§199A QBI Deduction on IRS-Prepared Substitute Return Not Allowed

Background—substitute return. In general, if a taxpayer fails to file a tax return, the IRS can make the return from its own knowledge and from such information as it can obtain through testimony or otherwise. (Code Sec. 6020(b)(1)) Such a return is commonly referred to as a substitute return.

When a delinquent return is secured after a substitute return has been prepared, the IRS will generally examine the taxpayer's records to determine the accuracy of the return unless it is impracticable to do so (based on necessary time, research, etc.) or it is not warranted. (Internal Revenue Manual 4.12.1.9)

Background—Sec. 199A QBI deduction. Code Sec. 199A provides a deduction to non-C corporation taxpayers of up to 20% of the taxpayer's QBI from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.

The memorandum points out that, depending on the taxpayer's taxable income, the QBI deduction is subject to multiple limitations including the type of trade or business, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Additionally, a qualified business loss or qualified publicly traded partnership loss carried forward from prior years must be considered.

Guidance. Effective immediately, because of the multiple limitations to which the QBI deduction is subject, while a taxpayer may be entitled to claim a QBI deduction on a filed return, the IRS will not allow the QBI deduction on an IRS-prepared substitute return.

If a taxpayer subsequently files a delinquent tax return that includes a QBI deduction, the IRS will consider the deduction in accordance with IRM 4.12.1.9.