Morgan Stanley Flubbed Cost-Basis Tax Reports to Customers, Reserves $70M
Morgan Stanley’s wealth management division has set aside $70 million to cover payments to the Internal Revenue Service and some customers because of incorrect cost-basis tax information on forms it sent for tax years 2011 to 2016.
The errors, which resulted in both tax underpayments and overpayments, were due to “operational Issues” that appear to have been recently discovered since the IRS only began requiring brokerage firms to send out Form 1099-B cost-basis reports in tax year 2011.
“Most of our clients are not impacted by these issues,” Morgan Stanley wrote in its annual report filed with the Securities and Exchange Commission on Monday. “However, these issues have affected a significant number of client accounts.”
Morgan Stanley, which said it services about 3.5 million clients in its retail brokerage unit, said it is in “advanced discussions” with the IRS to resolve the underpayments at no expense to clients. It also plans to notify clients who overpaid and offer them “an amount equivalent to their overpayment,” according to the filing.
Clients will not have to refile tax forms as a result of the errors, which totaled under $300 in 90% of the cases and under $20 in half of them, a spokesman said.
The disclosure is, nevertheless, likely to be an embarrassment to Morgan Stanley, which relies more on its wealth management business than any of its banking rivals. In 2016, 44% of the bank’s revenue of $34.9 billion and 39% of its $8.9 billion of profit derived from the wealth division.
“This is a pretty bad screw-up for sure, and it certainly took them long enough to catch it,” said Joseph C. Peiffer, a plaintiffs lawyer in New Orleans, who added that it is unlikely clients would litigate the issue.
The operational issues occurred as Morgan Stanley was untangling significant technology integration snafus related to its purchase of Citigroup’s Smith Barney retail brokerage unit between 2009 and 2013. Last month the Securities and Exchange Commission and other regulators fined Morgan Stanley $40 million for overbilling managed account customers as a result of coding and administrative errors in systems inherited from Smith Barney.
The company spokesman declined to comment on whether the Financial Industry Regulatory Authority or other regulators are investigating the client tax-reporting issue.
“We are committed to making this right for our clients with minimal inconvenience to them,” he wrote in an emailed statement.
The review of the tax-reporting issues is continuing, the regulatory filing said, noting that the $70 million provision “is based on currently available information and analyses.”