Received f1099-B after e-filing

[The Real Halloween]

Taxpayer received f1099-B after he e-filed his 2021 return. However, f1099-B has only one transaction and has "Transactions for which basis is not reported to the IRS and for which short or long-term determination is unknown (to broker)". If TP had received this 1099-B before filing, the transaction would have been reported as short-term capital gain with a basis of zero.

TP reported the transaction as part of the wages when he e-filed. As wages and ST capital gain have the same rate and TP is below the NIIT threshold, should TP take no action now? Or, Does TP need to file an amended return?

Please comment and advise. Thanks for your time.

[George4Tacks · Accepted solution]

File an amended return. IRS will assume a zero basis for the sale and propose a significant tax. Take care of it now with an amendment. 

[The Real Halloween]

@George4Tacks Thanks again as always for your time and comment.

[qbteachmt]

"TP reported the transaction as part of the wages when he e-filed."

Are you sure this isn't a chain of events? Example:

Employee stock option = W2 reporting.

Then, the sale of those shares = 1099-B. And now you have the basis, from the W2. The broker didn't have that basis, but you have the documentation for it, including that it was short- or long-term.

It's doubtful that the same transaction was on both a W2 and a 1099-B. But the shares would go through a process of award-ownership-sale.

[The Real Halloween]

@qbteachmt The transaction reported on f1099-B was an Indemnity Escrow Final Release in December 2021 as part of the closing of an acquisition of TP’s employer back in 2017. The escrow final release in December, 2021 was not on a W-2 as TP’s employment was in overseas. However, TP included the escrow release as part of his wages.

TP had reported the original proceeds from the acquisition as a Short-Term Capital Gain on the Schedule D / Form 8949 since TP had received a Form 1099-B for that in 2017.

The amended return will be including the escrow release in Schedule D/f 8949 with a zero basis (short-term capital gain) and excluding the escrow release from part of the total wages as originally reported. The tax should remain the same.

Your thoughts on this? Thank you.

[qbteachmt]

You follow the process to understand what happened and when it is considered to have happened.

"Escrow" typically reflects funds or other assets on hold (as in trust or secured; time restricted for vesting, for instance), but the financial transaction might have been fully reported in 2017 (if these relate). Just not fully dispersed. The funds or asset being dispersed in 2021 would be like the final banking (if these relate). I can sell you a house and you and I agree you will put 1/3 of the sale price in escrow, not to be paid to me until the 3 year mark, for instance; we want the release of the remainder of the funds to be based on some contingency such as, you agreed I could live there for 3 more years and I need to move out to get the rest of the money. But now I live in a house that I don't own.

If these were not funds but shares (you only stated "an acquisition of TP’s employer" and not ESOP or units or stock options or some other equity or cash-equivalent vehicle), then it is likely the 2017 reporting would be basis (thinking of the example of a 5-year vesting requirement). The release of the investment/equity from escrow is just that: released from being held, and now at the discretion of the taxpayer to hold or sell.

There doesn't have to be a 1099-B. Since there is, you evaluate what was sold and how that activity relates to the other activities. Perhaps this taxpayer then disposed of whatever got released, as Sold, triggering the 1099B for 2021.

"The escrow final release in December, 2021 was not on a W-2 as TP’s employment was in overseas."

Does it seem likely that the employer knows to report what needed to be reported on W2, though? Or is that part of the question, that you don't trust the W2 is correct, anyway?

Example: The acquisition of this company involved a liability to existing employees: an employee stock option or award was triggered, that was time-restricted until they have worked there 5 years (or 5 years after the sale, to keep good staff from leaving), and might not include a 1099-B at that point, unless the employer optionally utilizes an outside broker as required or requested to handle a sale or for fractional shares that cannot be distributed or allocated. That's just an example (very much made up), but some people look at a 1099-B without understanding why it is issued, or assume one not being issued has some other meaning that is not reflective of why one does not need to be issued. And in this example, the W2 amount would be years earlier, depending on if this is restricted stock, restricted stock units, when the election is made to price it for basis, etc.

Possible process:

W2 for FMV when vesting occurred (establishes basis in 2017); then there is the time-restriction completion; then there is optional disposal through sale, triggering a 1099-B, in 2021.

It helps if the employee knows what they participated in: Restricted Stock Units, awards, ESOP, profit share bonus from the sale/acquisition, stock purchase plans, company stock savings, etc.

I learn a lot from articles; for instance:

https://www.investopedia.com/articles/tax/09/restricted-stock-tax.asp

https://carta.com/blog/breaking-down-rsas-and-rsus/

[The Real Halloween]

@qbteachmt Thanks for your valuable comments and insights and the two tax articles. TP has indicated that it was nonstatutory stock options (NSOs).

