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Bank of America/Merrill Lynch has not done this incorrectly. The problem lies in the fact that they are only required to report the sales proceeds to the IRS. They do not report the cost or the loss. That is all that is required of them. It also would appear that you may not have shown the sale and proceeds on your tax return. The loss would have tax benefits for you.
Since you seem to have erred in not showing the loss, the IRS has "corrected" the return for you. To get this matter resolved you will need to send the IRS a letter explaining what has happened and submit proof of your statements with that letter. Here is the letter I would send. It is brief, to the point, and will get the matter corrected.
Re: YOUR NAMES, ADDRESS, AND SOCIAL SECURITY NUMBERS
We have received your letter of DATE with which we disagree. A copy of your letter is attached for your reference.
The reason for our disagreement is that, while we mistakenly failed to report the sales proceeds on our return, you have not taken our basis into account. I am attaching (DOCUMENTS) hereto to substantiate our position. Please update your records to correct this matter.
Very truly yours,
You should also consider filing amended Federal and state tax returns for the tax year involved since, on a joint tax return, the amount of the loss can be used to offset capital gains and an additional $3,000 can be used to offset other income. Any loss unused at that point can be carried forward to future years to reduce income there.
1. If you erred in reporting the loss, once it is reported the IRS will change the amount due to take the loss into account. If that is the only change they have made you will not owe the additional tax, interest or penalties. If you do not address the issue, the IRS will close the case using their numbers and then report this change to your state resulting in additional tax, interest, and penalties at the state level.
2.I would prepare the amended returns through TurboTax if you feel comfortable doing so. If not then you should seek professional assistance. The amendment process is not difficult and you should be able to handle it yourself. You also need to know that amended returns must be mailed in and cannot be submitted electronically.