Probably the two most important lines in the IRS Form 1040, "individual income tax return", are line 43, "taxable income", and line 44, "tax". Form 1040 instructions instruct taxpayers that they must use the tax tables to determine their tax from their taxable income.
Publication 17, "your federal income tax", instructs taxpayers with qualified dividends and capital gains to use the "qualified dividends and capital gain worksheet". It also instructs taxpayers not to include the worksheet with their tax return.
There's the rub! The tax figured using the qualified dividends and capital gain worksheet does not equal the tax obtained from the tax tables using line 43, "taxable income". catch 22. a built-in discrepancy. One would think that the IRS would be smarter than to ask taxpayers to submit their tax returns with such an obvious built-in discrepancy.
To remedy this obvious discrepancy for our 2015 tax return, we entered the reduction in taxable income from the qualified dividends and capital gain worksheet on line 28, "other miscellaneous deductions", schedule a, "itemized deductions". We clearly annotated the deduction on line 28, schedule a, as "qualified dividends and capital gains worksheet".
A few months later we received a tax refund in the mail for exactly the same amount as shown on our "qualified dividends and capital gain tax worksheet". The deduction in tax had been double-counted. We immediately wrote the IRS informing them of the mistake.
After months and several "we need more time" letters from the IRS, we finally got a response--the IRS said that the refund is not a mistake.
We wrote the IRS informing them again that the refund is a mistake and that we have not and will not cash the refund check.
After several more months and several more "we need more time" letters, we got another letter from the IRS
- instructing us to void and return the refund check (which we did)
- contained erroneous calculations saying that we had paid $450 less tax than we actually paid (shown clearly on page 2 of our form 1040)
- informed us that we owe an additional $450 plus interest for our 2015 federal income tax
One would think that the guardian of the treasury wouldn't be so stupid. If the IRS:
- doesn't know the tax that we paid in 2015 (that is shown clearly on our 2015 form 1040)
- has an obvious built-in discrepancy in the form 1040
- can't follow their own forms and instructions for our simple tax return