Hi,
according to Just Answer rules I may not contact customers outside this site and may not prepare your tax return.
However - I would be happy to help you with finding answer on your questions.
Generally - UTMA account is not tax sheltered account - and any income earned in this account should be reported on the tax return.
As the account is under your son's name - he is required to file a tax return - or you as a parent should help him.
It is clear that dividend income reported on the 1099div is taxable income - my understanding - it was $902
It is not clear if $23,000 were also reported as dividends or that amount was reported on the form 1099B - as gross proceeds from a broker - if so - you need to determine the basis - please verify how that amount was reported - that is very important to calculate his tax liability.
If - for instance shares were purchased on his account for $20,000 and sold for $23,000 - the total amount $23,000 is reported to the IRS, but his taxable income would be only $3000.
Please let me know more details.
The UTMA account - is not tax defered account.
Regardless if it was closed or not - your son is responsible for taxes each year he had an income.
As we are talking about 2007 - we need to clarify which income your son had in 2007 according to reporting documents.
We will discuss other years income and responsibilities after we clarify 2007.
I am still not clear and need confirmation from you:
-- did your son receive the form 1099-div for 2007 which reports $902 as taxable dividends?
-- did your son receive the form 1099-b for 2007 which reports $23,000 as gross proceeds from a broker?
If you have copies of reporting documents - please take a look;
If you do not have a reporting documents - ask your broker for copies.
If your son kept his investments in stocks or mutual fund - each year his account most likely was credited with dividends and/or interest.
I would like to ask you to contact the broker and get information for every year - which amount of interest and dividends was credited - that is very important because it should be added to the basis.
I am still waiting for additional information from you.
It is much clear now.
So there are two types of income in 2007
-- dividend income reported on the form 1099-div $902,
-- original issue discount reported on the form 1099-OID $141 - should be treated as interest income and is taxable as it accrues over the term of securities. US Treasury Sec Stripped Int Pmt 0.00% $140.99.
-- capital gain resulted from selling US Treasury Securities reported on the form 1099-B - gross proceeds $23,000
On your son's 2007 tax return - http://www.irs.gov/pub/irs-prior/f1040--2007.pdf
the dividend income reported on the line 9b - I assume that are qualified dividends and therefore will be taxed at reduced tax rate.
The amount $23,000 reported on the form 1099-B - the IRS will treat a s taxable income unless you report it on your tax return.
The taxable capital gain is determined on the schedule D - http://www.irs.gov/pub/irs-prior/f1040sd--2007.pdf
as your son held securities more than a year - it will be long term capital gain - should be reported on line 8.
in column (d) you will have $23,000
and in column (e) you should put the basis.
The cost basis is mainly the purchase price $5000 - according to your information - plus any accrued interest - that means your son received the form 1099-OID every year he owned securities - and all should be added to the basis.
I assume that the basis should be $23,000 and there will not be any capital gain.
But the IRS doesn't know about the basis - and know only that your son received $23,000 of taxable income - that is why you received a letter from the IRS.
So you need to report that transaction on the schedule D with zero capital gain.
So far I see your son's adjusted gross income $902 +$141 = $1043
If he was your dependent - his standard deduction for 2007 would be $850 , and
taxable income $193
His 2007 estimated income tax liability $19 plus any penalty and interest for not filing and not paying on time. - http://www.irs.gov/pub/irs-prior/i1040tt--2007.pdf
Any tax preparer in your area will be able to prepare your son's tax return.
Let me know if you need any help.
Based on the information you provided - the money were invested into US Treasury Securities - that means - instead of paying interest such securities are sold with discount from the nominal and Original Issue Discount every year.
When matured - your son was paid a nominal value - while that still need to be confirmed - there should not be any capital gain.
You do not need to have 1099-OID form for all years - but it is also possible that these securities were purchase not 18 years ago but later and we still not certain about purchase price - so you still need to contact your broker.
original issue discount reported on the form 1099-OID $141 - should be treated as interest income and is taxable as it accrues over the term of securities - so every year your son received such income - it was taxable - there is no difference for 2007.
see some additional information here - http://www.treasurydirect.gov/instit/marketables/strips/strips.htm
When you sell securities - the total proceeds is reported on the form 1099-B.
If you did not file the tax return - the IRS will treat the total amount as taxable income.
The IRS doesn't know what did you sell and what was your basis - they only know the total amount you received.
If my suggestions above are correct - your basis is your original purchase price plus all interest paid over the time you owned securities - that all together should be equal to the nominal amount.
In this case you should report the sale transaction on the schedule D and because the selling price and a basis are equal - there will not be any capital gain.
But that still should be reported to avoid possible questions from the IRS - as it was in your case.
Reporting interest income and including it into the basis - are two different transactions and they do not exclude each other.
You may ask questions in this thread as you wish and I am sorry that sometimes I am not able to respond promptly.
As you are not familiar with the subject and because the issue already attracted the IRS attention - I would suggest to have a local tax preparer to file your son's tax return.
If you still decide to do on your own - you may want to have someone to go through all your paperwork and verify the filing.
You may use Second Look service from HRBlock - http://hrblock.com/ - enter your zipcode to locate the office - or any other tax preparation business.
Tax Preparer
Taxes, Immigration, Labor Relations