Reporting from joint 1099-B to separate returns

[RBGulrajaniCPA]

I have a client who just got a notice from the IRS for underreported income for 2022.  The brokerage 1099-B was for a joint account.  However, he and his wife divorced during the year.  So I reported half of the dividends, interest, and capital gains on each 1040 return.  Same with K-1s from a limited partnership.  I clearly marked (50%) on the Schedule B on each tax return.  What's the best way to respond to the IRS?  Is there a better way that it should have been reported so he didn't get stuck with all the taxes on the income? I use ProSeries Basic.

[Accountant-Man]

I always enter 100% on the person whose SSN is on the 1099, then "Nominee" out the amount reported by the other owner.

Sch B items are shown on the 2nd page of the Sch B entries, Section E for interest and Section D for dividends. Capital gain divs are a little hard to make sure you get right.

1099B is harder, but I enter 100% and enter a second dummy "sale" to remove the profit/loss belonging to the other owner reducing this owner's gains/losses.

This is for the person whose SSN is on the 1099; the other owner just reports half of everything, since the IRS cannot look up their income.

[sjrcpa]

You respond to IRS with the same explanation you gave us:

"The brokerage 1099-B was for a joint account.  However, he and his wife divorced during the year.  So I reported half of the dividends, interest, and capital gains on each 1040 return.  Same with K-1s from a limited partnership.  I clearly marked (50%) on the Schedule B on each tax return.  "

I'd add the exwife's name and SSN in the explanation.

[RBGulrajaniCPA]

Thank you!

[RBGulrajaniCPA]

The 1099-B has different amounts for Total and Qualified dividends, capital gain distributions, nondividend distributions, and Unrecap. Sec 1250.  It looks like you can only nominee out one amount to me.

[BobKamman]

Not that anyone reads IRS instructions, especially when they are directed at the people who don't know they should be filing the form, but here is what the 2022 general instructions for all 1099 forms tell you:

Nominee/middleman returns. Generally, if you receive
a Form 1099 for amounts that actually belong to another
person, you are considered a nominee recipient. You
must file a Form 1099 with the IRS (the same type of Form
1099 you received) for each of the other owners showing
the amounts allocable to each. You must also furnish a
Form 1099 to each of the other owners. File the new Form
1099 with Form 1096 with the IRS Submission Processing
Center for your area. On each new Form 1099, list
yourself as the “payer” and the other owner as the
“recipient.” On Form 1096, list yourself as the “Filer.” A
spouse is not required to file a nominee return to show
amounts owned by the other spouse. The nominee, not
the original payer, is responsible for filing the subsequent
Forms 1099 to show the amount allocable to each owner.

So you're not required to give one to a spouse (does that apply to former spouse, also?  Not clear).  But there's no rule against doing it.  But the time and effort required to issue nominee 1099's is probably more than just attaching a statement, then sending a copy of it when IRS comes back a year later because, you know, who at IRS ever reads attached statements?

The JD Vance solution to this problem is to tell couples to stay married.  Well, at least put your assets in separate accounts for at least a year before going to divorce court.   

[Terry53029]

I have always issued a 1099 on the few clients in the above scenario that I have had (including an ex wife)

[rbynaker]

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@RBGulrajaniCPA wrote:

The 1099-B has different amounts for Total and Qualified dividends, capital gain distributions, nondividend distributions, and Unrecap. Sec 1250.  It looks like you can only nominee out one amount to me.

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I haven't used ProSeries in several years but in the past my work-around for this with the 1099-DIVs was to make a separate entry on Sch B for each category of income and then use the nominee box to adjust it.

e.g.:
Merrill Lynch - Qualified Dividends  $1,000  (Nominee $500)
Merrill Lynch - Non-Qualified Dividends $200 (Nominee $100)
Merrill Lynch - CGD $500 (Nominee $250)

That seemed to work for most things.  As AM said, the 1099-B/Sch D/8949 was more like hammering a square peg into a round hole to get the results to the right place.

Add me +1 to the Nominee 1099 forms at the end of the year.  That can be difficult with brokers if you get a 2nd and 3rd "correction" in March/April.  Best bet is to split the account ASAP.

But none of this addresses your current problem, just go with SJRs solution, tell the IRS the same thing you told us, and include the ex-spouse's SSN.

Rick

[Accountant-Man]

Once you enter an amount for Nominee dividends, all the items are pro-rated automatically.

IE, $100 box 1, $50 box 2, $1,000 box 3, $77 box 2b. You want to show 50%.

Add box 1 and box 3. This is the total dividends, $1,100. Boxes 2 and 2b amounts are already included in boxes 2 and 3. Enter $550 as Nominee amount.

Sch B is $50, Sch D is $500, Qual Divs is $25, Sec 1250 gain is $38.

[BobKamman]

Although this raises some ethical questions, and illustrates why the safest thing to do with divorcing clients is send both of them to a new preparer.  Do you have written permission from the ex-wife, to disclose to the ex-husband what is on her return?  Do you have her permission to provide her name and SSN to IRS when not addressing an issue involving her return?  And how do you know she hasn't found someone else to amend her return, removing the nominee income, since you saw her last?