IRS announces change to 2018 Schedule D Tax Worksheet

Technical topics regarding tax preparation.
#21
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So you two are saying that everybody with a kernel of reading ability and at least a two-digit IQ should recognize immediately that "Your capital gains tax is based on your regular tax bracket, while your unrecaptured Section 1250 gain is [taxed at] a flat rate," - as one source has written on its website - is simply wrong, incorrect, misstated, and should be disregarded. Which part of it?
 

#22
LW25  
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makbo wrote:[ . . . ] As one in the early years of the profession might agree, you are more open minded and skeptical when it comes to asking whether something is correct than someone who is comfortable with a wide variety of tax returns, and thus is lulled into a false sense of confidence.


My sense is sort of the opposite; the more training and experience one has with Federal tax matters, the more likely one is as a general rule to be skeptical and to question what one reads -- particularly with respect to the lower level materials, such as published IRS instructions.

I was thinking just the other day, though, about the fact that with computer programs being used as part of the preparation of virtually every tax return I prepare, I no longer do certain things -- like independently checking the math to make sure that the computer program's arithmetic is correct. Also, I don't check the net figure on, say, a Schedule C, to make sure that this is the figure actually reflected on the face of the Form 1040.

But, even in the old days (late 1970s, early 1980s for me), it was the same in a sense: We used electronic desk calculators -- but we didn't independently check to make sure that the desk calculator was actually doing the math correctly. Instead, we performed the calculation on the desk calculator two or three times, to see if we got the same answer consistently. I still do that any time I'm using my desk calculator (or the calculator in my smart phone).

The narratives found in IRS Instructions and IRS Publications (as opposed to the computational worksheets included in the Instructions and Publications) do contain some errors, but my sense is that the errors are few and far between.
 

#23
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glowacks is like Harry Markopolos. He told everyone Maddoff was running a scheme but nobody listened.

Good job glowacks.

I guess if you read general intellect discussion boards and actually know about something called a "sanity check" in the software we can not say it was a fluke.
 

#24
LW25  
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LW25 wrote:[ . . . ] We used electronic desk calculators -- but we didn't independently check to make sure that the desk calculator was actually doing the math correctly [ . . . ]


To digress even further, checking a desk calculator to make sure that it is actually computing the correct arithmetic may not be as weird as it sounds, too.

In the first CPA where I worked, we audited banks. One of the banks had desk calculators that looked like regular ten-key calculators, but they had a sort of cartridge insert for the calculators that held the program to calculate the interest rate on a loan (given the present value, monthly payment, frequency of payment, frequency of compounding, number of months, and so on). The machines were used by bank personnel to come up with the exact interest rate to be disclosed as "APR" on the loan documents.

I don't remember all the details, but when we tested the machines, we found that the bank's calculations were resulting in disclosures that, on first blush, sometimes did not appear to comply with what was then Regulation Z (Truth in Lending), after considering what I think were the "rounding" rules. This could have been a major problem for the bank, because the bank might have been required to refund some amounts to hundreds or thousands of bank customers. I forget exactly how the problem was resolved, but maybe the solution involved an application of the old concept of m-a-t-e-r-i-a-l-i-t-y........

Suffice to say: It's possible that no officer or employee of the bank had previously questioned the accuracy or precision of the interest rate calculations on those desk machines.
 

#25
makbo  
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Here you go, just posted at the IRS web site in the last hour (at least from where I am on the internet)

https://www.irs.gov/forms-pubs/error-in ... -form-1040
 

#26
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The 2018 Schedule D Tax Worksheet in the Instructions for Schedule D (Form 1040) contained an error. The tax calculation did not work correctly with the new TCJA regular tax rates and brackets for certain Schedule D filers who had 28% rate gain (taxed at a maximum rate of 28%) reported on line 18 of Schedule D or unrecaptured section 1250 gain (taxed at a maximum rate of 25%) reported on line 19 of Schedule D. The corrected worksheet is at the end of the updated instructions at the link above.


Here is the linked page...


Page Not Found.

Error 404.

Sorry, this page isn't available.

You'd think they could at least get THIS right!!
 

#27
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Chay wrote:
glowacks wrote:there's a sanity check at the end of the worksheet so that you don't end up paying a dollar more because of rounding issues when you have a very small amount of capital gain.

You not only found the error but you also understand the deeper meaning of each line? How do you know so much about this worksheet, especially considering you seem to be relatively new to the profession?


I had to spend a few hours on research between the code and the worksheet to find this out. Some of the lines on the worksheet explicitly calculate certain lines in the code. Some of them do not and are amalgamations of various numbers and only used in intermediate calculations. It was absolutely the hardest thing I have ever done as an accountant. I do not fault other people used to the IRS being right all the time for not taking the time to research this. When I started to do the research I was so sure that I was missing something, because the IRS is "always" right, but I simply went line by line in the code and did the calculation and it differed from what the worksheet said, and the worksheet ended up wrong. As someone at a small CPA firm with only a year of being a CPA, there wasn't much we could do except notify Thompson Reuters and put in a form comment submission through the IRS website, as I mentioned. I went back and forth with TR a bit before they understood that my problem was not with their software, but with the IRS worksheet. I didn't hear anything back from TR after the point I explicitly told them that, and I don't know what went on behind the scenes after that. But it took 2 months to straighten out, and not until after tax season.

