The IRS recently owned up to errors in Schedule D processing. Many mutual funds annually report long-term capital gains, which represent profits from the sale of stock held over one year. In the past, these capital gains dividends were reported on Schedule D in order to take advantage of the lower capital gains tax rates. For 1999, the IRS changed the procedure and no longer required a Schedule D when all the capital gains were from dividends. Instead, a box on line 13 of the 1040 was checked to signify there were long-term capital gains taxed at the lower rate.

Unfortunately, this procedure hit a snag attributable to two IRS oversights. The first was the IRS failure to include the line 13 check box on Form 1040PC, a popular form of tax return utilized by tax professionals. The second is attributable to keypunch errors at the IRS Service Centers where the box was overlooked by IRS data input staff. In both cases, the IRS computers began issuing a variety of letters to the taxpayers requesting a Schedule D or refiguring the tax without the lower capital gains rates causing an increase in tax.

If you received any of these erroneous IRS notices, or any other notices, always contact your tax professional before responding. Never assume the notice to be correct.