They don’t know enough to know how much you owe them, but they do know that you got $xx,xxx from a brokerage account and that the tax would be $7,000 unless there were some things unknown to them that would make it a lower amount. You didn’t tell them about any of those things, so they assumed the full amount but were perfectly willing to be shown that that this assumption was wrong.
my favorite part is how brokerages like morgan stanley don't report the cost basis when they report your sales to the irs, and for no reason I can find.
This means that if you don't report sales from your side so you can note the cost basis, the irs assumes a cost basis of 0 and calculates owed tax on the entire sale value - this applies to stuff like RSU grants as well, and trips up a great many people entering the tech sector ( especially young people who may not have much tax filing experience )
I legitimately don't know why brokerages don't all include the cost basis by default ( or why they aren't required to by law )
Cost basis is not so cut and dry. In fact, the IRS (federal law?) allows you to use almost any reasonable method for determining it as long as you are consistent.
An example of where the brokerage wouldn't know:
You buy 5 shares of stock at $X and then a few months later buy 6 more shares at $Y. Later on you sell 3 shares for $Z. What is your cost basis? It could be $3X or it could be $3Y. Or maybe a blend of the two $(2X + Y)! The IRS thinks that you should be the one to decide, not the brokerage.
