An Update on 1099 and W-2 Changes

By Chris Bevington, CPA

By now, most taxpayers have received, or will soon be receiving, all their 1099s and W-2s needed to prepare their 2011 tax returns.  For many, these important tax documents will remain in a pile, unopened until they’re delivered to their CPAs and tax preparers who’ll be given the responsibility of sorting through it all in the preparation of their client’s returns.  If this sounds like a familiar practice, this may be the year to consider breaking this annual “tradition.”

The more the IRS “simplifies” things to help in detecting the underreporting of income and gains, the more important it becomes for you as taxpayers to make sure the income that’s being reported is accurate and free of errors.  Make it a practice to open all of your tax documents right away to examine them for accuracy.  If 1099s, W-2s, or K-1s report something other than what your records indicate, try to get corrected forms issued now versus battling with the Internal Revenue Service’s document-matching systems later.  Also, read tips below for recent or upcoming changes to tax forms you’ll need to become familiar with as you try to make sense of it all.

For 2011, Form 1099-B, which provides information to you needed to report gains or losses in the sale of stocks and bonds, will include more details than ever before.  In addition to providing the usual date and proceeds from securities sales, the 2011 version also includes boxes that report the date you bought the security; your cost or basis in the securities; and whether your gain or loss is considered short-term or long-term.  There is a caveat, however.  The extra reporting is only required for stocks bought on or after January 1, 2011; mutual funds bought on or after January 1, 2012; and bonds and options bought on or after January 1, 2013.  Where reporting isn’t required, brokers are to check a box indicating “noncovered security.”  It is expected that larger outfits, like Charles Schwab, will calculate gains and losses on noncovered securities, (where basis is known), but will not report this information to the IRS.  With these extra reporting requirements, it’s only too obvious the importance of keeping good records to confirm what your broker is reporting to the IRS is accurate.

If you run a business that accepts credit card payments, or payments through a third-party network like PayPal, you need to make sure you become familiar with the new form 1099-K.  This form is designed to help the IRS track credit card and third-party network payments to you, but, unfortunately, only reports the gross amounts for such transactions.  It does not provide information relating to fees or charge-backs that likely reduced the amount you ultimately received.  Be prepared to provide your tax preparer with the records needed for such fees, so that the gross amount reported on form 1099-K can be easily reconciled to the amounts you actually received.  The good news is, the amounts reported to you on 1099-K are not being reported in 2011.  The bad news is, unless something changes, they will be being reported in 2012 and beyond.

And finally, don’t be surprised if you notice new information on your 2011 W-2s.  This new reporting will be represented by the code DD in Box 12, and is part of Obama’s health plan.  Companies with more than 250 employees will be required to report the value of health care benefits paid on an employee’s behalf, beginning with their 2012 W-2s.  And some employers have begun doing so with their 2011 W-2s.  What’s the purpose of this new reporting, you ask?  Left unchanged, this new law will make individuals without insurance subject to penalty taxes as soon as 2014.

The need to check tax documents received for accuracy, and to get a handle on the forms reporting income to you, has never been more important.  Pointing out the above changes only helps in supporting the importance of doing so.