About this time of year (and for the next month or so), you might receive a corrected Form 1099 from your broker. Despite presumably their best efforts it is common for some types of investments to make corrections, especially when it comes to allocating the fund income between dividends, qualified dividends, capital gain distributions, and nontaxable return of capital. So why does that happen and what can you do to avoid problems with the IRS?
It happens because mutual funds are complicated. A mutual fund is made up of lots of other investments, so before the mutual fund knows its own income for the year they need to receive that information from the various investments. Then the mutual fund needs to aggregate all of that information and give the info to your broker. Allocating everything between interest, dividends, qualified dividends, capital gain distributions, and return of capital is a complicated process. Then the broker adds up all of your mutual funds plus other investments and reports the information to you. If one entity along the way makes a mistake or one of the underlying investments make a change to their reporting, you end up with a corrected 1099.
If you have mutual fund investments or stock fund investments that have historically issued corrected 1099s, I would just recommend waiting to file your return until closer to April 15. You could also file an extension just to be sure you have the final 1099 before filing your own return. So what can you do if you already filed and received a corrected 1099? The IRS does not require you to file an amended return upon receiving a corrected 1099. Let’s be honest – often times the changes are so miniscule the tax impact is negligible. If the changes are material, then I would consider filing an amendment. If you do end up amending your return for some other reason, you should include the corrected 1099 information.