True or false? A corrected 1099 form must mean your broker made a mistake.
False. While it's true that everyone, even a broker, is capable of a slip-up, if you received a corrected 1099, it's likely due to an income reallocation rather than a mistake. It happens more frequently than you might guess.
Let’s explain. When you receive a distribution from a security, it’s received as qualified or 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 about 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 funds are 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 1099 after filing your taxes. We feel your pain. Preparing your tax return the first time around isn’t usually a picnic. Filing a corrected 1099, potentially three years later, won’t be high on your list of favorite things either.
The upside? Most income reallocations happen before the April 15 tax filing deadline (April 17 in 2018). If you're 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. And if you're not sure how to file a corrected 1099, your tax advisor can certainly help you. 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 1099s after filing, you can prepare for the possibility by reviewing your original 1099s 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 17, please be aware that the IRS probably hasn’t received all of these notices by the tax deadline. The corrected 1099 deadline is the end of March, but some brokers will file for an extension. IRS Publication 1220 details what, when, and how brokers report tax forms.
TD Ameritrade clients can sign up for electronic delivery of tax documents and stop receiving paper documents.