Monday, May 22, 2006
In a pair of identical private letter rulings released on Friday (200620018 & 200620019), the IRS exercised its discretionary authority to permit a taxpayer to make a late election because it found that the taxpayer had acted reasonably and in good faith in relying on tax preparation software which the taxpayer later discovered did not adequately handle a specific tax provision.
The issue concerned the election to treat qualified dividend income as investment income under §§ 163(d)(1) and 163(d)(4)(B):
Taxpayer timely filed Form 1040, Individual Income Tax Return, for Year 1. The return was prepared using a computerized tax return preparation software program sold to the general public. Taxpayer's return included Form 4952, Investment Interest Expense Deduction. It is represented that the tax return preparation program permits a taxpayer to elect to include all of the taxpayer’s qualified dividend income in investment income. The software program does not calculate the optimal amount of qualified dividend income the taxpayer should include in investment income and does not advise the taxpayer that the software program does not calculate this optimal amount. Instead, a taxpayer using the program was required to compute this amount and manually enter it into the software program. It is represented that Taxpayer did not realize that the software program did not compute the proper amount to include in investment income and merely elected to include all qualified income in investment income on Form 4952 for Year 1.
The IRS accepted the glitch in the tax preparation software as an adequate excuse enabling the taxpayer to file a late election:
The information and representations made by Taxpayer establish that Taxpayer acted reasonably and in good faith with this request.