Be Ready for IRS Notices

I received two emails today within about five minutes of each other. These emails are from tax preparers in North Dakota and New York. Each of the emails indicated that the IRS had sent notices to their taxpayers requesting additional information on how taxable income was computed.

The IRS computers were not able to match up taxable income on Form 1040 to what the return showed. The issue is that the IRS instructions indicate that Section 199A DPAD from a cooperative is simply reported as a deduction directly on line 10 (taxable income) of Form 1040.

The instructions do not tell you attach any type of worksheet showing how the number is arrived at, but simply subtract that number from other taxable income.

As you can imagine the Form 1040 does not foot, therefore, the computer is not able to add and subtract to the correct amount of taxable income, even though the IRS told us to prepare it this way.

This means that these tax preparers will now need to write individual letters to the IRS explaining how taxable income is computed.

In our neck of the woods we luckily (from a tax compliance standpoint) have very few cooperatives that passed out any Section 199A this year. Therefore, we are likely to receive very few of these notices, but we may get notices for other parts of the new tax law.

We will keep you posted.

  • Principal
  • CliftonLarsonAllen
  • Walla Walla, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.

Comments

HI Paul,
I follow your web posting religiously and find you to be very enlightening. I have received a letter from IRS on one of the very first farm clients I filed. IRS has disallowed the DPAD deduction. This is a hog confinement operation and no cooperative sales involved. Are we going to be bombarded with these letters for ALL types of DPAD deductions? Does IRS not have their software up to date to process these returns? Of course the first one I received need a reply by April 15th…great timing!

Paul, just received IRS notice here in Iowa from one of my clients with Farm income and taxable social security benefits. IRS adjusted the taxable portion of social security benefits wrong – to the clients benefit by excluding the DPAD from the calculation. Ugh. Oh well.

If I received a K-1 in the amount of $133,000 that number was placed under guaranteed payments but I am guaranteed nothing, it’s all production based as well receive no dividends. My question can I place this$133,000 under Qualified Business Income Deduction?
Thanks

Paul,
We have probably 750-800 clients that have the DPAD 199. Have not got a letter yet. What would happen if we got together and had a uniform letter that we could send back to the IRS. Just like one of their forms. If the IRS received a million letters that were very simpler would that get their attention.