True or false? A corrected 1099 form must mean your broker made a mistake.
False. Although your broker is fallible, you more than likely received a corrected form because of an income reallocation. It happens more frequently than you might guess.
Let’s explain. When you receive a distribution from a security, it’s received as qualified/non-qualified dividends, return of capital, or long- or short-term capital gain distributions, just to name a few. However, when that amount was distributed, the true “taxability” may not have been known. Brokers are required to provide updated tax forms to tax filers within 30 days of learning there is a material change to tax reporting.
This is particularly common for regulated investment companies (RICs) and real estate investment trusts (REITs). Although the company pays the distribution one way, the tax advisors for the company may determine that the income should be taxable in a different manner. This could change an investor's dividend income into capital gain distributions or return of capital. Essentially, the income allocation and tax classification may change after it has been distributed to investors. Brokers are then required to make these updates on the investors' tax forms.
It All Takes Time
Securities income reallocation requires a change in the reporting based on material findings uncovered for up to three years. That means you may receive a corrected tax form three years after the fact. We feel your pain. Filing taxes the first time around isn’t usually a picnic. Filing an amendment won’t be high on your list of favorite things either.
The upside? Most income reallocations happen before the April 15 filing deadline. But if you are invested in RICs or REITs, you may want to consider filing for an extension no matter what, just to buy some time in the event of an adjustment.
Prepare for the Possibility
Filing taxes can be difficult, but getting an extension is relatively simple, and you have options. Take a look at the Extension of Time To File Your Tax Return page from the IRS. You can file an extension on your own, even if you use a professional tax preparer, which can potentially save some fees. Keep this in mind: the extension is for time to file your tax return; it does not extend the time to pay taxes, so read the form carefully.
Although there’s nothing you can do to avoid getting corrected tax forms, you can prepare for the possibility by reviewing your original 1099 thoroughly. Do you understand everything that’s listed? If not, there’s nothing wrong with asking your broker some questions. Just keep in mind that a firm is never able to guarantee that you won’t receive any more corrected tax forms.
For investors who receive multiple corrections before April 18, please be aware that the IRS probably hasn’t received all of these notices by the tax deadline. Brokers are required to file with the IRS by the end of March and some will file for an extension. IRS Publication 1220 details what, when, and how brokers report tax forms.