JohnH Posted February 25, 2008 Report Share Posted February 25, 2008 I received a CP2501 from a client who lives in CA in which IRS is asking him to report the proceeds from exercising some Non-Qualified Stock Options in 2006. He forgot to give me the transaction info last year (I know, I should have noticed the "Code V" entry on the W-2 & asked him, but I didn't). The Schedule D washes out the income on the 1040, but I noticed ATX opened a CA SchD/3885A when I made the entries. It appears that this is only a formality, but I thought I'd ask you CA preparers if NQ options are treated any differently by CA? Also, if there's no difference is there any reason to amend the CA return to add the CA SchD/3885A? I don't mind reading up on it but thought I'd first appeal to the wisdom on this forum. Thanks for any advice on this. Quote Link to comment Share on other sites More sharing options...
Julie Posted February 25, 2008 Report Share Posted February 25, 2008 You'll need to amend the 540 to bring in the new federal AGI, probably not for the D/3885A. You use that only when there's a basis difference, and I can't think how there would be one. (Of course thinking is difficult anyway, with the IRS blasting classical music into my head!) I received a CP2501 from a client who lives in CA in which IRS is asking him to report the proceeds from exercising some Non-Qualified Stock Options in 2006. He forgot to give me the transaction info last year (I know, I should have noticed the "Code V" entry on the W-2 & asked him, but I didn't). The Schedule D washes out the income on the 1040, but I noticed ATX opened a CA SchD/3885A when I made the entries. It appears that this is only a formality, but I thought I'd ask you CA preparers if NQ options are treated any differently by CA? Also, if there's no difference is there any reason to amend the CA return to add the CA SchD/3885A? I don't mind reading up on it but thought I'd first appeal to the wisdom on this forum. Thanks for any advice on this. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 25, 2008 Report Share Posted February 25, 2008 The CA D is not required when the gain/loss is not different from federal. The NQSO usually produce a small loss for the costs of excercising. It sounds like you know that and there is no need to go into it. The real trick to the CA return is watch for CL carryovers. Putting them in on the federal DOES NOT get them to the CA return (I can't tell you how many times I missed that). You must enter the carryovers in both places. If anyone has a way to make it populate the CA return, I am all ears. I would ammend the CA just because. I would rather deal with the IRS than the FTB any day. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
jainen Posted February 25, 2008 Report Share Posted February 25, 2008 >>if there's no difference is there any reason to amend the CA return to add the CA SchD/3885A?<< If you don't amend it, when the client gets the FTB letter he will complain, "I thought you already took care of this!" California allows "mini-ISO" treatment for certain NQ options granted before 2002. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 25, 2008 Report Share Posted February 25, 2008 Jainen, Excuse my ignorance, but what is "mini-iso treatement"? This is the first time I heard that term. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 26, 2008 Report Share Posted February 26, 2008 The stock has to be declared 'qualified CA stock option', also AGI has to be I believe $40,000 or less, plus a whole lot of other limitations. Plus the stock had to be exercised before 2002, so you're not going to see this on an option exercised now. I had an FTB notice from someone who used TurboTax and put their NQSO gain as an adjustment on the Sch CA and would not admit that they, and not the program, had made the error. ATX automatically opens the 3885A/D whenever there is a Sch D or depreciation. I've never had a use for it for it with stock transactions (only depreciation, thank you so much for the new bonus depreciation, NOT!), but maybe if I have anyone from CA with a carryover, I'll need it. I just delete it if not needed because you'll get an efile error message if its not needed. Quote Link to comment Share on other sites More sharing options...
JohnH Posted February 26, 2008 Author Report Share Posted February 26, 2008 Thanks for all the responses. I didn't get into the fact that he does have a small loss due to transaction costs (a couple of hundred $), but I told him it would cost more for me to amend than he would save in taxes. He did the math and ageed with me. I'm just sending him a Schedule D showing the loss and we'll see what IRS does with it. I appreciate the quick replies and the discussion of the other issues that may be involved. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 26, 2008 Report Share Posted February 26, 2008 >>I told him it would cost more for me to amend than he would save in taxes<< I don't mean to tell you how to run your own practice, but I would put this one in the category of preparer error and not charge for amending state and federal. Quote Link to comment Share on other sites More sharing options...
JohnH Posted February 26, 2008 Author Report Share Posted February 26, 2008 You know, after I posted that comment I began to have some remorse - your follow-up comment pushed me over the edge. Thanks for the suggestion, and you're exactly right. I think I am going to amended the returns at no charge after all, especially since I had the info on the W-2 and failed to ask him for back-up info in the first place. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 26, 2008 Report Share Posted February 26, 2008 The CP2501 doesn't require an amended return; they would like to see a sch D, and if you compute a small refund, then put that in your letter. Get a POA and write a response along the lines of 'we admit the stocks omitted from the return. They were sold at a $____loss. this change results in a refund of $________. Here's a worksheet showing the cost basis info. and attach a D. You probably won't have enough of a difference to require a state amendment. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 26, 2008 Report Share Posted February 26, 2008 >> I had the info on the W-2 and failed to ask him for back-up-<< One of the nice things about our business is that it doesn't cost us anything to offer this kind of superior customer service. You don't have to admit the error. Just punch out the forms and put them in a nice folder. The IRS will back down and you'll end up looking like a hero. For those who still aren't convinced, look at the national chains. They built their market share partly on the promise that they won't charge extra to handle routine IRS inquiries like this, including amending a return if they prepared the original. The value to the client is far more than the cost to the preparer. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted February 27, 2008 Report Share Posted February 27, 2008 Trust me, clients love you when you take a notice like a CP2000 that says they owe beaucoup tax and turn it into a small refund (or even better a large one). You are a hero, es[ecially if they are coming to you because they got a CP2000. Quote Link to comment Share on other sites More sharing options...
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