Merrill Lynch Slip Creates Tax Headache for Clients

Merrill Lynch Co., the nation’s largest brokerage house, made a mistake in reporting interest earned on All Savers accounts that is causing headaches for thousands of taxpayers and the IRS, it was disclosed Wednesday.

An IRS spokesman said the brokerage firm reported interest from All Savers accounts as taxable income in 1982, triggering IRS letters to thousands of taxpayers who had claimed on their 1982 tax returns that they did not have to pay taxes on the interest.

The IRS letter informs taxpayers that they owe back taxes and penalties since Merrill Lynch did not report the income as non-taxable All Savers interest.

Neither Merrill Lynch nor the IRS know exactly how many people may be affected, but in 1982 some 250,000 All Savers accounts were sold by the brokerage house, IRS spokesman Scott Waffle said.

When taxpayers get an IRS letter, Waffle said, they should send the IRS a note that a Merrill Lynch All Savers account was involved, and the IRS will correct its records.

Waffle said Merrill Lynch’s error was discovered last September when taxpayers in New England began receiving the IRS notices and complained.

But he said it was too late for the company to refile the corrected information for 1982. Waffle said the mistake was repeated for the 1983 tax year, but the brokerage firm was able to correct the tax information it filed.

A Merrill Lynch spokeswoman said account executives were told about the problem and how to handle customer queries, but no letters were sent to customers to warn them about the problem.

Waffle said it was impossible to determine how much Merrill Lynch’s mistake has cost the IRS.

“We have been in touch with Merrill Lynch. We have been cooperating with them in trying to figure out ways to decrease alarm when the taxpayer gets a notice from the IRS,” Waffle said.

Waffle said other financial institutions also made reporting errors involving All Savers accounts. He declined to identify those companies or disclose how many taxpayers were involved.