“Tax Season Alert: Uncle Sam is Watching”

This week’s insight is a reminder that Uncle Sam watches you.

The IRS began accepting 2024 tax returns last Monday. The good news is that Direct File, a free tax-return program sponsored by the IRS, is available in Florida (but not Alabama). It allows eligible taxpayers to prepare and file their federal returns online directly with the IRS. To qualify, those married filing jointly must have a combined income of $250,000 or less and have generally simple tax situations. There is a free customer support line if you go that route.

The bad news? Well, maybe not ‘bad,’ but more of a reality: Our tax overlords usually know if you received income during the year. Forms like a W2, 1099, and K-1 are sent to you… and the IRS. While few folks lose track of wage statements provided by their workplace, it’s easy (and common) to have an astray 1099 form that’s issued by a brokerage institution or bank.

We all dread seeing an envelope with an IRS or Department of the Treasury return address, so you must be sure you report all income. I’m talking about capital gains (or losses), interest income, partnership income, or earnings from the “1099-MISC,” which captures a variety of income types.

What’s more, there is particular stress that arises when you neglect to report the sale of securities, otherwise known as stocks, bonds, and funds. You see, if you do not report what you paid for a stock, the IRS generally initially assumes that you paid $0 for it. That’s a big problem since a zero-dollar “cost basis” means that an IRS letter will assert that you owe a potentially massive sum in capital gains tax.

Here’s the good news to the bad news: It’s easy to correct. All you need to do, in most situations, is provide evidence of your cost basis (usually from a brokerage statement) and a brief explanation of what happened. You might owe a small penalty, but the IRS will adjust its records to reflect the true cost basis, not $0, thereby potentially drastically lowering your tax obligation.

Just remember that the IRS knows a bit about your tax situation, but not the whole thing. The onus is on you (and your CPA) to make sure that all reporting is done and on time.