Have a Tax Question? Ask a Tax Expert
What you need to do is find out what the fair market value of the stock was when you inherited it. That will be your BASIS. You only really need to pay tax on the difference in the BASIS and the sale price. Because you inherited the stock you get to use the value on the date your father passed (this is called STEP UP IN BASIS).
The IRS did not use that when they calculated your GAIN. They just assessed tax to the sale price. Then you mark that you disagree with the notice and send a 1040X (amended return) reporting the sale and the correct gain or loss.
If you do owe tax you will have to pay that and the interest but you can request they ABATE the penalty so your final amount due will be less.
I would suggest you get a tax professional to prepare this for you and act quickly. You normally have only 30 days to respond so do not delay. You can call the number on the notice and ask for a little extra time.
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