appreciate all your commentaries and helping me w/ these issues.
JNN

Old_Joe

No offense, John, but things like this are why I think it's cheap insurance to have our taxes done by a professional attorney/CPA. I want someone who knows what he's doing looking over my shoulder and talking to the IRS for me. Before TT, for many years I filed all of our returns myself, but after we had gotten to a degree of complexity realized that that I needed someone to double-check my work.

Despite the best intentions of fellow board contributors, because of the complexity, detail and variables involved I will be surprised if they will be able to offer meaningful help in this kind of situation. Catch, below, pretty much agrees.

catch22

Hi johnN,

We have used both Turbo Tax and H&R Block tax cut.

However, we have not needed to import data from an online account to be loaded into the program; so, I can not speak to this regarding data errors.

---I will presume that the tax program must have been satisfied with calculations when processing the final review and did not set any flags for review of the data.
---I will also presume you reviewed the printed hard copy for your records and was satisfied that all entries for transactions were in place; and matched any document data that was imported into the program.

Your example mentioned $1K profit reported for the bond sale. This and other similar transactions should be found in the forms and schedules that TT maintains. You would not pay $1k in taxes for your example; but an amount based on the holding period, your total profits and/or losses and the % of taxation based upon these.

Does a review of the TT program details indicate all of your bond transactions?

Did you file electronically or paper copy?

Do you have the paperwork from Zion's or others indicating all of your sale transactions?

Obviously, a clear and concise understanding of what the IRS is concerned about with the reporting is the first step.

You may also have support from TT, if you feel there was a calculation error performed by the program.

Lastly, it is difficult to shuffle all of this as to what is or is not correct and why; from the point of our forum here.

Note: We still file a hard copy; not electronic. We are able to sit and read to review every detail before placing the filing into the mail.

Regards,
Catch

Investor

John, since IRS does not have any cost basis info for your holdings and they only got sales info from your broker they are calculating your taxes as if the cost basis was 0. You need to file revised return with your cost basis properly entered into the forms. At this stage, I would work with an experienced CPA to get these sorted out. You will probably going to pay actual capital gains and some penalties.

Do not trust programs to do the right thing. In the case of linking of the program to ZionDirect, it was your responsibility to verify that data was imported correctly. I always go over the forms before submitting to the IRS to see that all of my known data is represented on the forms. I file electronically but you can print (to PDF) and review the actual return before initiating the filing and print and keep a paper copy of the tax return after it is accepted . IMHO, there is no need to paper file these days.

msf

Bonds are significantly more complicated to deal with than stocks. The fact that the IRS (correctly) mentioned interest and no poster here picked up on this attests to the complexity. If you buy a bond at a market discount (not to be confused with OID) and sell it later at less of a discount (that sale could be at call/redemption, or on the open market), then usually (but not always) some of the gain is treated as imputed interest.

For taxable bonds, you have a choice of declaring that interest annually, or altogether in the year you sell the bond. (In your case, possibly you might have declared some interest on your 2009 taxes and some on your 2010 taxes - and when you fix things up, you might see how these two options play out.) Munis don't have this option, but do have a de minimis rule that sometimes lets you treat that interest as capital gains if it isn't too large.

I haven't yet touched on OID, which gets different treatment. Here's a very brief overview from Prudential (not enough to explain much of anything, but enough to give you sense of what's going on): http://www.prudential.com/view/page/public/12613?param=12624&id=11.

I completely concur with the other posters - many people who invest in individual bonds need to seek professional help. For the cover that this will provide you, and basically because of the complexity. Once you see how bonds are handled, you may learn enough to do them on your own; or you may stick with a tax preparer; or maybe you'll figure the complexity isn't worth buying individual bonds. (That's what mutual funds are for.)

Ted

Dear johnN: Seek professional help now !!!
Regards,
Ted

johnN

Thank you folks. Lots of work this weekend trying to sort out this mess/finding a tax experts for assistant
hagwe

tgeno

Like others have said, get a good professional CPA, and I don't mean H&R Block or any of those other storefront operations that just staff up for tax time. I pay a CPA to do my taxes every year. It costs me a few hundred bucks but it's money well spent. If you're doing any kind of active trading, that's even more reason to use a CPA and not those cheap software programs; those computer programs are for people with simple returns.

Old_Joe

Hi tgeno... yes, H&R and the rest of those are worthless in this sort of situation. Completely agree: a couple of hundred for a good CPA is really cheap insurance when the cost and aggravation of an IRS confrontation are considered. Computer programs are fine- our CPA uses one, of course- but the CPA tells the program what to do. Cheap software programs tell the taxpayer what to do... maybe.

Regards- OJ