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Date:   Thu, 02 Mar 2006
From:   Anthony

Michael,

I exercised some non-qualified options in 2004. The gross proceeds from the transaction were $7,005. My employer reported the taxable income on my W-2 Form.

Now the IRS has sent me a letter claiming I should report $7,005 of additional income. Aren't they double taxing me?

Thanks,
Tony

Answer

Date:   Sat, 18 Mar 2006

Hello Tony,

The IRS is simply trying to match what was reported on your income tax return with the documents they received.

The brokerage company sent them a 1099-B form for the sale of the stock, which you evidently didn't report on Schedule D.

Send an explanation to the IRS about what happened. Your tax basis for the stock is the option price plus the income included on Form W-2, which should be close to $7,005, so there should be a minimal amount of income or a small loss on the sale.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.