The Parade of Corrected 1099 DIVs – What should you do with them?

Every year, many of our clients express displeasure about how they continue to receive “Corrected” Form1099s, even into late April. These corrected 1099s complicate and delay completion of tax returns, so people are understandably upset. We thought we might take this opportunity to explain why this happens.

The 1099 DIV is the IRS form on which your income from stock dividends, capital gains, cash liquidation, nontaxable distributions and foreign taxes are reported. The first set of 1099 DIVs are required by law to be mailed to clients of all brokerage firms, banks and insurance companies by January 31 of each year. This date is supposed to give all of us plenty of time to calculate our tax returns and file them by April 15th. Why then do we receive corrected 1099 DIVs even as late as April?

There are a number of reasons why Corrected 1099 DIVs must be mailed out:

  1. Foreign Taxes – Foreign companies do not have to report on the same schedule as the U.S. and this leads to late reporting and corrections.
  2. Mutual Funds – Frequently, mutual funds reclassify their payments between long-term gains, short-term gains and regular dividends, long after January 31.
  3. Nontaxable distributions (such as return of principle on a mortgage owned by a mutual fund) – Nontaxable distributions reduce your cost basis in your investment and do not affect your tax liability.

Is there a better way to do this? Of course! It would make more sense for the brokerage firms to send out the first set of 1099 DIVs in January and then wait until April 1 to send out one (and only one) corrected 1099 DIV, if that were necessary. But the IRS would have to issue new procedural regulations. All right, so we know now that Corrected 1099 DIVs are a fact of life. What do we do about them? We have four choices:

  1. Ignore them.
  2. Send them back.
  3. Stuff them in our neighbor’s mailbox.
  4. Compare them with the original tax return and see if a change needs to be made.

The correct answer is # 4, unless these nuisances are addressed to your neighbor! You should compare the corrected 1099 DIV with your original 1099 to see if any adjustments require you to change your income tax return, or amend the return you might have already filed.

Even now, after some pretty poor performance by foreign stocks in the past two years, reliable data still shows that owning some shares of foreign companies will enhance returns and reduce volatility. Accordingly, if you own a well-diversified portfolio that contains foreign equities, you are likely to experience the irritation of receiving a Corrected 1099 DIV.

It takes the IRS nearly a year to manually enter the changes shown on the 1099 DIVs into their document matching system. If you elect to ignore the corrected reports and make no changes to your tax return as it was filed, it is highly likely that the IRS will contact you only if the amendments result in a substantial increase to your tax liability.

The best solution is to prepare your income tax return as completely and accurately as possible and simply wait to file it until you are sure that you have no corrected 1099 DIVs or that the corrections do not impact your tax return calculations.