Interest & Dividend Income with Joint Owners

[GTS1101]

I have a client who is on a joint account with her daughter that earns interest and dividends. They have agreed that every other year each one will report the interest on their own return. So my client will report it in 2007 and the daughter will report the income in 2008. The form 1099 for 2007 came in both names but only my client's social is on the form 1099. The IRS mailed my client a letter stating that she did not report the income and pay tax on it. The 1099 income was reported on the daughters return for 2007. I am assuming it is to late to do a nominee 1099 so do you suggest I write a letter to the IRS explaining the situation?

Thanks!
GTS1101

[erchess]

This is what I would do

I would prepare the nominee 1099 even though it is late. I would file it and I would prepare my client for a penalty and tell her that when the letter comes she needs to bring it to me so that I can seek to have it abated..

I would reply to the current IRS notice with the following:

A cover letter explaining everything
A copy of the form from the broker or bank with both names on it
A copy of the newly and lately filed nominee 1099
A copy of the daughter's Sch B (or if that was not filed a letter from her and a copy of her 1040 pg 1)

I would prepare the daughter for an eventual notice claiming that she did not tax herself on the money in question and assure her that if she brings it to you you will straighten things out.

You didn't say how long you have been doing the mother's return. If you have been preparing her returns without reporting the interest and without doing the nominee 1099s then you or your E&O policy need to pick up the tab for any penalties you cannot get abated and fix this mess without charging. Obviously if you are cleaning up a mess you did not make then you pay no penalties for them and charge your normal fees for the cleanup.

There is one other approach I sometimes try when, as in this case I am satisfied that the client owes either no additional tax or a specific amount of additional tax that is less than what the notice is asking for and yet the notice itself does not tell me what evidence I need to prove my facts. I will call up the number on the letter and explain the facts. Often the agent agrees that if my facts are proven my conclusion is correct and they tell me exactly what to send to whose attention to send it. What this phone call can do for me is two things. Number one the client feels more at ease and two sometimes the agent asks for something I would not have thought to send or tells me something I would have sent is not needed and either way time is saved.

Now maybe on Wednesday others will weigh in.

[taxmom34]

i have a client who has joint account with her mother also,and client's SS# is on 1099INT. i do client's return without the 1099 and write down what her refund is. then i put in the info on 1099 and give her the amount of refund. then i figure what mom should pay her for reporting the 1099 on her tax return. much simpler and easier way to handle it.

[BHoffman]

I have a few of these. My software creates a statement explaining that the 1098 or 1099 has been issued under another SSN and/or name/address. No questions so far.

I do not create any 1099 or 1098 forms for nominee transactions between family members. Might be wrong, and might be safer to issue them.

[Burke]

Somehow in this day and age with all the computer checking and reporting, it is easier to simply do it the way it is the least confusing to Brainiac. Proper way is to report under SSN on 1099, then subtract out 1/2 to nominee, and issue 1099 to that person. Or split the account and then each would have her own, unless there is some particular reason to have it in joint names.

[dsi]

Is it legal to alternate who claims the interest from one year to the next? Wouldn't it be more proper to divide it 50/50 each year?

[Davc]

Is it legal to alternate who claims the interest from one year to the next? Wouldn't it be more proper to divide it 50/50 each year?

No and yes.

[GTS1101]

Thanks!

Thank you all for your thoughts and ideas. My client never told me that she was splitting every other year with her daughter until she got the letter from the IRS claiming she did not report the interest. I am going to explain to her that they either need to split 50/50 each year or put all on her return and have her daughter reimburse her.

Have a great fourth!

GTS1101

[erchess]

I learned something

I did not know that there was anything wrong with alternating the reporting of joint income but I can see why allowing it would create an enforcement nightmare.Still does anyone have a cite for the rules on reporting income from a financial account held jointly by individuals who do not file jointly? I don't doubt personally that the rule is what we have decided that it is but the arrangement of this mother and daughter would make sense to a lot of lay people and I'd like to have a reference manual or an authority to back me up when I tell them they can't do things that way.

[OtisMozzetti]

is it legal?