We will prepare form 1040-X and amend form 1040 by including the missing Schedule D and form 8949 with the gross proceeds and the cost/basis have the same value and the transaction is to be reported with Box B checked (Short-term transactions reported on Form(s) 1099-B showing basis wasn't reported to the IRS).  The total tax remains the same.

Appreciate it if you have further advice on this and thank you so much for your valuable time!

[qbteachmt]

"with the gross proceeds and the cost/basis have the same value"

Just to review, then...there is 1099-B because something got sold. In 2017, that W2 amount didn't establish basis for everything? Only for what also got sold in 2017, so there was a 2017 W2 amount (the award) and the 2017 sale. And another round of new release happened in 2021, but you stated the value of the award was not on the W2. That would make me go back to the 2017 W2 to see if that was all of it and only some was sold.

Gross proceeds and cost basis would not have the same value unless it was issued at FMV and immediately sold at that same value. It is more typical for the employees to get this at 85% FMV, so it's strange that proceeds match basis.

[The Real Halloween]

@qbteachmt Thanks for your comments!

According to TP, he did not pay for anything to receive the proceeds as stated on 2021 form 1099-B. The proceeds were not on 2021 W-2 as this is an overseas job/foreign employer. But TP said this is NSOs as he got the option agreement. Therefore, the full amount of proceeds to be reported in 2021 return as part of wages and Sch D and f8949 with gross proceeds and cost figures are the same. It seems that the date of exercise and date of sale occurred on the same day in 2021.

TP also said that this 2021 proceeds were not in 2017 wages/income. It is strange because TP did not have enough fact/paper trail.

Your thoughts on this?

[qbteachmt]

"According to TP, he did not pay for anything to receive the proceeds as stated on 2021 form 1099-B."

That would be typical of the Escrow process. As I described, that's a release of something already considered theirs, held on their behalf until some condition or restriction has been met. The investment held on his behalf is released, available to be sold, got sold, and he got the proceeds. That's the same as any other investment sale held in escrow.

"The proceeds were not on 2021 W-2 as this is an overseas job/foreign employer."

Nope. "Proceeds" are not part of the W2 reporting process. Proceeds are from the Sale, so that is why there was a 1099-B (outside brokerage used). Basis or value of the award is part of compensation; compensation is a W2 process item. That would appear when it is considered Awarded or the option has been triggered.

"It seems that the date of exercise and date of sale occurred on the same day in 2021."

The exercise of the sale is the decision to sell, instead of hold. Or, are you referring to the award? Do you consider W2 is incorrect? Or was this award amount covered by the W2 in 2017 as an event in 2017?

Because, as I pointed out, it would be typical to award something and not make it available for a 5-year vesting or holding period, so that it is not sellable on the same year it is awarded. That vesting is an example of a restriction.

"TP also said that this 2021 proceeds were not in 2017 wages/income."

Of course not. Again, there is a difference between an award of something as value, as compensation; and the type of award, which was an investment vehicle of some type carrying Basis now that it has been awarded, reported as part of compensation and taxed. Proceeds only follow a Sale.

Basis would be as of the date of the award (2017, it seems, for this person). Specifically, it would depend on the provisions, as some plans are not valued until the award is declared to be the taxpayer's property, which can be later than notification of the award as an option. It depends on the type of event. If there is no valued basis until it was also sold (in 2021), then why is anything on the W2 for 2017? See the conflict?

Proceeds reflect that instead of holding it, the taxpayer opted to Sell it. That results in Proceeds, which is 1099-B for 2021.

Escrow indicates something was not freely available for the taxpayer to do whatever they wanted whenever they wanted to whatever this was, whenever this was.

"It is strange because TP did not have enough fact/paper trail."

Again: is the 2017 W2 amount for this activity enough that it covered the value at that time of all Awarded rights? There should be a quantity somewhere related to this event; not just amounts.

Let's try this example scenario one more time:

Something is awarded and that value is Compensation for that year = W2 reporting. There might also have been a sale, proceeds of which are reported on 1099-B, such as fractional shares or some amount to help cover bonus withholding. This would be the type of thing that happened in 2017, and established Basis.

5 years later, vesting is established, and the taxpayer doesn't have to sell, but did so. Or, that acquisition ended up with the staff having no option but to sell the released shares. Perhaps, for instance, the acquiring employer was the buyer of the shares in an agreement that wraps up the purchase of the prior entity, keeping those shares off the open marketplace. So now, in 2021, there is no New Compensation (no new awards). There is a Sale on behalf of the taxpayer, triggering the 1099-B.

