How to Answer a Tax Notice Letter of Deficiency - 1099-B Stock Trades
Document ReviewGather together all documents related to the IRS Letter Notice. If 1099-B stock trades, also go back to "purchase" brokerage records, or transfer-records, as the IRS is probably computing tax only on information made available to them - namely the "sales" price as "gross," without taking into consideration subtracting the purchase price or "cost-basis" - information which may not have been sent to them.
When a brokerage firm sells stock, they report the sales proceeds to the IRS. It is your job as taxpayer to provide the original purchase price information to offset this "1099" information - otherwise the IRS automatically charges you taxes-owed on the total "gross" sale amount, on total proceeds-received, without accounting for the difference in the price you paid and the price you sold - even where you purchased it for more than you sold it for and actually have a "loss," the IRS will only see the sales-price and not the difference-in-prices.
Response and 1040X (Amended Return)After ascertaining if a discrepancy exists, or delving further into adjacent records for accuracy, if indeed "new" information is discovered that was never originally revealed to the IRS, follow the relatively simple one-page 1040X instructions to re-do the tax return for that year.
Most likely such lack of information is what triggered the IRS Notice of Deficiency, and upon supplying the missing items, the IRS will be satisfied as long as you provide supporting documentation such as brokerage reports, purchase trades, and other independently verifiable documentation.