However, the "sanity check" at the end I already knew about for a different reason: personal experience preparing the worksheet by hand on a relative's return. Before I got a job in accounting, I didn't have any access to software and so I used the IRS free file system where you have to go line by line and enter numbers and it doesn't do much of any math on your behalf, to the point where I forgot to include personal exemptions and thus got a check from the IRS months later because of my math error. Anyway, this relative had a small amount of qualified dividends, such that 15% of the amount was at least $1, but that subtracting the number from taxable income would not change the ordinary income tax because it was being calculated by tax table. So if you follow the worksheet (the simpler one for just regular capital gain and QD, but the same thing is done on the more complicated one), you calculate a tentative tax of $1 + your previously calculated ordinary income, meaning that the worksheet would find that by using capital gains rates your tax would go up, and since this can't happen, it takes the minimum of your tax if all your income is ordinary and the calculation at capital gains rates.

Was being a new CPA helpful in leading me to do this? Not really. This stuff is fairly obscure and not exactly something that gets covered with any particularly emphasis in school or in CPA review materials. I took and passed the CPA exam several years before I could manage to find a job because of my personality issues with Asperger syndrome, so it's not like I was immediately out of school and fresh from studying. What did help was my unrelenting questioning of authority on purely factual matters, and a nearly encyclopedic knowledge of the laws as they affect the types of clients I am called on to work with at this firm, and the ability to comb through the Internal Revenue Code and understand it, which are things my Asperger tendencies accentuate compared to the general accounting profession. If this involved something with respect to the new laws regarding foreign operations and base erosion (or whatever), things that I have only passingly read about, there's little hope I would have found it. But given that one of our major clients is a real estate investment group, I'm well aware of how 1250 gain works. I only looked into it more simply because I thought the tax on an individual who sold some rental real estate seemed too high, and I peeked at the worksheet in question and noticed the issue. If I hadn't had that feeling that the tax was too high, I wouldn't have thought to look. I admit that part of the reason I checked though was that I had already recognized the potential problem there was with moving ordinary tax rates between 15% and 25% when it came to 1250 gains, but my assumption was that the IRS would handle it correctly, or even more likely that Congress was the ones who screwed it up among the two. I was absolutely shocked to find out the IRS actually implemented something like this incorrectly, and that whoever wrote the new legislation correctly took into account the issues there were with the change in ordinary tax rates.
 

#28
Chay  
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glowacks wrote:It was absolutely the hardest thing I have ever done as an accountant. I do not fault other people used to the IRS being right all the time for not taking the time to research this.

I have to say, section 1(h)(1) is the only section I've read in the Code so far that I'm unable to comprehend. I know what the outcome is supposed to be, but I lose track of what all of the subparagraphs are saying by the time I get to the end.

About the IRS - I'm not sure if you know this or not, but they are wrong or unclear about a lot of things all the time. This includes plain language that they insert into their instructions and publications. Just today I stumbled on this example from Publication 504:

Divorce or separation agreements after 2018. Amounts paid as alimony or separate maintenance payments under a divorce or separation agreement executed, or changed, after 2018 won't be deductible by the payer. Such amounts also won't be includible in the income of the recipient.

This statement is contradicted not only by section 11051(c) of the Tax Cuts and Jobs Act, but also by another IRS statement about the issue in "Topic Number 452 - Alimony". Both of these sources confirm that changing a divorce agreement only affects the deductibility of the payments if the modification expressly states that it does.

glowacks wrote:However, the "sanity check" at the end I already knew about for a different reason: personal experience preparing the worksheet by hand on a relative's return.

I think this experience will serve you well in the profession. Personally, I was never very involved in taxes before entering the profession and there's a blind spot when it comes to knowing about some things (the worksheet, for example) that your average intelligent taxpayer might understand.

glowacks wrote:I only looked into it more simply because I thought the tax on an individual who sold some rental real estate seemed too high

This is the real accomplishment. Any number of contributors on this forum could have slogged through the other work that you described, but how many of us could really say that we could have looked at the number on line 11a of Form 1040 and thought that it "seemed too high"?
 

#29
Nilodop  
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Fascinating explanation. I suspect that, over the years, you'll find one or two other mistakes that most of us might miss because we have come to trust the software. Your approach is a welcome one.
 

