I have a new client this year who has a joint account with her sister. The consolidated 1099 shows both names, but of course only has one Social. It contains interest, dividends, and sale of stock. They split all income on this acount equally. I know how to report nominee interest on the tax return (code N on Schedules B and 8949s to subtract out the part being assigned to the other sister). The sister who received the income is supposed to do 1099 INT, 1099DIV, and 1099B to report the nominee to the other sister and the IRS. But the sisters say they have never done that and have been splitting the income this way for the last 20 years with their former tax guy. The IRS has never said a word about it. Their previous preparer didn't even make note that it was nominee income, he just split all the numbers in half and put half on each return.

Here are my questions: Does the IRS really care if the nominee 1099s are  done? Do people usually do the forms or just do what these sisters have been doing? And is there any note or anything that I should attach to the return (not that anyone probably reads notes) to explain the nominess income if they don't want to bother doing the 1099s?

Thanks for any insight and advice you have on this.