by Catherine A. Walsh, CPA, MBT
One of the most common issues that individuals struggle with during tax season is how to properly report income derived from investments in marketable investment products, such as stocks, bonds, mutual funds, and real estate investment trusts (REITs).
Making an innocent mistake on an income tax return for this type of income does trigger correspondence, audits, and deficiency notices from the IRS. These notices are fairly common because investment custodians are required to report annual taxable income to the IRS on various forms 1099, and the IRS uses these to match to what is reported on your return. If there is even a minor difference, a letter will be generated. This can occur long after you have filed your return. Generally, the IRS has three years after the due date of the tax return to assess additional taxes. No one likes to receive these notices and they take time to resolve. Taking these few extra steps during tax season may help you avoid receiving one in the first place:
- Make sure that you have received a 1099 for each investment account that held investments and generated taxable income, such as dividends and/or interest. If you had any sales of investments, make sure the custodian sent you a copy of Form 1099-B (this is the form custodians use to report the proceeds for each investment sale). If you are missing any of these forms, call your investment advisor or custodian to make sure they send you a copy.
- Make sure that the 1099s look accurate based on what was reported to you on your statements during the year. If you have questions, call the custodian and, if you have found a problem with the 1099, make sure the custodian corrects the 1099 and sends you that corrected 1099. This corrected 1099 is what you will use for the tax reporting.
- When you hold certain types of more complex securities, such as real estate mortgage investment conduits (REMICs), or collateralized mortgage obligations (CMOs), or even some mutual funds, there are often revisions to the originally-issued Form 1099. Many times these revised 1099s are not issued until after March 1st so, if you file your return prior to this date, you may need to amend the return later.
- Report the exact amount (you may round to the nearest dollar) listed on each 1099 form on your return. This applies to proceeds received on sales of investments, as well as interest and dividends.