February 09, 2021
If you are reading this article, congratulations! When it comes to filing tax returns, your mantra is: “Git-R-Done,” as Larry the Cable Guy likes to say. But, as you seek to finish up your tax return, you might find a fly in your soup. And that fly is known as Form 1099 – which you may be waiting to receive from LPL Financial. Here’s a little background on Form 1099:
This is a form that is generated when you take a distribution from a retirement account, such as an IRA or a 401k. The form lists things such as: the amount of distribution, and whether or not you withheld tax from the distribution. Or, in the case of a rollover, it may indicate that the distribution is a non-taxable event.
Form 1099 Consolidated
This is a form that is generated for non-retirement accounts. There is quite a bit of data on a Form 1099 Consolidated, and it includes multiple 1099 forms, including: 1099-DIV, 1099-INT, 1099-B, 1099-MISC, and 1099-OID. To make this easy to understand, going forward, I’ll refer to Form 1099 Consolidated, simply as Form 1099-C.
The IRS Battle and Reclassification
As it pertains to Form 1099-C, there is a type of “battle” that takes place between equity companies (such as mutual funds and REITs) and the IRS. And that battle is played out through Form 1099-C. For example, let’s say that a REIT company lists their capital gains in a manner recommended by their team of accountants. That information would then be transferred to LPL and LPL would issue Form 1099-C to you. But if the IRS disputes it, they might need to battle it out – so to speak. Not surprisingly, this battle has a legal name to it. It’s called reclassification. And if an equity firm has to reclassify, it results in a revised Form 1099-C through the broker dealer.
Now that you understand the issue at hand, here’s where it might affect you. Imagine that LPL went ahead and mailed Form 1099-C to you at the end of January. And as a result, you put the finishing touches on your tax return and filed it with the IRS. But then, a few weeks later, as a result of reclassification, LPL issues a revised Form 1099-C. It’s possible, if this came to fruition, that you might have to file an amended tax return with the IRS. Not fun, right?
Therefore, to try to reduce the instance of sending out revised Form 1099-C, LPL purposely invokes a delayed schedule for releasing them to clients. This is especially true for those of you who hold REIT positions in non-retirement accounts.
Form 5498 is delivered to investors who hold IRA accounts. It is NOT required to be turned in with your tax return. It’s more of an FYI to the government. You will receive Form 5498 in June – well after most have filed a tax return.
Here are some details on the release schedule from LPL Financial:
So, the moral of the story here is simple: Even if your tax return is all finished, consider holding off on submitting your tax return until the second week of March. I understand that it’s not preferable, because you may want to complete your return sooner rather than later. But it is prudent in order to reduce the chance that you might have to file an amended return.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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