Ca. Franchise Tax Board Says I Owe $18,000 from Trading $5k of NYSE Stock

[Glenns]

My question involves personal finance in the State of: CA.

Ok. Some time ago I had $5,000 that I sunk into the stock market. Over the years I traded this money, eventually withdrawing bits and pieces of it as I continued to trade. Eventually, I didn't have anything left in my brokerage account; over the years I traded over $500,000 of stock (remember there's a difference between "trading" and "gaining"). Overall I didn't gain, mind you, but I don't think I lost, either (in other words, I'd gain and lose over the years, with the net effect being that I withdrew $5K in bits and pieces, with no overall net capital gain).

Now here's the thing. Imagine my shock when I receive in the mail one day a bill from the idiots at the franchise tax board (California's IRS) totaling a whopping $18,000! Yes, like you, I fancied it a joke. But from whom?

During my trading years I never did any taxes, mainly because I thought the brokerage house did all that for me, and besides, I'm not gaining anything in capital gains, so why even do taxes?

So just recently it looks like that $18,000 wasn't a joke, as the FTB took all the money out of my bank account (like $680), and effectively said they'll keep taking more out until I've paid off $18,000.
I come to find out later that the imbiciles taxed me $18,000 based on the cumulative, year over year trading I had done, or "total trading revenue" (remember? The $500,000). As far as I understand it they should have taxed me on capital gains only, which in my case was a net $Zero.
So what recourse do I have against these knuckle-dragging thieves? They only returned half the $680 and are refusing to pay the bank-imposed $75 lien fee.
They should not have initially taxed me $18,000, as they are obligated to tax on capital gains only, not total trading revenue. Since they came up with that $18,000 figure based on total trading revenue, that means they also had access to my capital gains info during the same period (which is what they should have taxed).
Since this caused me immense pain and suffering (I have therapist bills to prove it), can't I sue the FTB for like an ungodly amount of money?

[flyingron]

Contact your brokerage for the historical records. If you dealt exclusively with them, they should have the information for you to determine what the gains are. I've never seen a brokerage take "taxes" out. The better ones submit you a report at the end of the year to let you know just what you need. A good tax-savvy CPA can probably resolve this for you. If it's gotten to the point where they're levying your bank accounts, you already have been ignoring their inquiries for quite some time.

[llworking]

My question involves personal finance in the State of: CA.

Ok. Some time ago I had $5,000 that I sunk into the stock market. Over the years I traded this money, eventually withdrawing bits and pieces of it as I continued to trade. Eventually, I didn't have anything left in my brokerage account; over the years I traded over $500,000 of stock (remember there's a difference between "trading" and "gaining"). Overall I didn't gain, mind you, but I don't think I lost, either (in other words, I'd gain and lose over the years, with the net effect being that I withdrew $5K in bits and pieces, with no overall net capital gain).

Now here's the thing. Imagine my shock when I receive in the mail one day a bill from the idiots at the franchise tax board (California's IRS) totaling a whopping $18,000! Yes, like you, I fancied it a joke. But from whom?

During my trading years I never did any taxes, mainly because I thought the brokerage house did all that for me, and besides, I'm not gaining anything in capital gains, so why even do taxes?

So just recently it looks like that $18,000 wasn't a joke, as the FTB took all the money out of my bank account (like $680), and effectively said they'll keep taking more out until I've paid off $18,000.
I come to find out later that the imbiciles taxed me $18,000 based on the cumulative, year over year trading I had done, or "total trading revenue" (remember? The $500,000). As far as I understand it they should have taxed me on capital gains only, which in my case was a net $Zero.
So what recourse do I have against these knuckle-dragging thieves? They only returned half the $680 and are refusing to pay the bank-imposed $75 lien fee.
They should not have initially taxed me $18,000, as they are obligated to tax on capital gains only, not total trading revenue. Since they came up with that $18,000 figure based on total trading revenue, that means they also had access to my capital gains info during the same period (which is what they should have taxed).
Since this caused me immense pain and suffering (I have therapist bills to prove it), can't I sue the FTB for like an ungodly amount of money?

This is entirely your fault. You should have been filing tax returns all along, reporting your stock sales (and any dividend or interest) on a yearly basis. Its true that you may not have had any significant gains or losses, once you reported the sales and their basis, but that is how you get the right information reported.

The FTB doesn't know that you have basis in the stock sales, so they don't know that you don't owe that full amount that they are trying to get from you.

You need a tax professional who is experienced with tax problems to get the returns filed for you (once you have the composite 1099's from your broker, you actually got those every year in your end of the year packet). Getting the returns filed will solve the problem.

