PORTIA:
This is Portia Bingham I'm talking with David Alito about a refund scheme involving Form 1099-OID.
David, first of all, what is a Form 1099-OID?
DAVID:
The OID stands for Original Issue Discount. It's a form of interest earned upon the sale of certain types of debt instruments, such as zero coupon bonds.
PORTIA:
Thank you. Now, what's the refund scheme about?
DAVID:
Basically it involves claiming refunds of non-existent withholding. These claims may use: Form 1099-OID or any other type of Form 1099, Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, or Other bogus financing instruments, such as bonded promissory notes.
PORTIA:
What are the some of the characteristics of this scheme?
DAVID:
Five of the most prevalent characteristics of false withholding claims are: Withholding reported on any Form 1099 that is nearly equal to or greater than the income reported on the tax return. Form 1099 withholding reported on any series Form 1040 tax return that is nearly equal to or greater than the “interest income” or “other income” lines on the return. Taxable income shown on Line 28 of Form 1120 that is nearly equal to the amount of the backup withholding credit reported on Line 32g. Returns with unrealistically high withholding amounts such as 33 percent or more of the reported income. Lack of information return documents to support the withholding credit or information returns submitted improperly by taxpayers in the names of their creditors.
PORTIA:
How can tax professionals and business owners help stop this scheme?
DAVID:
Spread the word: Tell your clients, customers, employees and acquaintances to beware of people promising big refunds. Let them know that the IRS and Justice Department are working hard to find, shut down and prosecute promoters of abusive tax schemes. Be sure they understand that they are responsible for information on their return, and will end up owing tax, interest and penalties on any false claims. Let them know that if other parties file information returns in their name, they can notify the IRS to help avoid future problems
PORTIA:
If a tax preparer or taxpayer encounters something suspicious, how can they report it to the IRS?
DAVID:
I'm glad you asked, because we have several, very specific avenues for reporting suspicious activity. If you suspect or know of an individual or company that is not complying with the tax laws, complete Form 3949-A. You'll find it on our Web site, IRS.gov. To report abusive tax promotions and/or promoters, use our Referral Form for Reporting Abusive Tax Promotions and/or Promoters. The form is self-explanatory, to help you document the information to report an abusive tax avoidance scheme. You can report abusive CPAs, attorneys or enrolled agents participating in suspicious actions to the IRS Office of Professional Responsibility by e-mail at opr@irs.gov.
PORTIA:
Good information. What resources are available for someone who wants to know more?
DAVID:
Additional information is available on IRS.gov. Simply do a search using the words “1099-OID Fraud.”
PORTIA:
Thank you, David. I've been talking with David Alito of the IRS. This is Portia Bingham.
