SAN FRANCISCO – Thanks to a new reporting requirement that became law last year, more brokerage firms may delay until February mailing Forms 1099 to reduce the number of corrections they're forced to send later, an industry trade group said Wednesday.
"This year we have many of the largest brokers deciding that they're going to ask the IRS for permission to send out their 1099s a little later than the Jan. 31 date and send them out instead in February to try to help investors," said Patricia McClanahan, vice president and director for tax policy at the Securities Industry and Financial Markets Association, in a telephone conference with reporters. Forms 1099 provide the information taxpayers need to report their investments.
"Brokers reasonably decided to apply for this extension for extra time to mail out their 1099s and sit back and wait for the first wave of corrected information to come in from mutual funds and real estate investment trusts and others, and wait to send out their first 1099s to customers," she said.
Morgan Stanley and Wachovia (WB) are among those planning to delay their 1099 mailings, McClanahan said, though she would not provide names of any other firms.
Still, the delays may be short. Morgan Stanley (MS) said it expects to complete its 1099 mailings by Feb. 9.
"In anticipation that tax-law changes will significantly increase the number of mutual funds that will be late in supplying their tax information, we applied for and received an IRS extension allowing us additional time beyond the Jan. 31 deadline to send 1099s to our clients," said Ted Jahn, executive director of client reporting for Morgan Stanley's global wealth management group, in an e-mail message.
"We will use just one week of the 30-day extension, which will give us enough time to capture the majority of this late tax information. This should substantially reduce the number of corrected 1099s we need to send, but we won't eliminate them entirely," he said.
The delay helps investors by reducing the chance they'll file their tax returns with incorrect information. Plenty of investors have received 1099 corrections in years past, forcing some to then file amended returns.
Increase in corrected 1099s
In fact, after 2003, when a major tax-law change reduced the tax rate on dividends, the correction rate jumped to 14 percent, from 5 percent to 8 percent in previous years. It's hovered between 11 percent and 14 percent since, McClanahan said, based on data SIFMA gathers from a survey of its members.
"We were hoping that was a one-time change," she said. But the double-digit level of corrections stuck. "Frankly, there is more and more [data collection] being compressed into the January timeframe, so corrections have remained in the 11 percent to 14 percent range ever since. Just last year it came in at over 13 percent," she said.
"You start taking a percentage like 13 percent or 14 percent and apply it to ... many millions: That's a lot of pieces of paper going out to customers," she said.
And the mid-2006 tax-law, in which Congress decreed the 1099 form should include tax-exempt interest, may cause more corrections, hence prompting brokers to seek IRS approval to delay 1099 mailings, McClanahan said.
While such interest is tax-exempt under the regular tax code, it's often taxable for taxpayers who fall into the alternative minimum tax.
"The IRS and the government wanted that change in the law so they could enforce the AMT," McClanahan said.
The delayed mailings are most likely to affect investors with taxable investments in mutual funds or real estate investment trusts, plus those with tax-exempt interest, McClanahan said. But if the latest tax-law change "delays the mutual funds getting their basic information out, it probably could affect the investor that doesn't have any tax-exempt interest."
IRS sets new filing deadline
Separately, the Internal Revenue Service announced Wednesday that, thanks to a new Washington, D.C. holiday, taxpayers nationwide have until Tuesday, April 17 to file their returns.
"This year, taxpayers have additional time to file and pay beyond the traditional April 15 deadline," said Mark Everson, the IRS commissioner, in a press release. "As we always do, we encourage taxpayers to get an early start on their taxes to make sure they have plenty of time to accurately prepare their return."
Until the announcement, the deadline was to be Monday, April 16 for most taxpayers (as the traditional April 15 deadline is a Sunday this year). But April 16 is now a legal holiday — Emancipation Day — in Washington and holidays there apply to taxpayers nationwide.
The IRS said in its press release that, "under a federal statute enacted decades ago, holidays observed in the District of Columbia have impact nationwide on tax issues, not just in D.C."
This means the entire country has the April 17 deadline, the IRS said. "Previously, the April 17 deadline applied just to individuals in the District of Columbia and six eastern states who are served by an IRS processing facility in Massachusetts, where Patriots Day will be observed on April 16."
Since the IRS printed most forms and publications before this announcement, you may see some forms or publications referring to a due date of April 16. Those forms are wrong.
Next year, the filing due date for most taxpayers will, once again, be the familiar April 15.
See the IRS's updated tax calendar (PDF document).
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