Found mistakes on 1099-DIV. File for extension?

[Sojourner]

I'm pretty sure I know the answer to this, but wanted to get validation from this very wise, knowledgeable group.

In reviewing my tax documents today, I've discovered two non-trivial mistakes on one of my 1099-DIVs. The first involves the mischaracterization of some proceeds as ordinary dividends (non-qualified), when they should be "cash liquidation distributions". The reporting of these proceeds as ordinary dividends vs. CLD is costing me roughly $2,000 in additional tax. The other issue is the incorrect reporting of a short-term transaction as a wash sale. This one isn't so egregious in nature (only about $400), but I would like to discuss it with the brokerage and see if it could be cleared up before filing my returns.

I am due small refunds from both federal and state as things stand now, so I'm leaning towards filing for an extension to give myself time to work with the brokerage to get an updated, corrected 1099-DIV. Seems like this would be preferable to filing now and either foregoing the $2,400 or filing an amended return later, if/when I get a corrected 1099-DIV. Seems like a no-brainer to simply file for an extension, but please tell me if you disagree or if I'm missing something here.

 

[MarieIG]

I would file for the extension.

 

[Sunset]

I'd file now and get the small refunds. Then file an amendment when you have the proof needed.

Because:

• You may not get the proof you want. So taxes are done, refund in the bank.
• The proof may take longer than the extension time, then you are forced to file and amend anyhow.
• Doing amendments are not hard if you are using the tax software, just a couple of pages.

 

[Sojourner]

• You may not get the proof you want. So taxes are done, refund in the bank.
• The proof may take longer than the extension time, then you are forced to file and amend anyhow.
• Doing amendments are not hard if you are using the tax software, just a couple of pages.

Interesting points, definitely worth considering.

I do believe, with very high confidence, that I'm right about the "ordinary dividends vs. cash liquidation distribution" mistake. The only uncertainty there is, will my brokerage admit the mistake and issue a corrected 1099-DIV? And if they don't, would I then file my return by the October deadline using the accurate numbers which would then conflict with the "official but incorrect" 1099-DIV? Perhaps I'd need to consult with a tax professional on that.

One other thing I just discovered, to my chagrin. My tax software charges $20 to e-file an extension, whereas it's free to e-file my entire federal return!

 

[MarieIG]

https://www.irs.gov/pub/irs-pdf/f4868.pdf

Do you need to use your software to file? The form doesn't look too complicated.

 

[njhowie]

https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return

E-file Your Extension Form for Free

Individual tax filers, regardless of income, can use IRS Free File to electronically request an automatic tax-filing extension.

• Filing this form gives you until October 15 to file a return.
  • If October 15 falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day. Your return is considered filed on time if the envelope is properly addressed, postmarked, and deposited in the mail by the due date.
• To get the extension, you must estimate your tax liability on this form and should also pay any amount due.

 

[Sojourner]

https://www.irs.gov/pub/irs-pdf/f4868.pdf

Do you need to use your software to file? The form doesn't look too complicated.

True, but I always prefer doing things online vs. paper/mail/USPS. Turns out it can be done for free via IRS Free File (thanks, @njhowie). I guess H&R Block hopes their paying customers won't discover that.

 

[SecondCor521]

When you file the original return, you're signing that it's accurate. If you currently disagree with the 1099-DIV, that wouldn't be true. Up to you how much that might matter. If it does matter to you, then the proper course of action is to file for an extension.

I agree with MarieIG that the 4868 could be filled out by hand and mailed by next Tuesday.

If you are due a refund currently and would be getting more of a refund with a corrected 1099-DIV, then there should be no penalties or interest for filing late (after 4/18 but before 10/xx).

There is no way you're getting a corrected 1099-DIV in time to file on time, if you were wondering about that.

While Sunset is right that filing amended returns with software aren't hard, I would argue that a Form 4868, getting the corrected 1099-DIV and filing a single regular 1040 by October is easier overall (IMHO).

Whether to file with what you believe the correct numbers if the brokerage disagrees with you and refuses to correct the 1099-DIV is a harder question. I think I would probably try to talk with someone knowledgeable at the brokerage who understands investments and tax law, and debate it with them thoroughly. While it's possible their 1099-DIV is wrong, it's also possible that you are wrong about the tax treatment; I would keep that in mind.

