Development is looking into this issue. 

If the Income Taxes box is not checked on Line C of the State and Local Income Tax Refund Worksheet and it should have been then you would want to check that. 

If you are sure the full prior year refund should be taxable this year you can skip making the manual adjustment and just check the box below line 4 for "Use this worksheet to complete taxable refund amount? - If no, skip this Smart Worksheet. Total refund from Line 1 column (b) will be reported as income."