What if Client didn't report Nominee income using 1099?

[dhoyt]

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.

[sjrcpa]

It's not really nominee income since it's a joint account. It belongs to both of them. I'd be fine with just splitting it and each reporting half.

[BobKamman]

If it's $100, it doesn't matter to IRS.  If it's $100,000, it matters.  

[dhoyt]

Yeah it's somewhere in the middle. Ultimately, I'll leave it up to them. I have a feeling they will say "it's been working for 20 years, why do anything different now?" But it looks like some of the gains and losses are bigger than they were in previous years. I guess we will see what happens. Thanks for the response.

[BobKamman]

I would follow the instructions for reporting nominee income, even though it doesn't really meet that definition.  I wouldn't bother with 1099 filing; maybe attach a statement explaining the situation, if the amounts are large enough they might trigger a CP2000.  I would be particularly concerned about the stock sales.  Suppose they sold shares for $10,000 with a basis of $10,200.  If the sister whose SSN appears on the 1099-B reports only $5,000 of proceeds, IRS is not going to recognize it as half the $10,000 they know about.  So they are going to propose an assessment of $10,000 LTCG, if there is no basis reported because it's pre-2011 investment.  

[dhoyt]

I agree that is probably the way I will recommend to them that we handle it. I suppose worst case scenario we have to explain if we get a CP2000 and it goes away hopefully. Thanks again for the responses.

[BobKamman]

Why doesn't this fit the IRS definition of a partnership?  So tell them about filing 1065's and BOI reports.  Maybe they'll decide to keep their money separate. 

I haven't had any clients lately who are members of investment clubs.  But can you imagine the BOI reporting for those?