I’ve received IRS Notice CP2000 for the year 2010, proposing that I owe an additional $2185.Since the discrepancy pertains to the sale of a PTP partnership, which involves a K-1 ... and these things are the dickens to understand (which is why I sold it) ... I am graciously open to taking responsibility for any errors I’ve made. At the time I filed, I was confident of my reporting ... but looking at it now I’m dazed and confused.I bought CODI in 2007 for $4993 and sold it in 2010 for $5522 -- and have both trade confirmations.Using an online 2010 tax program (which I no longer have access to), I reported the sale of CODI on Form 4797 (Sales of Business Property), Line 2. The net gain from Line 7 was carried over to Schedule D, Line 11 -- as directed -- and taxes were duly paid on it.But here’s where my memory gets hazy. On form 4797, I correctly reported $5522 as the sale price, (and this is what the broker reported to the IRS). But for the cost basis, I reported $4776 ... which I apparently took from the 2010 K-1, Part II, Section L (Partner’s Capital Account Analysis), on the “Withdrawals and distributions” line -- and I have no idea why I did this -- unless it’s that the “Tax Basis” box is checked.Over the years, I dutifully reported interest and dividends on Schedule B ... and since I don’t itemize, I didn’t take any deductions. I don’t know whether any of this leads to an adjusted cost basis.QUESTION 1 - Is this $4776 my adjusted cost basis ... or should I have reported the $4993 which I actually paid as my cost basis?_________________________However, none of the above is what’s bothering the IRS. Their notice to me states that the sale of CODI for $5522, which was reported to them by my broker, was NOT included on my return -- and they recomputed my taxes using a zero cost basis. They apparently missed the Form 4797, and the carryover gain to Schedule D, Line 11. (I had not listed CODI on the Schedule D long-term cap gains list ... because it seemed that would cause it to be taxed twice.)Their zero basis treatment of CODI also resulted in more of my Social Security benefit being taxable -- which ran up quite a tab of underpayments.QUESTION 2 - Do I owe the IRS more, less, or exactly what I paid -- and do you have any advice for handling this?Thanks a million ...
QUESTION 1 - Is this $4776 my adjusted cost basis ... or should I have reported the $4993 which I actually paid as my cost basis?Probably neither is correct. Your basis is what you originally paid, plus all of the taxable income you reported for the years you owned it, less all the flow through deductions you reported, less any distributions, plus or minus a few other things I've deliberately omitted for now.Their notice to me states that the sale of CODI for $5522, which was reported to them by my broker, was NOT included on my return -- and they recomputed my taxes using a zero cost basis. They apparently missed the Form 4797, and the carryover gain to Schedule D, Line 11. That's because it really should have been reported on schedule D to begin with, not on form 4797. (Well, not all of the sale, anyway. Perhaps some should have been reported on Form 4797, but you'd need to look at the materials accompanying your K-1 to determine if any of the sale should be reported on Form 4797.)QUESTION 2 - Do I owe the IRS more, less, or exactly what I paid -- No way to know for sure without looking at all of your returns for the time you owned it plus all of the K-1s from the partnership.and do you have any advice for handling this?The IRS will probably go away if you write to them, saying you reported the sale on Form 4797. Including a copy of the 4797 can't hurt.I am not saying that your basis was correct. But if you show the IRS where you reported the sale, they probably won't inquire further.--PeterPS - As a tax pro I also hate Publicly Traded Partnerships. They're a pain in the neck to deal with and I can't charge enough for the work. Plus I feel PTPs should be taxed as corporations.
Thanks a lot, Peter! I have just responded to the notice, and included a letter with a humble apology for reporting the sale on the wrong form ... which I attached.
PS - As a tax pro I also hate Publicly Traded Partnerships. They're a pain in the neck to deal with and I can't charge enough for the work. Plus I feel PTPs should be taxed as corporations. ..ditto. I asked a broker why they screw with these and he explained it this way - MUCH BIGGER COMMISSIONS.He als stated he makes money and the brokerage house makes money and two out of three isn't too shabby.
I have just responded to the notice, and included a letter with a humble apology for reporting the sale on the wrong form ... which I attached. Excellent. Now, for what to expect.In about 45 - 60 days you'll get a letter from the IRS thanking you for your reply and saying they need additional time to process your letter. There's nothing to do at that point but continue to wait.Then another 2 months or so will pass and you'll get another letter. That one will either say they've resolved the issue OR it will say what additional information they need. If they're happy, you're done!But if they need additional information, you'll have to send in whatever else they need, then repeat this process. In the mean time, the automated portion of their process may generate a letter attempting to finalize the proposed changes from their very first letter. This is where things can get ugly. Hopefully, you won't need to know how to deal with this, but if you do, just post back here.--Peter
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