IRS Computation Error Affects Certain 2018 Schedule D Filers

Stan Rose, Director, Tax Practice
June 2019

Certain filers of 2018 Forms 1040 or 1041 Schedules D (capital gains) may have been victims of nationwide computational errors caused by erroneous IRS instructions. Affected filers are limited to a relatively small subset of individuals and trusts/estates that not only filed 2018 Schedule D, but reported sales of certain assets other than routine stocks, bonds, mutual funds, and similar investments.

What happened?

The IRS recently announced that on May 16 it revised and corrected the instructions it previously provided for taxpayers’ use preparing worksheets that support Schedule D. The previous guidance, and software required to follow IRS form instructions, may have produced incorrect tax amounts for certain taxpayers, consisting of those who reported:

  1. Gains from the sale of collectibles or small business stock (which are taxed at a federal rate of no more than 28%), or
  2. Gains from the sale of certain depreciable real estate (which are taxed at a federal rate of no more than 25%).

The IRS intended to compute the tax by applying the smaller of (1) the tax rate that applies to the taxpayer’s regular tax bracket or (2) the 25% or 28% rate described above. The error apparently resulted when the superseded IRS instructions led to the use of the 25% or 28% tax in all situations, including those where the rate associated with a taxpayer’s tax bracket was lower than 25% or 28%. The IRS suggests that some taxpayers may see tax increases, but the vast majority will see tax decreases, as the result of the correction.

What’s next?

According to the IRS, taxpayers should not file amended returns. Instead, it is reviewing 2018 returns, and will provide more information regarding how it plans to correct its error at a later date. We speculate the IRS will send notices to affected taxpayers, and presumably send refunds as appropriate. An IRS notice explaining this in more detail may be found here.

BNN plans to review client returns that may be impacted by this change, and will contact affected clients directly with an estimate of the potential change in tax. How we proceed from there will depend on the IRS’ next steps nationwide, which, as explained above, we are waiting to hear.

For more information, please contact your BNN tax advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.