As we head into tax season, many of you have received tax reports – commonly referred to as “1099s” – from your investment firm.
The IRS requires that 1099-MISC forms must be mailed by January 31st, but issuers are not required to file copies of all 1099 Forms with the IRS until the end of February.
We frequently advise our clients to delay filing their taxes until March at the earliest. That’s because the tax code is so complex that errors are inevitable. As a result, investors often receive “corrected” 1099 forms after the February deadline has passed. This may result in a change in the tax owed. Those who use tax preparers or CPA firms may need to have their tax re-calculated, increasing the cost to the investor.
We note that Morgan Stanley has admitted to providing erroneous information to its clients.
Apparently Morgan Stanley’s reporting system sometimes generated an incorrect cost basis for its clients’ stock or bond positions, which threw off capital gains tax calculations following the sales of the securities, the paper reports. The errors affected a “significant number” of the firm’s 3.5 million wealth management clients for tax years 2011 through 2016, according to the paper. But around 90% of the under- or overpayments were less than $300 while more than half were less than $20, a Morgan Stanley spokesman tells the Journal.
It is always a good idea to check the accuracy of the statements you receive from your custodian. There may be erroneous or missing information. In many cases where securities were purchased years ago, the custodian does not have the cost basis of stocks or bonds that were sold. In those cases the investor is responsible for providing that information. If you do not provide that information, the IRS may assume that the cost basis is zero and tax you on the full amount of the proceeds of sale.
On a final note, many clients have asked us how long they need to keep records for tax purposes. The primary IRS statute of limitations was three years. But there are many exceptions that give the IRS six years or longer. Several of those exceptions are more prevalent today, and one of them has gotten bigger. The three years is doubled to six if you omitted more than 25% of your income. “Omitted” can mean to not report at all, or it can mean that the amount of income was under-reported by 25% or more.
If you have questions about your tax forms, or wonder where you can get assistance to determine the cost basis of securities bought or gifted long ago, give us a call.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.