Your 1099-B and Your Tax Return

11048105_sI always think it’s funny when people act like it’s a waste of money to pay someone to do their taxes. We pay people to fix our cars. We pay people to tend to our health. We pay people to install our home appliances. Why? Because messing up any of those things can cost us, at best, just money, at worst, our lives.
When it comes to preparing taxes, there is potential to make many mistakes. And those mistakes can cost a lot of money. Hence, those tax preparation commercials with the mounds and mounds of cash that represent the value of what goes unclaimed each year. But the purpose of our discussion today is not meant to convince you to go pay someone to do your taxes. No, our time together is better spent with me explaining how you can prevent some of those mistakes.
According to a survey completed by tax preparers, the most common mistakes they see when preparing tax returns are on 1099-B forms. A 1099-B is a form issued by a custodian at the beginning of the year with a summary of all of the stock and security transactions completed in an account over the prior year. Since 2011, custodians are required to collect cost basis data for those transactions and include that information on the 1099-B.
Information from the 1099-B relative to capital gains and losses gets listed on Schedule D and flows onto page one of Form 1040, the federal income tax return for individuals. Custodians are also required to send that same information to the IRS. The IRS compares the custodians’ filings to individual tax returns, looking for any inconsistencies that could point to unreported income. If any issues are identified, major delays can result in filing and critical revisions to an individual’s tax return may be necessary.
Custodians usually send these forms to individuals by February 15 and to the IRS by March 31. This gives people a month and a half to review the forms and identify and correct any issues before they cause any major problems. But oftentimes, such errors cannot be corrected quickly, as the custodians must make the changes and then resubmit them.
This is dangerous, not only because it pushes people closer to the tax filing deadline, but also because the longer a person waits to file, the larger the risk is of having his or her identity stolen and tax return filed fraudulently (and thereby having any associated refund directed to a fraudulent address).
Because these corrections have become time consuming, a new rule has given custodians a little leeway, in that if the form is off by less than $100, they do not need to issue a new, corrected form.
So what can you do to avoid problems with your 1099-B?
First, don’t file your return hastily. I’m not advocating procrastination here but make sure you have all of your information complete before you send in your return. As I tell my girls when I coach them on fielding a grounder, “Be quick but don’t hurry.” Hurrying causes mistakes and if you make a mistake, you must send the IRS an amendment on Form 1040-X. It is a paper form that often receives more IRS scrutiny than an electronic filing and it will likely delay your refund.
That being said, when you get your 1099-B, review it right away. (I find that for many folks in the later stages of their life and in retirement, the gains listed on this form represent the bulk of their total income.) Take a look at your cost basis, which is your starting point for measuring any potential taxable capital gain on the sale of an appreciated asset. The value of an investment at the time it is sold minus its cost basis equals capital gain. Cost basis is not always easily identifiable, particularly for assets that are inherited, received as a gift, or transferred from another account. So don’t delay in reviewing that information.
You also need to be aware of transactions that are called “wash sales.” If an investor sells a stock or a security at a loss and purchases a “substantially identical” position within 30 days, it is known as a wash sale and the loss cannot be used to reduce a capital gain on the security sold. Instead, it gets added to the basis of the replacement securities. So, when you sell those, your previously disallowed loss effectively reduces your gain or increases your loss on that transaction. Taxpayers must report wash sales to the IRS. Custodians are not required to report them, so it is the responsibility of the taxpayer to get it right before Uncle Sam comes knocking.
Lastly, if you do find an error on your 1099-B, try to get it corrected by the issuing custodian before the custodian files the inaccurate version with the IRS. If you are not able to do this, you must use the incorrect number on your tax return, and then use another form (because we all love filling out as many forms as possible), Form 8949, to enter the adjustment. If you use the right number but the custodian reports the wrong number, you are likely going to make the IRS’s computers upset, which is never good for you.
Taxes are never fun, but doing them correctly makes them a lot less painful than they could be. 1099-Bs can be tricky, even for professional tax preparers, so make sure you give them a little extra attention this year.
Be vigilant and stay alert, because your tax return deserves more.