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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3170
Experience:  IRS licensed Enrolled Agent and tax instructor
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I just got a notice from the IRS that I owe an additional

Customer Question

I just got a notice from the IRS that I owe an additional $3000 in taxes from the year 2013. I cashed out a mutual fund that year for $11,996. It was not an IRA and I funded the account years ago with $11,600 that had already been taxed, do I need to pay this?
Submitted: 2 years ago.
Category: Tax
Expert:  USTaxAdvising replied 2 years ago.


I can't say for certain that the $3,000 is in fact due but what I can comment on is your fact regarding the IRA.

You mentioned that you paid tax already on the IRA funding amount of $11,600. This should not be the case as IRA contributions are made out of pre taxed income. Or, alternatively, you make contributions with after tax dollars but you should get a tax deduction for the contribution for the respective amount.

So if the 11,996 distribution was in fact distributed from an IRA which was funded with pre tax dollars (or fund with after tax dollars and subsequently deducted) then the 11,996 would be 100% taxable absent any other exceptions. Such exceptions would be to use the funds for medical expenses, first time home purchase, education. If you used the funds for vacation or a hot tub then the distribution would be taxable.

I hope this provides the clarity you were looking for. Please let me know if something is not clear or if you have any follow up questions and I will get back to you as soon as I can.

Best regards,

Customer: replied 2 years ago.
No, I said this was NOT an IRA, It was just an account I opened with my own money, that I had already been taxed on.
Customer: replied 2 years ago.
I don't feel this question was answered, since this was not an IRA and I did not take a deduction
Expert:  emc011075 replied 2 years ago.

Hi. Another expert here. My name is ***** ***** I have a different answer for you.

No, you don't have to pay $3000 but here's what you have to do. You will have to amend your 2013 return using form 1040x and use Schedule D to claim $11,996 proceeds and $11,600 basis. That way only the difference of $396 will be taxable. You will owe little tax plus some interest and penalties but not much, I am estimating around $75.

Here's what happened. The brokerage firm reported the transaction to IRS, but only the proceeds of $11,996. Since you didn't report it on your tax return, IRS had no way of knowing how much did you purchased it for years ago and therefore assumed the entire $11,996 taxable.

On your notice your received there's a section asking you to respond. Check the box that you don't agree with the adjustment and write "see 1040x" next to it. On the top of your 1040X write the letter type, I am assuming is CP2000 (top right corner, start with CP and #), attach the check with the balance calculated on your 1040x and mail it to the address provided on the notice. Most importantly, DO NOT sign the notice since you don't agree with the changes, but don't forget to sign 1040x.

Let me know if you have any questions.