Every year we get a lot of questions about 1099 delivery, which used to be a very straightforward process, and now is seemingly anything but.   Advisors generally just sit back and weather the storm, answering calls as they come in, and trying to keep up. We have been doing the same, but I thought it was worth doing a quick post about 1099’s.

The old rule of thumb that 1099’s get sent out in January is no longer the simple rule that it once was. 1099’s are not really that simple anymore, period. First, there are different kinds of 1099’s with different deadlines. Setting that aside, the real issue with potential 1099 delays in our world is dividend reclassification.   Dividend issuers report dividends at the time they are paid, and custodians all over the industry make a classification decision on their recordkeeping system recording the dividend as “Qualified” or “Non-Qualified.” What does that mean? Under EGTRRA 2001 (Economic Growth Tax Relief Reconciliation Act) certain dividends were eligible for the lower tax rate generally reserved for capital gains. These are “qualified” to receive the preferential tax treatment. Without going into a lot of detail about how that determination is made, which is beside the point for our purposes today, we can just say that not all dividends get this treatment.

Custodians don’t actually know for sure what treatment to apply to dividends until the issuing party officially lets them know, and that information is often not available by the old (pre 2001) deadlines for issuing 1099’s. When the information comes through, the custodian sometimes needs to reclassify the dividends that they have already recorded, in such a way that the reporting is accurate for tax purposes. This obviously takes a little time. Now, 1099’s are issued in waves as that reporting becomes available, and corrections are fairly common. The last major wave of corrections often does not get sent until sometime in early April.

This has been going on for some time, Here is a link to a New York Times article from 2006 which talks about this issue. While the IRS is out there every year, telling us all how quickly they can respond to early filers, the reality is that for many of us, our tax documents are not going to be ready in time to do that.

With a couple of exceptions, all of the 1099’s for our clients have been sent, and we are not anticipating any further corrections this year (which does not mean that there will be none). There is a list of securities that are still expecting to reclassify, and only a few of our clients hold any of those. So, other than a “surprise” reclassification, it looks like that issue is behind us for the year.