All of this is speculation on my part, but this is not an unusual situation in that sequence of events.

No one on the internet can compensation for what the taxpayer doesn't know about their employment activities. Have you searched the web on that/those employers, on this acquisition, do you have a broker relationship who can look back in their archives for what happened and can help understand what paperwork your taxpayer has available? For instance, a Montana company was bought by ARCO who got bought by BP. It's hard to navigate, but all the details exist in the public domain.

[The Real Halloween]

@qbteachmt Thanks again for your valuable comments and your speculations may be proven to be right (see below).
Just received further clarifications from TP as follows:
The gross proceeds on 2021 f1099-B was $67,000 and TP had received such amount minus bank charge of $10 in 2021. For our discussion below, I will disregard $10.
The $67,000 gross proceeds can be broken down into 2 components as follows:
1. In October, 2017, $30,000 was set aside as an escrow from the merger consideration to be received in the future (2021). He $30,000 was not set aside from the stock sale proceeds reported in 2017 tax return.
2. Between 2019 and 2021, 3 deposits ($12,000 in 2019, $12,000 in 2021 and $13,000 in 2021) were made into the escrow fund based on milestones that were achieved. The total deposits of these milestones were $37,000.
The 2021 originally filed f1040 included the $67,000 as part of wages. Shortly after TP e-filed, he received the 2021 f1099-B containing $67,000 as its gross proceeds.
I am seeking your comment as well as advice as to whether the 2021 f1040-X is correct as follows:
a) 2021 f1040-X will include Sch D/f8949 with gross proceeds of $67,000 and a basis of zero resulting a $67,000 long-term capital gain. ($30,000 as a long-term capital gain Box E Sch D (being the escrow fund) and a long-term capital gain of $37,000 Box E Sch D (being the milestones deposits).
b) 2021 f1040 will be amended to reduce wages from $67,000 to zero.
Your thoughts on this? Again, many thanks in advance for your advice.

[qbteachmt]

"The 2021 originally filed f1040 included the $67,000 as part of wages."

But it's not part of 2021 W2 compensation. It's the sale, not the award. You state "as part of wages" but you also mentioned earlier that you had done this yourself, and it was not presented as such on the W2. That means they knew it was not 2021 compensation. You keep stating: "not on 2021 W-2 as this is an overseas job/foreign employer." But it's not because they are foreign. A foreign employer still has US reporting requirements. Of course it would not be reported when it doesn't apply to that year.

For your a) and b), you should be using the W2 info as issued. You don't make a supplemental entry as if you know better than what the employer reported. The W2 = Award is basis. The selling is the 1099-B event.

It seems you need to confirm the 2017, 2018, 2019, 2020 and 2021 W2 per the employer. You will also want to know what this was held as, if that was the investment instrument (shares or RSU), then that would explain the change to deposited amounts but not new W2 data for those three deposits that total $37,000.

The release of escrow is not a taxable event, when that value was already reported as taxable compensation. That's why I describe it as part of Banking, not W2 or 1099-B.

[The Real Halloween]

@qbteachmt You mentioned that: The release of escrow is not a taxable event, when that value was already reported as taxable compensation. That's why I describe it as part of Banking, not W2 or 1099-B.
But TP informed me that the $30,000 that was set aside as an escrow from the merger consideration to be received in the future and $37,000 that were made into the escrow fund based on milestones that were achieved were never reported and taxes in 2017, 2018, 2019 and 2020 returns. None of these two amounts were reported on W-2 or f1099-B and taxed in 2017, 2018, 2019 and 2020.
Therefore, it seems to me that $30,000 and $37,000 (totalling $67,000 as per f1099-B) should be reportable in 2021 return. What I am not sure is whether the $67,000 should be taxes as ordinary income wages or short-term capital gain (to treat $67,000 as part of the 2017 transaction) or long-term capital gain (to treat $67,000 as part of investment in 2021 with a basis of zero).
Any comments? Thank you!

[qbteachmt]

Are you sure this was not a 409(a) plan? A Non-qualified deferred compensation plan would only make this taxable when it is distributed. I find it interesting that you have a starting point in 2017, since the TCJA changed the treatment and that is the same timing. Or a 457(f)?

https://www.thetaxadviser.com/issues/2016/aug/treatment-for-nonqualified-deferred-compensation.html

Nothing would be reported as wages/compensation, unless it is reported on a W2. A tax preparer would only report wages if there is the belief the employer didn't handle their reporting requirements properly. I think the point is to find the factual info and not keep making assumptions. You're going to need a better resource than this employee and their own communication and forms from their employers.