IRS To Change Form 1040 To Improve Collection Of Tax On Business Income

by Mike Godfrey, Tax-News.com, New York

22 August 2002

The US Treasury Inspector General For Tax Administration (TIGTA) issued a report this week suggesting that the IRS change Form 1040 Schedule E to require taxpayers to separately report the original amount on a K-1 (the form which details an individual's share of profits, losses, deductions or credits from a partnership, S corporation or trust) and the amount by which they are offsetting that income on Schedule E.

This would make it easier for the IRS to automatically match information from Schedule E to information provided on Schedule K-1s. The IRS used to carry out this matching process manually, but recently announced that its new focus on electronically-submitted returns meant that it had ended a program where it matched manually-submitted K-1s to information reported on individual income tax returns.

TIGTA said the change would allow the IRS to automate the Schedule E and K-1 matching process and that it would make manual screening easier and more accurate.

The TIGTA report says that more than $850 billion in income would have been reported on K-1s for the 2001 tax year; since the IRS estimates that between 6% and 15% of taxpayers are omitting the K-1 information from their individual income-tax returns, this is likely to mean that billions in tax revenue is lost each year.

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