[Taxing Matters]

So what recourse do I have against these knuckle-dragging thieves? They only returned half the $680 and are refusing to pay the bank-imposed $75 lien fee.
They should not have initially taxed me $18,000, as they are obligated to tax on capital gains only, not total trading revenue. Since they came up with that $18,000 figure based on total trading revenue, that means they also had access to my capital gains info during the same period (which is what they should have taxed).
Since this caused me immense pain and suffering (I have therapist bills to prove it), can't I sue the FTB for like an ungodly amount of money?

This is your fault, not theirs. While you are taxed only on the gain you get from the stock, all that the broker reports to the IRS are the amounts you get from each sale stock. It does not get the basis information. The IRS shares its info with the state, but again that means that the state does not have your basis information. Your gain is the sales proceeds less your basis. This means that you must file tax returns and report the sales, provide the basis information, and compute the gain or loss on each sale. If you don't do that, the IRS and/or the state may compute the tax you owe based on the information they do have: which is the sales info and zero basis, meaning you get hit as though the entire amount of the sale was gain.

Moreover, the gain or loss is computed on each sale and your net gains and losses are computed annually. So while you think that overall by the end of all your trades you ended up with no gain you may well have had years in which you did have taxable gains and other years with taxable losses. Exactly how that played out would determine whether you had tax to pay. You may well have had tax to pay some years even though overall through the years you washed out even. Did you keep good records of your stock trading activity? If you did, you might be able to get the state even at this late date to adjust the the assessment to the correct tax you owe based on the gain you actually had. I recommend you see a CA tax professional about that. What you certainly do not have here is any valid claim against the FTB for pain and suffering nor can you sue the FTB for "an ungodly amount of money." This was a situation of your own making. Had you filed accurate returns as you were supposed to do you would not be in this mess now.

[flyingron]

I got hit real hard one year. When my broker switched firms, the old one reported my entire portfolio as a sale. This was a massive error on their part. Nothing was sold, just transferred to a different brokerage. I got a letter from the IRS wanting an amount in six figures. I called my accountant and broker and told them to fix it. I had been paying the actual tax due.

[llworking]

I got hit real hard one year. When my broker switched firms, the old one reported my entire portfolio as a sale. This was a massive error on their part. Nothing was sold, just transferred to a different brokerage. I got a letter from the IRS wanting an amount in six figures. I called my accountant and broker and told them to fix it. I had been paying the actual tax due.

I have had many clients get CP-2000 letters for stock sales that were not included on their original return because they never provided the information. If it gets fixed at the CP-2000 letter point then there are not usually problems with the states. The OP had to have been ignoring both the feds and the state for quite some time.

[Glenns]

This is your fault, not theirs. While you are taxed only on the gain you get from the stock, all that the broker reports to the IRS are the amounts you get from each sale stock. It does not get the basis information. The IRS shares its info with the state, but again that means that the state does not have your basis information. Your gain is the sales proceeds less your basis. This means that you must file tax returns and report the sales, provide the basis information, and compute the gain or loss on each sale. If you don't do that, the IRS and/or the state may compute the tax you owe based on the information they do have: which is the sales info and zero basis, meaning you get hit as though the entire amount of the sale was gain.

Moreover, the gain or loss is computed on each sale and your net gains and losses are computed annually. So while you think that overall by the end of all your trades you ended up with no gain you may well have had years in which you did have taxable gains and other years with taxable losses. Exactly how that played out would determine whether you had tax to pay. You may well have had tax to pay some years even though overall through the years you washed out even. Did you keep good records of your stock trading activity? If you did, you might be able to get the state even at this late date to adjust the the assessment to the correct tax you owe based on the gain you actually had. I recommend you see a CA tax professional about that. What you certainly do not have here is any valid claim against the FTB for pain and suffering nor can you sue the FTB for "an ungodly amount of money." This was a situation of your own making. Had you filed accurate returns as you were supposed to do you would not be in this mess now.

This is your fault, not theirs. While you are taxed only on the gain you get from the stock, all that the broker reports to the IRS are the amounts you get from each sale stock. It does not get the basis information. The IRS shares its info with the state, but again that means that the state does not have your basis information. Your gain is the sales proceeds less your basis. This means that you must file tax returns and report the sales, provide the basis information, and compute the gain or loss on each sale. If you don't do that, the IRS and/or the state may compute the tax you owe based on the information they do have: which is the sales info and zero basis, meaning you get hit as though the entire amount of the sale was gain.

Moreover, the gain or loss is computed on each sale and your net gains and losses are computed annually. So while you think that overall by the end of all your trades you ended up with no gain you may well have had years in which you did have taxable gains and other years with taxable losses. Exactly how that played out would determine whether you had tax to pay. You may well have had tax to pay some years even though overall through the years you washed out even. Did you keep good records of your stock trading activity? If you did, you might be able to get the state even at this late date to adjust the the assessment to the correct tax you owe based on the gain you actually had. I recommend you see a CA tax professional about that. What you certainly do not have here is any valid claim against the FTB for pain and suffering nor can you sue the FTB for "an ungodly amount of money." This was a situation of your own making. Had you filed accurate returns as you were supposed to do you would not be in this mess now.

