Tax practitioners were in for a nasty surprise when they saw the instructions for the 2005 Form 1040. There, in absolutely unequivocal language, the instructions for Schedule D stated that the IRS was requiring that each disposition of a capital asset had to be reported on a separate line on the Schedule D (or Schedule D-1 if there were more dispositions than would fit on the Schedule D.)

Strictly speaking this was not a change. If asked, the IRS has always taken the position that it was technically incorrect to report merely summary information on the Schedule D while referring to an attached schedule that provided the details for each transaction. But these new instructions were a clear shot across the bow of those practitioners who had been attaching schedules.

This put tax return preparers in a difficult position. It would substantially increase the time and effort needed to prepare a return having numerous transactions while adding little value in the eyes of the client. On the other hand, not to follow the implicit instructions ran the risk of incurring preparer penalties and having the return deemed incomplete.

The AICPA immediately made informal contacts with high level officials at the IRS expressing our concerns. While we agreed that the IRS needed the details, we argued that presenting those details on a supporting schedule should satisfy that need.

We are pleased to be able to report that in response to our concerns the IRS issued the following statement:

...(T)axpayers may continue to use a substitute statement to provide all of the same information and in a similar format to lines 1 and 8 of Schedules D and D-1. They are not required to use the official version of Schedules D and D-1 to provide the details on each transaction . . . [but] the details of each transaction still must be provided with the tax return and not just upon request.

The IRS has informally clarified that they will accept attached schedules that include the four critical pieces of information for each transaction. The four are:

1. date of acquisition
2. date of disposition
3. basis
4. proceeds less transaction costs

Subsequent guidance from the IRS has clarified that attached schedules can be used for both electronic and printed filings.

We very much appreciate the IRS clarifying how it will accept Schedule D information, lifting the burden on tax practitioners during the busy filing season.

The two IRS releases can be found at the following URLs: http://www.irs.gov/formspubs/article/0,,id=109875,00.html http://www.irs.gov/businesses/small/article/0,,id=153349,00.html

Written by Tom Ochsenschlager, CPA
Vice President -- Taxation
American Institute of Certified Public Accountants