#30
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So my boss and I went on the practitioner hotline to call about the letters two of the affected clients have received and serendipitously got a guy who was somewhat in charge of the issue there (I don't know the details) or at least had just been to meetings about this, and was quite happy to talk to some people who were actually on the other side of the issue, as most people were calling about why they shouldn't amend their returns if they shouldn't have paid as much tax. Apparently despite the worksheets being updated, it's not entirely updated at the IRS and that such an amendment filed now would be rejected with a math error. So perhaps part of the delay is trying to figure out exactly how they are going to be fixing this issue. As rare as the problem is overall, the number of people affected is likely in the thousands.

He also claimed that they knew about it at the IRS around the same time, but I don't know if I'm the one who tipped the IRS about it or if it was discovered independently. My boss says I'll never find out if I was the root cause of this change or if they found out about it from numerous independent sources. The fact that Thomson Reuters completely misunderstood my issue at first indicates they were not aware of it until I brought it to their attention, but I haven't heard anything from them that would confirm this. I would just like to know just how rare it was for someone to have discovered this mistake independently, as apparently there were no professionals that did made it known to the wider professional world prior to the Ultra Tax update. The fact that it was in an Ultra Tax update that we first heard about, which is what I work on, and not from some other software provider, suggests to me that the people at Thomson Reuters were heavily involved in the discussion of this issue with the IRS such that they had a solution ready to go before it was official, and as I mentioned, given my interactions with their support team, I almost certainly was the first to mention the issue to Thomson Reuters.

Maybe I should just stop caring about what sort of role i played in this, but it would nice for me if I knew I was a major factor in getting this fixed, just to know that at least once in my life I played an important role in something that affected thousands (probably) of people, just by doing my job as best as I could. If I was just another cog in the wheel of getting this moving, then it would be just the same as everything else I do - maybe better than average, but it didn't really matter that it was me and not someone else.
 

#31
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Spell Czech wrote:So you two are saying that everybody with a kernel of reading ability and at least a two-digit IQ should recognize immediately that "Your capital gains tax is based on your regular tax bracket, while your unrecaptured Section 1250 gain is [taxed at] a flat rate," - as one source has written on its website - is simply wrong, incorrect, misstated, and should be disregarded. Which part of it?


I found that quote on a website when looking for whether anyone had actually figured it out before. My interpretation was that they had studied the worksheet the IRS gave and explained how the calculation worked based on their understanding of what the worksheet did, without having bothered to read the Code. However, it's quite clearly a flawed outlook anyway, because this issue *only* affects people in the 22% and 24% brackets. Those in the 10% and 12% brackets had it taxed as ordinary income the entire time, and those above the 24% bracket had it taxed at the "flat" 25% rate the entire time.
 

#32
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One of my clients in the 22-24% bracket with $100K of 1250 recapture and another $100K of cap gain was affected by the incorrect IRS Schdule D worksheet. The IRS just issued him a $1849 refund(plus interest). My Proseries sw with the corrected WS shows a $2377 refund is due. Now preparing a 1040X(which IRS said I did not have to do) for the additonal $528.
Has anyone else had affected clients who received a refund and was that refund correct?
 

#33
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I just found a client effected by this, unfortunately they are going to owe about $1,800.

In a nutshell about $45k that was previously taxed at 25% (u1250 gain) will now be taxed at marginal rates (dropping to 24% bracket). But that means that $45k that was previously taxed at the 15% LTCG rate will now be taxed at the 20% LTCG rate. So the net change will be 4% higher taxes on the u1250 gain.
 

#34
Jake  
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Q. Tax Monkey: In this circumstance is there any duty to amend?
 

#35
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We had a client who was issued a refund with no explanation. We called the tax practitioners hotline and the IRS could not explain why the refund was issued. We recalculated the return (Prosystem Fx) and the change was due to the Schedule D tax worksheet and the recalculated return agreed to the refund issued.
 

#36
Wiles  
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TaxMonkey, how did the 45k move into the 20% bracket? Taxable income didn’t increase?
 

#37
jon  
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There was no explanation with the refunds that were sent out like 9/29/19 - the IRS announced they were in the mail. I had a couple call, but there should have been more. The IRS said do not amend they were calculating.
 

#38
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We had a client who was issued a refund with no explanation. We called the tax practitioners hotline and the IRS could not explain why the refund was issued. We recalculated the return (Prosystem Fx) and the change was due to the Schedule D tax worksheet and the recalculated return agreed to the refund issued.


Did the client have a lot of unrecaptured 1250? (What part of the worksheet triggered the refund)
 

#39
Anderly  
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The client had a $19,000 their capital gains that were taxed at the 25% rate when those capital gains would have been taxed at the ordinary income 22% regular tax bracket. The refund was 3% of the $19,000.
 

#40
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Client finally got a notice after receipt of a $1849 check saying they made a Schedule D error and were refunding $1849. Notice came after we filed 1040X for additonal $528. Our 1040X shows receipt on 10-16-19 but no adjustment yet at IRS.gov . Client called automated account line on 10-30-19 and computer indicated $528 check will be mailed. Would you say the 1040X tripped the additonal $528 refund or that IRS on their own figured they made an error on the first refund and then issued a second refund?
 

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