March 11th, 2008

Scares 'R' Us

While I'm on the subject of screwy run-ins with government agencies, allow me to relate another recent story I'm sure you'll all enjoy.

I dealt with my taxes pretty promptly this year, and I was relieved to have it behind me (and actually get a refund in stark contrast to the money I owed last year). So imagine my confusion when I got a thick envelope from the IRS in the mail a few weeks later. Allow me to summarize the contents in relevant terms:

Hi. We just found out you owe us over $6500. Pay now or die.

My sequence of thoughts over the next few minutes went something like the following:

  1. "Um ... WTF?"

  2. "Oh, I see this has nothing to do with the 2007 taxes I just filed. This is about 2006. The timing is just a coincidence."

  3. "Um ... WTF?"

  4. "Okay, this can't be right. I already paid a substantial sum with my 2006 taxes last year. This must be a mistake ... but where is it coming from? Let's read a little more closely."

  5. "Something about unreported securities income ... E*TRADE ... almost $20,000 worth ... Well, I did flip all my VA Software stock options that year, but the income was reported on my W2, and I already paid dearly for it in last year's taxes."

  6. "So ... why on Earth are they saying I owe them more money for this and that I failed to report it?"

  7. "Um ... WTF?"

As far as I could tell, the IRS was treating my stock option sale as though I had already owned the shares, sold them, profited massively (to the tune of about $20k), and lied to them about it when I did my 2006 taxes. In reality, since they were stock options, I had bought and then immediately sold them all. So yes, I sold them for about $20k, but the majority of that $20k was used to pay for them when I simultaneously bought them. This is how stock options are supposed to work.

At this point, I was able to breathe a provisional sigh of relief. I had pinpointed the root of the mistake, and I knew I didn't actually owe the IRS an additional $6500. But what next, I wondered? How much of a headache is it going to be for me to get this resolved? I pictured myself having to buy services from H&R Block, hiring a lawyer, going through this whole convoluted process just to prove I had not cheated on my taxes, etc. etc. etc. (considering that when it comes to taxes, I pretty much have no idea what I'm doing).

But rather than let all this speculation grip and paralyze me, I immediately called the IRS. I got connected to a rep fairly quickly, and she seemed very perceptive and helpful from the get-go. Whew. So far so good. I briefly explained my findings so far and waited to see what she'd say.

She replied "Oh, that's an easy fix. We can take care of it over the phone."


Let me repeat that to let it sink in.

"Oh, that's an easy fix. We can take care of it over the phone."

It reminded me of the time I went to court to fight a speeding ticket after a year of juicing the system to the best of my ability. The officer chose not to show up, instead submitting paperwork requesting that the case be dismissed "in the interest of justice." The judge pro temp asked me "Do you have any objection to that?" I said "Well, no." And he said "I didn't think you would. Case dismissed."

But back to the IRS. I had this whole epic novel pre-written in my mind, relating the trials (literally and figuratively) and tribulations I was about to have to go through in order to clear my name. And in that brief moment, the IRS rep reduced my future best-seller to one sentence with a big fat period at the end. And no, I had no objection to that.

She took a minute to explain why this had happened, which sounded (to me) something like "blah blah blah W2 blah blah, stock blah blah blah ISO blah blah, W2 blah blah, IRS, blah blah blah blah, E*TRADE blah blah report blah blah blah blah blah blah blah blah blah blah. If you want to avoid this in the future, just blah blah blah blah blah, blah blah blah blah blah blah blah blah, blah blah on your W2 blah blah blah blah blah blah blah blah tax return blah blah blah. Simple as that!"

Definitely a very nice and very knowledgeable lady, but I think I'll consult a tax professional if I ever sell stock options again. Apparently, even though the income does show up on your W2, in order to properly report a stock options sale and avoid confusion, you must cleanse your feet with holy water, kneel, and face due north-by-northeast at midday while balancing a book on top of your head and chanting the Latin translation of War & Peace.

Anyway, last week, I got a follow-up letter from the IRS confirming that my case was closed. Which means I can file this all away and forget about it. But not without recording the experience for posterity first. Don't you wish it was you? C'mon, you know you do...