Did you receive an unexpected tax refund from the IRS this fall? If your 2018 return was filed before May 15th, 2019, it might be due to an IRS error regarding the new tax code.

On the 2018 Schedule D worksheet, the IRS made a mistake in the instructions and calculations. According to the IRS press release, “the tax calculation did not work correctly with the new [Tax Cuts and Jobs Act] regular tax rates and brackets for certain Schedule D filers”. Tax software companies follow the IRS guidelines when building the software for each tax year. In this case, the IRS simply misapplied the new tax law meaning that every tax preparation software was affected and incorrect.

While this is certainly unprecedented, it demonstrates a need for clearer and more concise tax law. The IRS was forced to send out thousands in refunds to affected individuals often out of the blue and without an explanation. In most cases, the IRS sent letters to affected individuals admitting and explaining the mistake, but these did not come until a few weeks after the refunds were received.

Luckily, only a small number of individuals were affected. By May 15th, the IRS had found and corrected the mistake. Although for us and a number of other preparers, clients with Schedule D’s had already been filed.

For the majority of affected returns, individuals were sent a refund. In a very limited number of cases, the miscalculation resulted in a higher tax obligation and thus a small bill from the IRS. None of our clients experienced a higher tax obligation, but a small number did receive refunds. At this point, all affected returns have been corrected, but the issue makes evident the flaws in adopting complex tax laws that have been rushed through Congress.