IRS embarrassed anew by unnecessary warning Agency overestimated number of taxpayers who failed to file Schedule D

May 24, 1998|By NEW YORK TIMES NEWS SERVICE

As if the Internal Revenue Service hasn't suffered enough embarrassment of late for overzealous collection practices and other abuses, the agency -- a stickler for accuracy on the part of taxpayers -- now admits that one of its figures is a whopping overestimate.

Early in April, the IRS warned that more than 1 million taxpayers who should have included Schedule D, the form for reporting capital gains and losses, had failed to do so in their filings for 1997. These filers could expect the agency to send their return right back to them -- without any claimed refund.

Such a large number seemed to confirm the difficulties that filers were having with the new tax laws, which required for the first time that capital gains distributions from mutual funds be reported on Schedule D. Previously, such capital gains could be listed directly on Form 1040.

Without a Schedule D, the IRS cannot tell which of five tax rates for 1997 should be applied to the gains; the proper rates depend on the type of asset, how long it was held and when it was sold.

The estimate suggested that a large number of taxpayers would have to resubmit their filings.

But the estimate "was a very seat-of-the-pants guess," said Donald D. Roberts, a chagrined spokesman for the IRS. "I have no confidence in the number."

The IRS posted the estimate on its World Wide Web site and included it in its electronic newsletter, Digital Dispatch, which is sent to a mostly professional clientele. The news also found its way into the Wall Street Journal last month.

Roberts, meanwhile, found what he called the "flimsy" basis for the projection -- an extrapolation of an analyst's experience with taxpayer correspondence on the subject -- and had the estimate removed from the IRS site.

But it was too late to keep the estimate from being picked up by Tax Notes, an authoritative publication in the field, and given fresh impetus.

As it has turned out, returns with Schedule Ds jumped this year through May 1, to 20.6 million, or 18.2 percent of all those filed, from 13.8 million, or 12.3 percent, the final tally last year, according to an IRS usage survey. This increase is in line with what the IRS expected, Roberts said.

The IRS still cannot provide a reliable estimate of the number of missing Schedule Ds, though Roberts indicated that the earlier estimate exceeds the realm of possibility. Thus, no outlandish number of taxpayers is likely to suffer delayed refunds.

Indeed, while its added complexity might well have proved a deterrent -- Schedule D swelled to 54 lines from 19 -- taxpayers benefited by slogging through it.

Previously, the only people who got a break from the 28 percent ceiling on capital gains were those in higher brackets.

But now the capital gains rate is lower across the board, Roberts noted, so those who did not comply "would have shortchanged themselves."

Pub Date: 5/24/98

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