The Importance of Record Keeping Part 1

I have never heard of anyone getting an unexpected letter from the IRS which contained good news. Not too long ago I got a phone call from a former client who found a letter from the IRS in his mailbox. They claimed he owed them an additional $11,000. Now he needed my help to see if he really owed the money or not.

Here is what happened. He became a client of mine in 2001. He had some investments scattered with several fund families and we transferred his shares from the individual fund companies onto my broker dealer's brokerage platform so he could consolidate everything into one account. I left that firm in January 2006 and, at that point, it did not make sense for him to transfer his investments to my new firm. We ended our business relationship for the time being but remained friends.

Apparently he sold one of his mutual fund positions in February 2006 for (let's call it) $XX,000. The IRS has no idea how much of that sale is a taxable gain, and how much of it is a return of the investment. The amount of money which was invested and therefore has already been taxed is called the cost basis. Any amount received over the cost basis is taxable when the investment is sold. The basic gist of the IRS's letter was that he either had to document his cost basis or they were going to tax 100% of the sale proceeds (which would be about $11,000 in taxes).

Obviously he does not want to pay any more in taxes than he legitimately owes. When he called he asked "Do you know what my cost basis was in the XYZ mutual fund?" Since I had already left the firm when he sold his position, I had nothing in my records to document the sale but that was okay. I told him that together, we should be able piece together most of the puzzle.

Tune in tomorrow to find out how.

Tax Time! by Cayusa

Comments

[Dividends4Life]

> found a letter from the IRS in his mailbox.
> They claimed he owed them an additional
> $11,000.

A problem we all wish we had! Great read thanks for sharing it.

Best Wishes,
D4L