New requirements and old challenges have caused several mutual fund companies to delay sending their 1099 tax forms to investors until after the Jan. 31 deadline, according to Kiplinger.

Edward Jones, Merrill Lynch, Morgan Stanley, and Wachovia Securities are among those who have requested an 30-day extension for sending shareholders the tax forms, which reflect investment interest, gains (or losses) and other income, in order to avoid having to send corrected forms later.  More than 13% of the 1099s sent for tax year 2005 were later corrected and resent.

For taxpayers, the danger of using a faulty 1099 is overpaying or underpaying the federal government, in addition to the hassle of filing an amended tax form closer to April 15th.

On the other hand, some investors find having to wait longer for tax forms a nuisance, especially if they prefer to file early, expecting a refund.

Mutual funds tend to send more corrections than other types of securities, simply because as a basket of stocks, calculating the various gains and losses is complicated, and if even one of the underlying holdings misstates earnings, the entire fund’s calculations are skewed.

Complicating the issue further is the 2003 change in law that distinguished between “qualified” corporate dividends, which are taxes at a 15% rate, and their unqualified counterparts, which are subject to as much as 35% tax payments. 

New this year is a requirement that 1099s reflect tax-free interest, separate from interest that is taxed. In the past, investors only saw an aggregate number.

This is especially critical if any of the interest earned might subject the shareholder to the alternative minimum tax.

Obtaining and reporting the data in this way has proven time-consuming for many funds.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.