Problem about capital gain tax

What is the name of your state? CA

Recently, I have problem with IRS. I used to own a house. I bought this house in early 1994 and sold it in late of 1999. So I have stayed in this house for more than 5 years. The capital gain (selling price - buying price) is about 130,000 US$. My agent and my CPA told me that I get exemption for capital gain tax because I have stayed in the house for more than 5 years and make capital gain for less than 200,000 US$. My CPA also said that I do not have to file any thing about this. So in 1999, I just filed only my personal income tax.
After 2000, I have moved out of the country. And I just got notice from my bank that IRS will take the money from my banking account due to the tax related to the selling of the house in 1999. Can IRS do that? Any mistake by my side or IRS side?

Thank you very much in advance.

The IRS assesses taxes based on information sent to it. It sounds like the escrow company issued you a form stating the selling price & sent a copy to the IRS. The escrow company did not send any info about the basis of the house because it didn't know anything. Therefore, as far as the IRS knows, you paid nothing for the house & the selling price was pure profit. The way around this is for you have to report the sale on Schedule D & then claim the section 121 exemption. It sounds like you'll need to amend your 1999 return. You have until 3 years from the due date of the return OR 2 years from the last time you paid taxes to amend a return. Since taking $$ from your bank account is a payment, you should still be able to amend.

Take copies of all IRS letters to your CP & have him/her file a 1040X listing the selling price of the home, and declaring the basis & selling expenses on Schedule D. The next line of the Schedule D is entered as "Sec. 121 exclusion" with proceeds=$0 & cost=$125,000 or the net profit, whichever is less. You'll need the closing papers for both the sale & the purchase of the home. Also, if you rolled over any gains on the sale of a previous home, you'll have to take that into account.

You should probably send an extra copy of the amendment to the IRS agent handling the levy so that s/he will wait a few weeks for the rest of the IRS to process the amendment & not take your money.