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IRS Form 1099s may be late this year. Here's what to do.

Consumer Reports News: January 27, 2011 02:37 PM

Early birds take note: If you expect to report a lot of your income on 1099 forms, you might want to wait until April to file your return. That’s because some of those 1099s might be corrected and re issued well into the tax-filing season.

Investors get 1099s each year from mutual-fund companies and other businesses that provide financial services. There are many variations, but the most likely ones you’ll receive include Form 1099-DIV, which is used to show dividends received in the previous calendar year; 1099-INT, which reports investment interest income; and 1099-B, which reports the sale of stocks or mutual funds. Copies are sent to the Internal Revenue Service, which matches the reported income with your tax return.

Updating more forms

The 1099 forms are supposed to be sent to investors by Jan. 31. But about one of eight has to be corrected, according to some reports. That’s double the number of revisions from 10 years ago. The corrected 1099s might not arrive until even after the April 15 deadline.

The delays are a result of recent changes in tax law. Form 1099-DIV now reports both “ordinary” dividends and “qualified” dividends; the latter have a lower income tax rate than nonqualified dividends. Form 1099-INT now reports tax-exempt interest and specifies the amount that’s “private activity” interest, which is subject to the alternative minimum tax. And for tax year 2011 and beyond, 1099-Bs will be expanded to include your cost basis for the investment you sold and whether the gain or loss is short-term or long-term.

Mutual-fund companies and other financial firms get information from multiple issuers of stocks and bonds. Then they break out the different types of dividends and interest on the 1099s that they send to investors. Some forms mailed in time to meet the Jan. 31 deadline have to be revised because information that arrives late requires a correction.

Putting off filing

One way to deal with the problem of corrected 1099s is to delay filing your tax return. Wait until just before the April deadline, even if it means delaying your tax refund for a few weeks. If you receive many late 1099s, you can request an automatic six-month extension by filing Form 4868. You’re required to estimate any tax due and pay it by April 15.

“As long as you have covered at least 90 percent of your current year’s total tax liability by then, you won’t owe any penalties,” says Sandy Soltis, a tax partner at Blackman Kallick, an accounting firm in Chicago. “Alternatively, you’re safe if you have paid 100 percent of your prior year’s tax or, if your adjusted gross income was more than $150,000, 110 percent of your prior year’s tax.”

After requesting a filing extension and paying the appropriate amount of tax, you can file your return any time until Oct. 15 and include investment income reported on the corrected 1099s.

Amending your return

What if you get a corrected 1099 after you filed your tax return? Compare the revised numbers with the ones you used to determine how your tax liability is affected. If the change is modest, you can wait for the IRS computers to pick up the discrepancy and send you either a refund or a bill for the extra tax.

If the change in your tax obligation is meaningful—or if you’d just rather not deal with any kind of IRS examination—you can file an amended tax return using Form 1040X. Pay any additional tax owed as soon as possible to limit interest and penalty charges, which start accruing from the original due date of your return. If you find that the corrections result in a larger refund, the IRS recommends that you wait until you get your initial refund before amending your return.

This article appeared in the January 2011 Consumer Reports Money Adviser.

   

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