1099 forms coming later

Some brokerages will delay mailings to comply with law on interest reporting

January 25, 2007|By Eileen Ambrose | Eileen Ambrose,Sun reporter

Now you might have another good excuse to procrastinate in filing your tax return.

Some brokerages are seeking more time to mail out Form 1099, which spells out a taxpayer's investment income in taxable accounts. These forms usually are sent out by the end of January.

This is just the latest wrinkle in what is shaping up to be a tax season where one of the best tax tips is: wait.

The IRS already warned taxpayers that three tax deductions were extended by Congress too late to be printed on this season's forms. The agency has told electronic filers to wait until Feb. 3 to submit returns if they are claiming one of those deductions, or their returns will be rejected. Paper returns claiming these deductions won't be processed until then either.

Now, delayed 1099s. That's sure to make for some unhappy taxpayers who like to file early to get their refunds.

"This will be a problem for them. They're the ones that will be upset about it," said Bob Cassel, director of tax services for Baltimore-Washington Financial Advisors in Columbia.

A 2006 tax law required tax-exempt interest to be reported on 1099s, and at least three of the five largest brokerages have told the IRS they need more time to do that accurately, said Patricia McClanahan, director of tax policy for the Securities Industry and Financial Markets Association.

It's not unusual for brokerages to ask for a 1099 extension, but often they end up not using the extra time, said Travis Larson, a spokesman for the securities industry group. This year will be different, he said.

Extensions can last 30 days, although brokerages don't expect to take that much time, McClanahan said. Morgan Stanley, for instance, told its clients that it will mail out 1099s between Feb. 5 and Feb. 9. It plans to ask for an extension every year.

The requirement to report tax-exempt interest was intended to help the IRS verify income that could be subject to the alternative minimum tax, McClanahan said. The AMT, created decades ago to make sure that the rich don't avoid paying taxes, doesn't allow the same deductions as regular income tax.

Typically, tax-free interest on municipal bonds issued to finance a private project, such as a stadium, is subject to the AMT, Cassel said. Small investors are likely to earn this tax-exempt interest through a mutual fund or a real estate investment trust.

Wachovia Securities also has received an extension from the IRS, although for a different reason: It says reporting dividends on 1099s has become so complex since a 2003 tax-law change that it will probably will seek an extension every year.

Wachovia expects to mail out its 1099s by Feb. 20, said Julia Flenner, a first vice president.

Since the 2003 change, all dividends are no longer taxed the same way, and investment companies must separate dividends that qualify for more favorable tax treatment from others.

That has led to a big increase industrywide in the number of corrected 1099s that brokerages must send out. One benefit of the delay is that 1099s might be more accurate the first time around, experts said. Theresa Bandell, an accountant with Stegman & Company in Towson, said her firm usually waits to prepare returns of clients with large brokerage accounts. "We usually wait to make sure amended 1099s don't come in later," she said.

eileen.ambrose@baltsun.com

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