When a Fremont tech employee receives an IRS notice, the cause may not be hidden income at all, but stock compensation that was reported in a way the IRS matching system reads as missing income. A tax attorney in Fremont, CA helps W-2 earners with RSUs, ESPP shares or options respond to CP2000 notices and audits, and prepare for the California Franchise Tax Board assessment that can follow.
If you have a notice with a response date on it, call (415) 754-0115 to schedule a free consultation, or send the notice type and date through our contact page.
Why stock compensation triggers IRS notices
The IRS matches the forms that employers and brokers file against each tax return. Equity compensation produces several of those forms, and they do not always line up neatly.
Restricted stock units
When RSUs vest, their value is taxed as wages and appears on the W-2. Many employers sell some of the shares to cover withholding. Later, when the remaining shares are sold, the broker issues a Form 1099-B.
The basis gap
Brokers often report a cost basis of zero, or leave it blank, for shares acquired through compensation. If the return copies that figure, the income that was already taxed on the W-2 gets taxed a second time as a gain. If the sale is left off the return entirely, the IRS sees the full sale proceeds with no basis and proposes tax on all of it. Either way, the cause is a basis problem, not unreported income.
Employee stock purchase plans
ESPP shares carry a compensation element that depends on how long the shares were held. Depending on the holding period and the employer's reporting, part of the gain may belong on the W-2, part may be capital gain, and the 1099-B may not reflect either correctly.
Stock options
Exercising nonqualified options creates wage income. Exercising incentive stock options and holding the shares can create an alternative minimum tax adjustment even though no shares were sold. Both situations produce paperwork the IRS can compare against the return.
Responding to a CP2000 notice
A CP2000 is a proposal, not a bill. It lists the income the IRS believes was missing and the tax it proposes to assess, and it sets a response deadline. The response can agree, partly agree or disagree, and a disagreement needs documentation. For a stock-sale mismatch, that typically means vesting confirmations, supplemental broker statements showing adjusted basis, and W-2 detail.
A clear, well-organized response can resolve a basis mismatch. If no response is received, the IRS can move to a statutory notice of deficiency. Our step-by-step CP2000 response guide covers the agree, disagree and partly agree options.
How a tax attorney in Fremont, CA can help
Not every CP2000 needs a lawyer. Legal help tends to matter when the proposed amount is large, when several years are affected, when the notice is tied to an examination, or when the taxpayer worries that a response could open other questions.
The Somal Law Firm is the practice of attorney Bob Somal, Esq., based in Pleasanton and handling tax law matters, including IRS disputes, audits and appeals across the Bay Area, including Fremont, Newark and Union City. An attorney can review your situation, reconstruct basis from employer and broker records, communicate with the IRS and, if needed, pursue an appeal. The first meeting is a free consultation.
From mismatch notice to audit to Tax Court
When a notice becomes an examination
Some stock-compensation issues are handled through correspondence audits by mail. Others, particularly when there are additional questions about deductions, rental property or a side business, become office or field audits. The rights are similar: the taxpayer can be represented, can provide documents and can disagree with the findings.
The notice of deficiency
If the dispute is not resolved, the IRS issues a statutory notice of deficiency. The taxpayer then has 90 days, or 150 days if the notice is addressed to someone outside the United States, to petition the U.S. Tax Court without paying the tax first. That deadline is strict. Our article on a Tax Court petition after a notice of deficiency explains the process.
The California follow-on: FTB assessments
Federal changes rarely stay federal. The IRS shares information with California, and the Franchise Tax Board can issue its own assessments based on federal adjustments.
Reporting federal changes
California generally requires taxpayers to report a final federal change to the FTB within six months, either by filing an amended state return or by providing the federal determination. If the federal change was based on a basis error that was later corrected, the state result should reflect that correction as well.
The Notice of Proposed Assessment
The FTB issues a Notice of Proposed Assessment when it believes more state tax is owed. A taxpayer can protest it within 60 days of the notice date. Because California taxes capital gains at ordinary income rates and has its own rules for equity compensation earned partly outside the state, the state figures do not always mirror the federal ones.
Appeals beyond the FTB
If a protest is denied, the next step is generally an appeal to the California Office of Tax Appeals. More on state examinations is in our guide to the FTB audit process in California.
Frequently asked questions
Does a CP2000 mean I am being audited?
Not exactly. A CP2000 comes from an automated matching program rather than a formal examination, though an unresolved CP2000 can lead to a deficiency notice.
My broker reported zero basis. Was my tax return wrong?
Possibly. If the return used the broker's figure without adjusting for income already on the W-2, it may have overstated the gain. An amended return may be an option for earlier years.
Will the FTB send a notice after my IRS case closes?
It can, especially when the federal change increased income. Reporting the federal outcome within the required period can help.
Stock compensation mismatches often come down to documentation, and they are easier to resolve before deadlines pass. Call (415) 754-0115 to schedule a free consultation with The Somal Law Firm, or reach us through our contact page with the notice type, tax year and response date.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.