Stock option exercise

[Eli]

Client from 2004 filed his return. On box 12 it showed 5353.50 (V). I failed to include a Sch D with the return. Client received a CP2000 from IRS several months ago. They were charging him $4136 which includes penalties & interest. According to them (IRS) there was a total of $14756 in stock sales in 2004. I went back to file a 1040X showing he only owed 850+interest. After a few weeks I called the Fresno Office and spoke to an employee and explained what I'd done. She said it was a stock option and should have pretty much zeroed out. Well They accepted the 1040X and are now charging him the 850 + interest.

Can someone with a little bit of spare time give me a step by step way to file the stock options correctly? I know it's something I should know, but have had some trouble with it as you can see :-)

Thanks!!

Eli

[Julie]

Short version:

The exact details vary depending on whether it's an ISO or a nonqualified option, but the latter are more common. It goes like this: When you buy a stock or option from your employer at less than face value, the difference between fair market value on that date, and the amount you paid is added to your W2. Your basis, then, is the sum of what you paid and what was added to your W2. The addition may be on the W2, or not. In this case, that's your code V. Often the stock or option is sold immediately upon purchase, and the profit is exactly the same amount as was added to the W2, give or take a broker's commission and a few cents one way or the other. So, to fix the tax return, you need to go back to your Sch D, and add the code V amount to the basis...it should come out right. If you still have significant gain or loss, then study the rest of the paperwork carefully. There should be a pile of computer printouts "explaining" this. If it's an ISO, you can have gain or loss, otherwise I'd look very carefully at numbers greater than $20 or so.

Julie

[taxxcpa]

I agree with Julie's explanation. I get a lot of these and some are very clear and easy to understand while others are confusing. It nearly always ends up that the "cost/basis" is added to the W-2 form and tax is withheld from the sale with the balance being paid to the taxpayer. The cost and sale are usually exactly the same, but due to broker fees, there is a small capital loss due to adding the fees to the basis.

If the transactions are not well-documented, you need to ask the client if the value of the options were added to his W-2.

If a guy has a regular $ 50,000 salary and his W-2 shows $95,000, the difference is probably the stock options.

Short version:

The exact details vary depending on whether it's an ISO or a nonqualified option, but the latter are more common. It goes like this: When you buy a stock or option from your employer at less than face value, the difference between fair market value on that date, and the amount you paid is added to your W2. Your basis, then, is the sum of what you paid and what was added to your W2. The addition may be on the W2, or not. In this case, that's your code V. Often the stock or option is sold immediately upon purchase, and the profit is exactly the same amount as was added to the W2, give or take a broker's commission and a few cents one way or the other. So, to fix the tax return, you need to go back to your Sch D, and add the code V amount to the basis...it should come out right. If you still have significant gain or loss, then study the rest of the paperwork carefully. There should be a pile of computer printouts "explaining" this. If it's an ISO, you can have gain or loss, otherwise I'd look very carefully at numbers greater than $20 or so.

Julie

[joanmcq]

If its a code V, its a nonqualified option. Nonquals are always added to the W-2, whether or not they are sold. Most are done in a same day sale, though. I have seen larger losses; some exercises are for thousands of shares and the commissions can be hundreds of dollars. I've also seen gains on these, although rare, when the value used for the W-2 calculation is less than the actual selling price. Having the transaction sheets from the broker or employer is a must.

ISOs don't have to be reported on the W-2, but if the gain is included in the box 1 wages, sometimes the amount is shown in box 14, or on the top of the W-2 where other info is sometimes reported (not on the form itself). I've also found the gain for ISOs and ESPPS on the paystubs if nowhere else.

Oh, and if a client gets a CP2000, don't file a 1040X. Just answer the notice.

[SCL]

1) the code v amount from the sale (included in w-2 wages) is the gain of the the selling price over the option price. this is part of the sch d basis.

2) the other part of the basis is in the transaction sheets from the broker or employer like joanmcq says. it is the cost of the options that is deducted from the sale proceeds.

gross proceeds - cost (gain + option cost) = 0, with a loss from the broker commission.

[Don in Upstate NY]

To further complicate things, since 2002 brokers are no longer required to issue a 1099-B for most same day non-qualified option exercises. So you may have a W2 with a code V and NOT have a matching 1099-B (See the instructions for Form 1099-B and IRB 2002-50)

[Redneck]

Eli - here's a link to some pretty good reading material on this subject: http://fairmark.com/execcomp/nqo.htm

[Eli]

Thank you all for the replies. Since I had already filed a 1040X, would it be best to try to contact the IRS employee who helped with this problem originally or should I try and send in another 1040X to correct it?

Thanks again!

Eli

[mcb39]

Eli....don't file another 1040X. Call the Contact Person on the original CP2000 or else call the person you talked to about this. I might add that 2006 is the first year that I ran into this same problem and was able to handle it with the assistance of the Community Board....It will be fine as there should be no additional tax....

[RitaB]

Thank you all for the replies. Since I had already filed a 1040X, would it be best to try to contact the IRS employee who helped with this problem originally or should I try and send in another 1040X to correct it?

Thanks again!

Eli

Wow. Now this is the way it's supposed to work. Lots of helpful info, and no showing off. I have noticed this forum has a good "atmosphere" and you can really see it in this thread. Thanks to all.

I am glad you asked about this, Eli, as this is an area I need to learn more about. Also, AMT. Ive not had to deal with it yet, but I know it's coming.

I have sent the second amendment before, with success, but others may have better info for you. For sure try to direct it to someone who is privy to the situation. I have also answered the CP2000 with a 1040-X quite a few times without problem. I know it says not to, but sometimes you notice other things that need to be fixed. (For me, it's usually Turbo Taxers where this happens.)

[SF BOB]

Wow. Now this is the way it's supposed to work. Lots of helpful info, and no showing off. I have noticed this forum has a good "atmosphere" and you can really see it in this thread. Thanks to all.

I am glad you asked about this, Eli, as this is an area I need to learn more about. Also, AMT. Ive not had to deal with it yet, but I know it's coming.

I have sent the second amendment before, with success, but others may have better info for you. For sure try to direct it to someone who is privy to the situation. I have also answered the CP2000 with a 1040-X quite a few times without problem. I know it says not to, but sometimes you notice other things that need to be fixed. (For me, it's usually Turbo Taxers where this happens.)

[Eli]

Marilyn,

Thanks for the suggestion. I will follow up on that hopefully next week. I'll post the result as soon as I know.

Thanks again!!

Eli

[TAXBILLY]

Agree with mchampine. You should be able to resolve the situation quickly.

taxbilly