You, like everyone else here, miss several key points (understand that some of what you're about to read has to be considered in depth and read carefully):
1. The franchise tax board/IRS (FTB), from a social or personal growth/self-help standpoint, is not supposed to play mommy and daddy. Their function is not to punish me because I didn't do as I was told; their function is to collect and disburse income and corporate taxes, and to initiate legal actions against those who avoid paying tax. For this reason, I'm hoping we can dispense with the "You're supposed to file taxes; that's why they grounded you and took away your allowance. You didn't do as you were told." So far, you and two other posters say the fault is mine for not doing what I was told--a rather infantile viewpoint.
2. You say, "There may have been times when you did have a capital gain,"as if to imply that the $18.54 gain I had in 2014 and the $7.92 gain I had in 2016 is justifiable grounds for the FTB to steal $18,000 from me. Sorry bro, but that's just not the world most folks don't live in. The world we do live in is when I get taxed $3.80 by the FTB, not $18,000 (15% of 18.54 + 7.92 = 3.80).
So, So far you have dispensed with the idea that the FTB should be playing mommy and daddy, and you've dispensed with the idea that I should be charged $18,000 on $25 worth of capital gains--If I'm making any progress, that is.
3. You correctly say that I'm taxed on stock sales, minus basis (basis simply means "How much I sold the stock for minus how much I paid for it." A shorthand way of saying 'capital gain or capital loss', depending on whether basis is + or -). Where the FTB is at fault (and putting out of mind the idea that the FTB plays mommy), is that they computed my tax liability "as if I didn't have a basis [i.e., I got the stock for free]." This is stupid, and shows the knuckle-dragging character of the imbiciles. How can they claim that I have $ zero basis when they didn't even have the slightest clue about what my basis even was? Why doesn't the FTB take the opposite tact and assume that all sales is a basis? Why must they be biased in favor of no basis? (remember--no mommy). Even the fact that they assume should be grounds for a pain and suffering suit on my part.
At this point you'll likely revert back to item #1 above and say, "BUT YOU SHOULD HAVE DONE YOUR TAXES! YOU'RE SUPPOSED TO! IF YOU DID, YOU WOULDN'T HAVE HAD YOUR ALLOWANCE TAKEN AWAY!!!" But by doing so you miss the point entirely. Since the FTB's function isn't to play a parental role,you must disregard what I should have done or shouldn't have done. The only thing that's of any relevance here is that I owed taxes on capital gains and capital gains only. If the FTB taxes me on anything other than capital gains then they should be held accountable!
What the FTB should have done is find out for sure what my basis was, and then compute my tax liability (and that does not! include asking me in a tax form). Who am I? Hell, I can be the biggest liar of them all and claim my basis is $98,000,000. Because they're relying on me and only on me for my basis information, they would have to compute my tax liability based on a $98,000,000 cost basis. Based on a $98,000,000 basis, I receive a huge tax windfall valued in the $millions, and there aint a damn thing the FTB can do about it! muHAHAhaaa!
$98,000,000 is ridiculous, right? Of course it is (just as ridiculous as my initial $18,000 assessment)! Hence the reason why the FTB must go to the source (my brokerage house) to get that needed cost basis information; not go to me.

Knowing this alternate viewpoint, what's stopping me from collecting on a pain and suffering suit?

[free9man]

I think I see the problem.

[Taxing Matters]

Knowing this alternate viewpoint, what's stopping me from collecting on a pain and suffering suit?

Because you didn't file the return as you should have done. You want to make that go away — and I understand why you'd like that to go away — but you can't. You needed to file the returns to show the tax agencies what your actual gain was. When you don't file returns, federal and state statutes empower the IRS and FTB respectively to prepare returns for you based on the information they do have and prepare an assessment for you. Which is what the FTB did here. Even with that, you still may respond to the state when you are first notified of the proposed assessment and provide the basis information so that the correct tax may be computed. That's the way the law is set up to work. This has nothing to do with the state playing your parent and the analogy is a ridiculous one. It is about the way the tax law is written and the authority the tax agencies have to go after tax when you fail to file returns. So long as the state followed the law in the process for making the assessment you have nothing about which to complain. And even if the state screwed something up, you would not have a claim for "pain and suffering" as those claims go along with a physical injury. Emotional distress damages, which are distinct from pain and suffering damages, generally intentional negligent acts that are so egregious that they fall well outside the normal range of human conduct. In others, regular negligence and errors aren't going to get you emotional distress damages. And if you try to sue the FTB for that you may get hit sanctions for filing a frivolous claim.

You want to fix this problem? Round up your basis figures, prepare the capital gain schedules as you should have done in the first place, and provide them to the FTB to contest its computation of the tax owed.

[llworking]

I think I see the problem.

Ditto....