1099 Waiting Game
As financial firms postpone sending essential tax information -- for fear it includes errors -- investors may have to delay filing returns ... and getting their refunds. Is it a gamble these days to file sooner rather than later?
It's February. Do you know where your 1099 tax forms are?
By January 31, banks, brokers and mutual fund companies are supposed to provide investors the Form 1099 information reports they need to complete their tax returns. These forms show how much interest, dividends and capital gains distributions you should report on your tax return.
Row 0 - Cell 0 | Kiplinger Tax Center |
Row 1 - Cell 0 | The Kiplinger Taxopedia |
Row 2 - Cell 0 | Ask Our Tax Experts |
If you still haven't received the forms you need to do your return, you are not alone. Millions of taxpayers are in forced-procrastination mode because many financial firms got IRS permission to delay sending 1099s for up to 30 days. If you're among that happy majority of taxpayers who get refunds, delaying filing means postponing getting your money.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Banks and brokers aren't trying to cause you pain. In fact, they're trying to do clients a favor by not sending erroneous information that will have to be corrected later. Last year, more than 13% of 1099s issued had to be corrected. "We're talking millions and millions of forms," says a spokesperson for the Securities Industry and Financial Markets Association. Taxpayers who receive these forms and file returns based on faulty information may over- or under-pay their taxes and may have to file an amended tax return.
To hold down the errors in the first place, firms including Edward Jones, Merrill Lynch, Morgan Stanley and Wachovia Securities are delaying sending some 1099s. Other companies, including Fidelity and Charles Schwab, say they met the January 31 deadline. It's quite possible, then, that you have some of the 1099s you need and are still waiting for others.
What's going on?
The 1099 problem is most acute with mutual funds, which own a basket of securities. The fund must gather interest, dividend and capital gains information from each company and pass it on to shareholders, or, if the fund is held in a brokerage account, give the information to the broker who then passes it on to the client.
Two key issues are being blamed for potential errors this year.
One, which has been causing trouble since 2003, is the fact that the law now treats some corporate dividends differently than others. Complicated rules distinguish "qualified" dividends (taxed at a maximum rate of 15%) from nonqualified dividends (hit by a rate has high as 35%). If a company incorrectly reports the qualified/nonqualified breakdown to a mutual fund and then corrects it after the fund issues 1099s, corrected forms must go out to shareholders.
The other matter is new this year: A requirement that 1099 forms that show interest include information about tax-free interest and any portion of it that might be subject to the alternative minimum tax. Some funds are having difficulty gathering the necessary information from the issuers of all the bonds held in a portfolio.
Note: You don't have to worry about the 1099 snafu for investments inside an IRA or 401(k). Because income earned in those accounts is not taxed until you withdraw the money, 1099s are not issued for the annual earnings.
Should you wait?
If you're among the lucky taxpayers who have received all of your 1099s, should you file as soon as possible or wait to see if you get a corrected 1099 in the mail?
That's a good question.
You could play it both ways. Prepare your return using the information you have now, but wait a few weeks to file. If you use tax preparation software such as TurboTax (for which Kiplinger provides expert advice), you can plug in the numbers from the 1099 you have now and easily change the inputs if a corrected 1099 comes along later.
Or, you can file as soon as you're finished with your return, gambling that you won't get a corrected 1099, or, if you do, it won't matter.
One California accountant reports that her firm routinely ignores corrected 1099s because the differences in reported income are so small that it's simply not worth the trouble of filing an amended return. Remember, the tax-rate tables move in $50 increments, so it's possible a change in the amount of income reported would not affect your tax bill one wit.
If you file and then get a corrected 1099 that significantly changes your tax bill, you can file an amended return. If you use tax software, that's not an onerous task.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: The Dow Leads an Up Day for Stocks
Boeing, American Express and Nike were the best Dow stocks to close out the week.
By Karee Venema Published
-
Black Friday Deals: Are They Still Worth It in 2024?
Is Black Friday still the best day for deals? We share top tips for smart holiday shopping.
By Jacob Wolinsky Published
-
Two Consequential Tax Cases You May Not Have Heard About
The Supreme Court's decisions in these cases create uncertainty about challenging IRS regulations and guidance. Expect more litigation to follow.
By John M. Goralka Published
-
Sometimes It Pays to 'Blow the Whistle' on IRS Tax Evaders
Tax Fraud The IRS recently awarded three IRS whistleblowers $74 million. Here's why.
By Kate Schubel Published
-
The Big CPA Shortage Problem in Accounting
Career This once resilient accounting industry is cracking, as the labor force seems in dire straits. It’s also affecting the IRS.
By Gabriella Cruz-Martínez Last updated
-
IRS Skirts TikTok Ban to Sniff Out Tax Scammers
Tax Scams Social media scams caused thousands to file inaccurate returns. What does that have to do with TikTok?
By Kate Schubel Published
-
Who Does the IRS Audit the Most?
Audits The IRS has a $400K audit directive problem. Here’s what you need to know.
By Kelley R. Taylor Last updated
-
IRS Hauls Back $1.3 Billion From High-Income Earners
Tax Filing Certain income and wealth levels can trigger an IRS audit. Here's what you need to know.
By Kate Schubel Published
-
Incorrect ERC? IRS Points to Five New Red Flags
Tax Credits These signs could mean there’s an error in your Employee Retention Credit claim.
By Gabriella Cruz-Martínez Published
-
IRS Has No Set Plan to Replace Old Tech
IRS What could old IRS technology mean for your federal tax return and cybersecurity?
By Kate Schubel Published