Tax Returns Are For Self Defense

One of the biggest mistakes many people make is assuming that because a sale of assets didn’t result in any taxable gain, that they don’t have to report it on their tax returns, or even file a tax return at all if they didn’t have much other income.  That is a very incorrect and dangerous assumption.

I have seen cases where people have had huge stock market losses and assumed they didn’t need to report the sales on their tax returns.  I have seen cases where people qualified for the tax free residence sales or Section 1031 tax deferred exchanges and assumed they didn’t need to show them on their 1040s.  I have also seen cases where recently inherited property was sold and the heirs didn’t report the sales on their 1040s because they knew that the stepped up cost basis of the property resulted in no net gain.   

In almost all of these cases, the individuals came in for a rude awakening when they received bills for taxes, interest and penalties on those sales from the IRS and/or State tax agencies. This is because the 1099 information that is provided to the tax agencies only provides half of the equation, the gross sales price.  IRS and the States have very efficient document matching programs that compare the gross income items reported on tax returns with the 1099s that have been received.  When items have been left off (or no tax return even filed), they assume that it was unreported income and that the sales price represented 100% profit, and assess taxes accordingly.  They have no information on the cost basis of the assets sold.  If you want them to know that you had a net loss, or qualified for the primary residence exclusion, you must report the sale on Schedule D with your tax return and include that additional information.   

KMK