I think filing with numbers that don't match the 1099-DIV would likely get you a computer matching love letter from the IRS and a bill for the $2400, because the IRS is going to assume the brokerage did things correctly. At that point, you'd get to decide if you want to have the debate with the IRS about the proper tax treatment. Which in the most extreme case, would give you the option of taking the IRS to tax court.

...

ETA: I'm not sure about the first issue you mentioned, but wash sales are pretty straightforward for most brokerages to report, and most of them do that correctly when they report them. If you want to discuss it here, we (me and @cathy63 and others) could probably help you understand why the brokerage's report of the wash sale is likely correct. And we could probably do it faster and more easily to save you the time and hassle of arguing that item with your brokerage and/or the IRS.

 

[Sunset]

Just wanted to clarify to OP.

I would file now with the paper work as it is, (possibly wrong). Signing it's correct is true as far as the current paperwork states so no moral/legal problem there.

Once you can prove via corrected paperwork a change, then file an amended return. Or after the brokerage fails to change the forms, be bold and file an amended return without proof and argue with IRS if they challenge your view.

 

[SecondCor521]

Signing it's correct is true as far as the current paperwork states so no moral/legal problem there.

Yeah, that's just not what the language says above where you sign. From 1040:

"Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete."

From Form 8879 (in case of e-file):

"Under penalties of perjury, I declare that I have examined a copy of the income tax return (original or amended) I am now authorizing, and to the best of my knowledge and belief, it is true, correct, and complete."

To be clear, I personally would not have a problem doing what you suggest in this scenario. I'm just pointing out the issue so that OP can make their own informed decision.

 

[Sojourner]

When you file the original return, you're signing that it's accurate. If you currently disagree with the 1099-DIV, that wouldn't be true. Up to you how much that might matter. If it does matter to you, then the proper course of action is to file for an extension.

I agree with MarieIG that the 4868 could be filled out by hand and mailed by next Tuesday.

If you are due a refund currently and would be getting more of a refund with a corrected 1099-DIV, then there should be no penalties or interest for filing late (after 4/18 but before 10/xx).

There is no way you're getting a corrected 1099-DIV in time to file on time, if you were wondering about that.

While Sunset is right that filing amended returns with software aren't hard, I would argue that a Form 4868, getting the corrected 1099-DIV and filing a single regular 1040 by October is easier overall (IMHO).

Whether to file with what you believe the correct numbers if the brokerage disagrees with you and refuses to correct the 1099-DIV is a harder question. I think I would probably try to talk with someone knowledgeable at the brokerage who understands investments and tax law, and debate it with them thoroughly. While it's possible their 1099-DIV is wrong, it's also possible that you are wrong about the tax treatment; I would keep that in mind.

I think filing with numbers that don't match the 1099-DIV would likely get you a computer matching love letter from the IRS and a bill for the $2400, because the IRS is going to assume the brokerage did things correctly. At that point, you'd get to decide if you want to have the debate with the IRS about the proper tax treatment. Which in the most extreme case, would give you the option of taking the IRS to tax court.

...

ETA: I'm not sure about the first issue you mentioned, but wash sales are pretty straightforward for most brokerages to report, and most of them do that correctly when they report them. If you want to discuss it here, we (me and @cathy63 and others) could probably help you understand why the brokerage's report of the wash sale is likely correct. And we could probably do it faster and more easily to save you the time and hassle of arguing that item with your brokerage and/or the IRS.

Thanks for this detailed reply! I was hoping you'd weigh in, since you gave me such good advice on how to handle my DF's missed RMDs recently. I will send you a PM to ask about the wash sale in more detail.

 

[Sojourner]

OP here. Just a quick note to say that I've been in touch with my brokerage, and they completely agreed with me about the "ordinary dividend vs. CLD" error. They are going to issue a corrected 1099-DIV within the next 2-4 weeks. So, looks like the best approach is definitely to file an extension. Thanks to all for the feedback and advice!

 

[jebmke]

https://www.irs.gov/pub/irs-pdf/f4868.pdf

Do you need to use your software to file? The form doesn't look too complicated.

The simplest way to file for an extension is to pay $1 for an extension using Direct Pay on the IRS site. It takes two minutes and you eventually get your dollar back.