IRS Schedule D Instruction Error

Recently, the IRS announced that the Schedule D Tax Worksheet that was contained in the Instructions for Schedule D for the 2018 version of Form 1040 contained an error.  The error affected taxpayers with capital gains subject to the maximum rate of 25% or 28%.

Such gains are reported on lines 18 or 19 of the 2018 version of Schedule D and can result from the sales of depreciable real estate, collectibles, or certain sales of small business stock under §1202 that was acquired on or before September 27, 2010.

Taxpayers who did not have any gain subject to the 25% or 28% rates were unaffected by the error.  For taxpayers who were affected by the error, it appears that they paid a slightly higher regular tax than they otherwise should have.

Practitioners should make sure that they have updated their tax preparation software so that they are using the corrected version of the worksheet when filing 2018 returns that are on extension.  The new worksheet was issued on May 16, 2019.

For 2018 tax returns that were filed prior to May 16, 2019, the IRS has indicated that affected taxpayers do not need to file amended returns or contact the IRS.  Rather, the IRS claims that it is reviewing returns that were filed prior to May 16, 2019 and will provide more information about this review later.

In the meantime, practitioners may want to consider whether their clients were affected by the error and, if so, the amount of the increase in the tax that may have resulted from the error.  Tax software typically provides the ability to create lists of returns that meet certain criteria, such as those that contain a Schedule D, which can be useful when making such a review.