Corrected Broker 1099s: ‘Tis Better to Extend than to Amend

Bridge_Wallpaper_by_tonvanalebeekWith the advent of IRS’ new 1099-B matching rules requiring brokerage firms to report “covered” and “non-covered” securities beginning in 2011, a new standard industry practice has developed:  corrected 1099s from brokers received long after the April 15th deadline has passed.

If you are an investor, you are now experiencing the headaches and hassles of dealing with these corrected forms.  One problem is that you have no way of knowing whether or not the 1099s you have in hand now will end up being the final ones for the year.

For this, and other important reasons, we recommend that our investor clients simply extend their returns each year, which allows another 6 months to receive and process the corrected forms.

By extending your tax returns, you’ll also solve a few other problems as well:  extensions are, by far, less costly to prepare than are amended tax returns.  Amended returns must be prepared by hand at both the federal and state level, and they require special attachments that are specifically labeled.  They are also “hand-processed” by IRS and require more people-power on their end as well.  Extensions can be e-filed with IRS, and most states accept IRS’ extension, so there’s no action required except to pay any tax due.

By filing an extension, you help to reduce the problem of “tax season compression” – especially bad this year due to the late start caused by Congress’ fiscal cliff debacle.  With less time to prepare returns, and data changing even as the returns are being processed, the risk of errors and omissions increases dramatically.  Even good CPA firms with great reputations may find themselves cutting corners in the quality control department in order to meet a client’s demand that the returns be completed by the deadline.

Another good reason to extend your tax returns is that sometimes taxpayers will receive an unexpected K-1.  This can happen if your broker decides to invest in publicly traded partnerships, or in private equity investments.  You’ll get a K-1 even if you only owned the units for a brief period of time during the year.  And,  receiving even a small inheritance from a distant relative can trigger a K-1 form from the estate that you don’t even know you are going to receive…until you receive it.

Since partnerships, estates and trusts can all file extensions, this delays the arrival of any related K-1s.  Estates of decedents are not required to select a calendar year end, so their filing deadlines can occur anytime throughout a year.

Some of our clients are reluctant to extend their returns because they have heard that this increases their risk of audit.  Nothing could be further from the truth.  There is absolutely no relationship between returns selected for audits and whether or not an extension was filed.  What CAN trigger an audit, however, is the filing of an amended return.  Since those are looked at by human beings at the IRS, and not by computers, there’s more of a chance that something will catch the eye of the person processing the amended returns.

So, not only will you save tax preparation fees by extending your returns, you’ll be making a smart move to lower the risk of errors and omissions on the originally filed return, and you’ll be eliminating the need to file an amended return if corrected 1099s or surprise K-1s arrive after the April 15th deadline.


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