Each year the IRS releases its annual “Dirty Dozen” list of tax scams with a warning to taxpayers to remain vigilant, not just at tax filing time, but throughout the year. One tax scam that has remained on the Dirty Dozen list is tax fraud whereby taxpayers attempt to claim fictitious tax rebates through the use of a Form 1099-OID form.
What is Form 1099-OID?
Form 1099-Original Issue Discount (OID) is intended to be submitted to the IRS by the holder of debt instruments, such as bonds, notes or certificates that were discounted at purchase to report the taxable difference between the instruments’ actual value and the discounted purchase price. The IRS issues the difference in the form of a rebate to the taxpayer.
What is 1099-OID Fraud?
The fraudulent filing of a Form 1099-OID occurs when a taxpayer makes a false tax refund claim. However, in most instances, the fraud is persuaded by a tax preparer who is well-versed in committing this kind of fraud. How does it work? In 99 percent of the cases, preparers convince unsuspecting taxpayers that the federal government maintains “secret accounts” for U.S. citizens and that taxpayers can gain access to these accounts by issuing 1099-OID forms to the IRS.
In this ongoing scam, the perpetrator tries to justify a false refund claim on a corresponding tax return. In some cases, criminals get away with this activity when the IRS does not cross-check tax returns with reported 1099-OID information. The inconsistencies on the form go unnoticed, so the IRS computes the tax refunds with the submitted inaccurate information.
As a defense, taxpayers cannot claim they didn’t know about the fraud (even if they had no idea that their tax preparer was scamming the federal government). There is no excuse in the eyes of the IRS. Plain and simple, this is tax fraud—there are no “secret accounts”!
It should also be noted that occasionally a taxpayer will pretend to be a tax preparer and file false claims in their “clients’” names so they can claim a refund or rebate for themselves. They often choose low-income individuals who do not have to file tax returns in the first place.
What are the Penalties for 1099-OID Fraud?
Individuals involved in such schemes can be audited, incur steep financial penalties or even face criminal prosecution. If the taxpayers cannot refund the government for the fraudulent refund they received, they will have to pay the government back via IRS collections.
Be on the alert for any fraudulent activity regarding your tax returns. While you may not be directly involved in the activity, those preparing your taxes may be. Honest tax preparers share a copy of all their tax preparations work, and you have a right to request it. Keep in mind that you are directly responsible for the information on your tax return even when you did not complete it yourself.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.