...or put all on her return and have her daughter reimburse her.
...
GTS1101

Is it legal to shift 100% of the taxable income from an interest-bearing account to another taxpayer, such as another taxpayer who perhaps pays taxes at some lower rate, by giving or selling that other person 50% of the account as a joint owner?

Hint: "no!"

[GTS1101]

I agree

I agree with you that it is not legal to shift the tax burden to another taxpayer who pays at a lower tax rate. I don't believe though that is the issue with my clients. They are not trying to avoid taxes it is just the agreement they came up with to split it every other year.

After thinking about it and trying to find something in the tax code that would forbid what they are doing it is common sense that they couldn't split it each year. The reason is because each one of them owns a percentage of the investment account. So if it earns interest and one owns 40% and the other owns 60% of the account each would have to pay their own tax each year based on that percentage that they owned. They couldn't shift the whole 100% burden to the other taxpayer because the other person doesn't own 100% of the account. It only makes sense that you would pay tax on the percentage you own each year.

[Zee]

Is it legal to shift 100% of the taxable income from an interest-bearing account to another taxpayer, such as another taxpayer who perhaps pays taxes at some lower rate, by giving or selling that other person 50% of the account as a joint owner?

Hint: "no!"

I would agree, it doesn't pass the "smell" test. But, I'll keep reading to see why others think it's ok.

IMHO, the interest should be reported 50/50 each year. If one taxpayer receives the 1099, they should include the entire amount on one line of the Schedule B, and on a second line titled "nominee interest" with the name & social security number of the other taxpayer, the other 50% should be subtracted.

If the ownership is in some other ratio (that can be documented), I would allocate in the other ratio. Also, it might depend on the definitions of joint ownership in each state. My guess is there are different rules & definitions. In the absence of so agreement, or other documentation I think 50/50 would be the prevailing answer.

[Burke]

If the ownership is in some other ratio (that can be documented), I would allocate in the other ratio. Also, it might depend on the definitions of joint ownership in each state. My guess is there are different rules & definitions. In the absence of so agreement, or other documentation I think 50/50 would be the prevailing answer.

Legally, I doubt seriously the account would be split 60/40% if something were to happen to one or the other parties without a long, drawn-out process of documentation. Joint Tenants by the Entirety ownership is usually applied to spouses, and each owns 100%. In the case of Joint Tenants or JTWROS accounts however, each would own the proportion in connection with the number of parties on the account, i.e, 2 = 50%, 3 = 33.3%, 4 = 25%, and so forth. POD and TOD accounts do not give ownership rights to anyone other than the primary accountholder. It is just a means of transferring at death, like a beneficiary arrangement. Sometimes you cannot tell from the 1099 how the ownership is set up, as the 1099 will show whatever someone plugged into the computer software, whether it is right or not. And they can only put one SSN/EIN on the form. And then you have community property states, another whole ball game.

[Zee]

Legally, I doubt seriously the account would be split 60/40% if something were to happen to one or the other parties without a long, drawn-out process of documentation. Joint Tenants by the Entirety ownership is usually applied to spouses, and each owns 100%. In the case of Joint Tenants or JTWROS accounts however, each would own the proportion in connection with the number of parties on the account, i.e, 2 = 50%, 3 = 33.3%, 4 = 25%, and so forth. POD and TOD accounts do not give ownership rights to anyone other than the primary accountholder. It is just a means of transferring at death, like a beneficiary arrangement. Sometimes you cannot tell from the 1099 how the ownership is set up, as the 1099 will show whatever someone plugged into the computer software, whether it is right or not. And they can only put one SSN/EIN on the form. And then you have community property states, another whole ball game.

I would agree that any split other than 50/50, etc. would be unusual, but nothing surprises me any longer. If there's a written, legal, agreement specifying the ownership percentage that's what I'd use. I would also think that such an agreement should have been communicated to the bank, etc.

[erchess]

Minefield

To me the whole idea seems almost like a minefield.

How much money does each of us put in and take out and when do these events occur?

If the account contains different investments, which are mine, which are ours and how are these shared, and which are yours?

There are probably other questions I am not thinking of and there needs to be a contract spelling everything out.