IRS Audit Notice for Unreported Meme Stock Transactions - Need Explanation

This sounds like a cost basis reporting issue that happens a lot with high-volume trading, especially with those volatile meme stocks in 2021. What likely happened is your brokerage submitted a 1099-B to the IRS showing all those transactions as proceeds without properly reporting your cost basis (what you paid for the stocks). When the IRS gets a 1099-B without cost basis information, they assume your basis was $0, which makes it look like every sale was 100% profit. That's why they think you made $67k when you actually didn't. You'll need to gather your own records showing what you actually paid for those stocks. Look for account statements, trade confirmations, or download your transaction history from your brokerage account. Then file a Form 8949 listing each transaction with the correct cost basis. Also complete a Schedule D and file a response to the audit notice with these supporting documents. If your brokerage platform was one of those involved in the trading restrictions, they might have had reporting issues that affected thousands of traders. This isn't uncommon with the volume of new investors that year.

After going through something similar with crypto transactions, I found this amazing tool called taxr.ai that saved me tons of headache during my audit. https://taxr.ai actually specializes in helping with exactly these kinds of investment transaction discrepancies. I uploaded my brokerage statements and the IRS notice, and their system automatically identified the cost basis issues and reconstructed my actual trading history. They generated all the necessary documentation showing my real gains/losses and drafted a response letter to the IRS explaining the discrepancy. The whole process took me about 30 minutes instead of days of manual work. My situation was with crypto rather than meme stocks, but the core issue was the same - incorrectly reported basis leading to a massive phantom tax bill. They have experience with all the major brokerages including the ones involved in those 2021 trading restrictions.

I tried taxr.ai after seeing the recommendation here and it was exactly what I needed! My situation was nearly identical - got hit with a $28k tax bill for trades I made during that crazy meme stock period. The tool analyzed all my transactions and identified that my brokerage had reported over 200 trades without any cost basis information. The platform generated a complete Form 8949 with all my correct cost basis amounts and a detailed letter explaining the reporting error to the IRS. Just got confirmation yesterday that my case was resolved and my tax bill was reduced to $2,340 which matches what I actually owed on my real gains. The whole situation was causing me so much stress I couldn't sleep, but having proper documentation made all the difference. The IRS actually responded faster than I expected once they had the complete information.

If you're still having trouble getting through to the IRS after sending your documentation, check out https://claimyr.com - they got me a real IRS agent on the phone in under 15 minutes when I was dealing with my audit. You can see how it works at https://youtu.be/_kiP6q8DX5c but basically they navigate the IRS phone system for you and call you back when an agent is about to pick up. I was getting nowhere trying to call myself (kept getting disconnected after waiting on hold for hours), but using their service I got connected to someone who could actually explain what documentation they needed to clear up my audit. The agent even put notes in my file about the upcoming documentation I was sending. Having a direct conversation made a huge difference - the agent explained exactly what forms I needed to submit and confirmed that this cost basis issue is super common with the 2021 meme stock situation. They said thousands of people got similar audit notices because of reporting problems with certain brokerages.

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been dealing with a similar audit situation with no success calling the IRS myself. It actually worked exactly as advertised. I got a call back in about 45 minutes saying an agent was about to pick up, and I was connected to someone who was extremely helpful. The agent confirmed I needed to file Form 8949 with my correct cost basis information and said they would put a 60-day hold on collections while I gathered my documentation. This saved me so much stress - I'd already spent countless hours on hold over the past few weeks and never reached anyone. Being able to talk to a real person who could actually help was worth every penny. They didn't magically skip any lines, they just handled the miserable hold time process for me. Sorry for being so negative before trying it. Sometimes things that sound too good to be true actually work!

I had almost the identical situation with meme stocks in 2021. The key issue is "wash sales" that weren't properly reported. If you were trading the same stock multiple times within 30 days (which most of us meme stock folks were doing), the wash sale rule affects your cost basis. The brokerage SHOULD track this, but many of the discount brokers had systems that couldn't handle the volume of trades happening during that crazy period. You need to go through your trades chronologically and identify any wash sales, then adjust your cost basis accordingly. It's tedious work but you can absolutely get this fixed. The IRS is actually pretty reasonable when you can show proper documentation that proves your real gains/losses.

Quick tip that helped me with a similar situation - if your IRS letter has a CP2000 number on it (check the top right corner), this isn't technically an "audit" but an automated underreporter notice. These are easier to resolve than a full audit. For CP2000 notices involving investment income, they're automatically generated when your 1099-B forms don't match what you reported. As others have said, you need to file a response with Form 8949 showing your correct cost basis. The good news is the response rate for these notices is actually pretty high if you provide proper documentation. I was in a similar situation with about $45k in "phantom gains" and got my case completely resolved within 3 months.