Names changed for confidentiality.
When I got a call from Mr. Cohn, he was frantic. He’d contacted the IRS about his missing 2025 tax refund, only to learn it was being withheld: the agency had no 2021 return on file for him, and according to IRS record, he had $16 million of gross proceeds from that year creating a staggering $6 million tax liability sitting on file.
“I’m a middle-income guy! I never earned this money! I can’t possibly owe them $6 million!”
My first thought was that he had been victim to some kind of tax fraud. Someone could have stolen his social security number to launder illicit income; identity thieves may have hijacked his data to rack up millions in unpaid payroll taxes. But first, there were other, more obvious questions that had to be asked. Had the IRS told him where those proceeds came from?
As a matter of fact, they had.
The source was a financial services firm and, yes, he did have an account with that entity at one time.
Mr. Cohn had neglected to file a return for 2021. Without a filed return to work from, the IRS had simply matched the gross proceeds reported by the financial services firm against his name. This is a standard practice where the agency prepares what’s called a ‘substitute for return’. I told him to call the financial services firm and ask for a copy of his Form 1099 for the 2021 tax period.
A 1099 is an information return used to report income received from a source other than an employer, such as independent contractor work, interest, dividends, or government payments. Recipients generally receive a 1099 when they have earned $600 or more from a given payer during the tax year. The form helps the taxpayer and the IRS track income that may be taxable.
When the 236-page document arrived, Mr. Cohn was on the phone again before I’d even finished opening the file. I wasn’t going to walk him through all 236 pages, but I did give him a crash course in cost-basis reporting.
“Were you, by any chance, a day trader in 2021?” Yes, he was.
That explains the huge filing. Brokerages are legally required to itemize every single individual transaction; high-frequency trading easily generates tens of thousands of line items. Day traders buy and sell constantly, and every single one of Mr. Cohn’s trades had been documented and reported to the IRS by the financial services firm, exactly as the law requires.
I explained that the number the IRS was fixated on was gross proceeds, the total dollar amount of everything he’d sold, not what he’d actually earned. Every sale on the form was paired with a cost basis, or what he’d originally paid for that position. The gain or loss on each trade was simply the difference between the two, transaction by transaction. All of it should have eventually rolled up on his return through Form 8949, Schedule D — which is where the net number, not the gross one, determines what’s actually owed.
Then I pointed to the summary page: $16,475,000 in gross proceeds, just as the IRS had told him on the phone. But before Mr. Cohn could faint dead away, I pointed one column over, where his net gains and losses told a different story — the ignoble sum of -$2,300.
In the end, Mr. Cohn did not earn (gain) $16 million; he lost $2,300. Had he filed a return, that data would have been properly reported, and his net capital loss would have wiped out his tax bill entirely. But the IRS computers didn’t care, because he had never filed the 2021 return that would have told them.
I advised Mr. Cohn to immediately file tax return with a Schedule D and Form 8949, showing the cost basis of all those trades.
Lesson learned: file your return or let the IRS write your story for you — and they’re not generous editors.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
