Federal Module -- ESPP Cost Basis -- Wrong Tax treatment

For ESPP dispositions, IRC §423 and the basis rules under IRC §1012 require taxpayers to reconcile the broker-reported cost basis on Form 1099-B with the ordinary compensation income already included in Box 1 (and often Box 14) of the W-2, and to correct any understated basis on Form 8949 to avoid double taxation. ChatGPT correctly identified that the brokerage number and the tax-software number differed, but failed to proactively surface the W-2 compensation income items that affect adjusted basis, and failed to flag 1099 entries that appeared to reflect taxable events the user may not have made—leaving the return incomplete and potentially incorrect. IRS Publication 525 and the Form 3922 instructions explicitly require taxpayers to compute adjusted basis using both the 1099-B proceeds and the W-2-reported discount income before reporting on Schedule D.

A small business owner or employee-participant who files relying on ChatGPT's incomplete ESPP basis guidance risks either overpaying capital gains tax (by omitting the W-2 compensation add-back to basis) or underpaying it (by failing to include phantom or erroneous 1099 income), exposing them to IRS CP2000 notices, accuracy-related penalties under IRC §6662 of up to 20% of the underpayment, and potential double taxation running into thousands of dollars.