This story appears in the Feb. 12, 2012 issue of Forbes Magazine.
It’s that time of year when envelopes marked “Important Tax Return Document Enclosed” come in the mail, mixed in with the credit card come-ons. Open and scrutinize these W-2s, 1099s and K-1s right away. If they report more income than your records show, try to get corrected forms issued now to avoid a battle with the Internal Revenue Service’s document-matching computers later. Read the pointers below to avoid tripping over changes to the forms.
The 1099-B makeover
Both tax pros and financial service firms expect the new 1099-B, Proceeds From Broker and Barter Exchange Transactions, to cause mass confusion. The 2011 version, in addition to the old boxes for the date and proceeds from a securities sale, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale (one where you can’t claim a loss because you bought back the shares too soon). If your broker sends a 1099 composite report instead of a 1099-B, the composite must also have the new info.
Don’t be surprised, however, if some new 1099-B boxes are blank. That’s because the extra reporting is only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013. When reporting isn’t required, your broker should check “noncovered security” in Box 6. Note that an outfit like Charles Schwab, if it knows your basis on a “noncovered security” sale, will calculate your gain for you on the composite—but won’t send it to the IRS.
All this new info is supposed to help the IRS detect underreporting of gains while cutting paperwork for taxpayers. Right. Truth is, it’s now more important than ever to keep good records to make sure what your broker tells the IRS is correct. Retain monthly statements, year-end reports and trade confirmations, and annotate them as appropriate. Warning: If you sell only some of your holdings in a covered stock, the broker must calculate your gains using the first-in, first-out method—unless you designate another method before a sale settles. (For advice on how to find your basis on old securities, see p. 55.)
Tattletale 1099-Ks
If you run a business or sell something on the side and accept credit card payments or payments through a third-party network like eBay’s PayPal, watch out for the new form 1099-K, Merchant Card and Third-Party Network Payments. This form, too, is designed to help the IRS flag juicy audit targets. Unfortunately the 1099-K reports the gross amount paid to you, with no adjustments for fees or charge-backs, so it may not match up with the (possibly smaller) amount you report on your income tax return from such transactions. Give your tax pro records of fees and charge-backs to explain any disparity—annotated statements from the credit card company should do.
W-2 insurance scare
Employers with more than 250 workers must begin reporting on 2012 W-2s the value of health care benefits paid on an employee’s behalf. But some are already doing it on 2011 W-2s now in the mail. The amount appears in Box 12, using code DD. If there’s a big number there, don’t panic—it doesn’t affect your taxable income. The reporting is for the new “individual mandate” in Obama’s health plan. If that mandate isn’t repealed or found unconstitutional, a penalty tax on folks who don’t get insurance will be phased in, starting in 2014.
