In 2007, my father (now deceased), unbeknownst to me, was trading stocks in a custodial account under my name. He actually ended up losing money on the trades, but he never filed taxes for them. Scottrade only reported his sales to the IRS, not what he paid for all those stocks, and since he never filed anything and since the account is under my SSN, the IRS has been under the impression that I made around $55k in 2007.

After tracking down all the trades and doing all the math, he spent around $60k on those stocks, so it was actually a net loss of around $5k (in fact, the losses were greater than my total income on my W2).

Further complicating things, much of the stock that was sold in 2007 was purchased in 2006.

And a tiny little matter, there was also $16.08 worth of interest earned on the account in 2007.

For 2007, I've got:

  • My W2.
  • "Composite Substitute 1099 Statement Summary" and "Composite Substitute 1099 Activity Detail", which show the interest and the net amount for the sold stocks, and was furnished to the IRS.
  • "Supplemental Information" which shows the net amount for that subset of stocks purchased in 2007, and was not furnished to the IRS.
  • Order confirmations from Scottrade for each of the purchases of stocks which were later sold in 2007.

I've gone through and calculated the total paid for all those stocks which were sold in 2007. I've found this 2007 1040: http://www.irs.gov/pub/irs-prior/f1040a--2007.pdf

But I have no idea how to fill in the stocks or interest, or if that's even the right form in the first place.

  • Did you actually receive a correspondence audit form from the IRS (CP2000)? If so, I suggest calling them and asking what they would want information-wise. It may simply by a Schedule D and not an updated 1040. Also, place close attention to the deadlines on the letter. If you ignore them, the IRS will assume they are correct and go after you for the money. – Scott McIntyre Mar 19 '12 at 14:35

Generally stock trades will require an additional Capital Gains and Losses form included with a 1040, known as Schedule D (summary) and Schedule D-1 (itemized). That year I believe the maximum declarable Capital loss was $3000--the rest could carry over to future years.

The purchase date/year only matters insofar as to rank the lot as short term or long term(a position held 365 days or longer), short term typically but depends on actual asset taxed then at 25%, long term 15%. The year a position was closed(eg. sold) tells you which year's filing it belongs in.

The tiny $16.08 interest earned probably goes into Schedule B, typically a short form.

The IRS actually has a hotline 800-829-1040 (Individuals) for quick questions such as advising which previous-year filing forms they'd expect from you. Be sure to explain the custodial situation and that it all recently came to your awareness etc.

Disclaimer: I am no specialist. You'd need to verify everything I wrote; it was just from personal experience with the IRS and taxes.

  • Would I need both the summary and itemized, or is it an either/or thing? – Asmor Mar 18 '12 at 21:10
  • @Asmor Both, it's really the same step. I've used software like TurboTax or TaxCut in demo/practice mode to do everything but file electronically at the end which they would charge for(the software makers not IRS or State), but was still able to print out neatly and mail, saving pdf files. – Marcos Mar 18 '12 at 22:59

You need to talk to an accountant who practices tax accounting, preferaby someone who is an Enrolled Agent (EA) with the IRS, and possibly an attorney who specializes in tax law. There are multiple issues here, and the executor of your father's estate might need to be involved here too. Presumably you were a minor in 2007 since the transactions took place in a custodial account, and perhaps you were a dependent of your father in 2007. So, were the transactions reported on your father's 2007 income tax return? or did he file a separate income tax return in your name? You say you have a W2 for 2007. So you were earning some income in 2007? This complicates matters. It is necessary to determine who has the responsibility to file income tax returns for a minor with earned income.

Above all, I urge you to not file income tax returns on your own or using a tax return preparation program, or after talking to a tax return preparation service (where you will likely get someone who works on a seasonal basis and is unlikely to be familiar with tax law as of 2007).

  • I was actually not a minor in 2007; the custodial account should have been transferred to me in 2005, but never was. As I said, I never even knew it existed until last week. Also, how would I find an EA? – Asmor Mar 18 '12 at 17:38
  • Look in the Yellow Pages under Tax Services. Most large (national) firms have several Enrolled Agents on their staff in any of their branch offices; with smaller firms and solo practices; ask. You also need to talk to ScottTrade or whoever since your father should not have been operating your custodial account which should have been transferred to your name in 2005. Was it a joint account by any chance, and not a custodial account at all? If so, whose SSN was on the account? – Dilip Sarwate Mar 18 '12 at 17:51
  • No, it was a custodial account (actually, still is; I didn't make any changes). I was at Scottrade on Friday trying to get this sorted out; they're the ones that told me that my father should have transferred the account to me when I was 21 (2005), but they said there was nothing they could do. The account is under my SSN. All the order confirmations are under my father's name as custodian for me. – Asmor Mar 18 '12 at 19:27
  • 2
    >they said there was nothing they could do. I would say that Scottrade is definitely at fault here for not insisting that the UGMA account be transferred to your name on your 21st birthday, and that your father's custodianship was discharged effective that date, and for allowing your father to trade in your account. You need legal advice in addition to tax advice. – Dilip Sarwate Mar 18 '12 at 19:39
  • Yeah, but there's not really a whole lot I can do about anything. There's no actual money at stake, other than that which the IRS mistakenly believes I owe, and it's probably easier just to submit the numbers to them to show that no money was actually made under my SSN, as opposed to some drawn out (and expensive) legal process to show that the trading was fraudulent in the first place. – Asmor Mar 18 '12 at 21:12

You need to submit an updated return. The problem is that once three years have passed you can't update the return to get any kind of refund, but if they are going after you for the sale price of the stocks, not knowing the cost, your goal is to show them there was no gain, and in fact you'd have had the loss if you were aware of the account. This is less than ten years back, so the broker should be able to give you the statements pretty easily.

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