1099-OID "Strawman" Scheme

[LPC]

Recently disclosed internal email advice from the IRS (emphasis added):

UILC: 6011.00-00
Release Date: 4/17/2009
ID: CCA_2008112109494957

Office: * * *

From: * * *
Sent: Friday, November 21, 2008 9:49:50 AM
To: * * *
Cc:
Subject: Form 1040 with false 1099-OID/1096 attached

You sought the advice of the National Office on a question submitted to you from a revenue agent who received a Form 1040 tax return for processing that contains a Form 1099-OID and Form 1096 that follows a new variation on a "strawman" scheme recently addressed by the Service in a problem alert. The scheme directs participants to substitute any 1099-MISC received with a 1099-OID that lists the original payer as the recipient and lists the taxpayer as the payer. The amount received is reported both as OID and federal income tax withheld on the 1099-OID. The 1099-OID and a 1096 supporting the 1099-OID is then included with the tax return.

It is our position that this return can be processed. Although it is frivolous as is a return listing all zeros, the 1099-OID return reports sufficient data to calculate the taxpayer's tax liability. * * *

* * *

Please let me know if there are any further matters to discuss with this case.

Sincerely,

* * *

[LPC]

From a March 5 press release of the Department of Justice:

The United States has sued tax return preparers in Placerville, Calif., and Columbia, S.C., seeking to bar them from preparing federal tax returns for others, the Justice Department announced today. According to the government complaints in the two cases, Teresa Marty of Pollock Pines, Calif., and Winston Able of Blythewood, S.C., prepare federal income tax returns for their customers that claim fraudulent tax refunds. The government alleges that Marty prepared one tax return claiming a $2.7 million fraudulent refund for one customer.

The complaints allege that Able and Marty both employ a tax fraud scheme that uses fabricated IRS Forms 1099-OID to report fictitious tax withholding on their customers' returns and then claim refunds of huge amounts. The complaints against Marty and Able allege that the scheme is part of a growing trend among tax protesters to file frivolous tax returns and forms in an attempt to escape their federal tax obligations and steal from the U.S. Treasury.

The complaints allege that while the IRS detects and stops most fraudulent refund claims, Marty's fraudulent tax return preparation has resulted in the IRS's issuance of at least $6.9 million in erroneous payments to her customers. The government alleges that the total amount of fraudulent refunds requested on the returns Marty prepared or filed in 2008 was approximately $26.2 million and the total amount of fraudulent refunds requested on the returns Able prepared or filed was over $13 million.

[Imalawman]

One wonders if these ass-clowns even have the slightest idea about original issue discount....I'm going with "no". I bet the terms "present value" and "imputed interest" have no meaning to them. What loons....

[notorial dissent]

The question is, do they understand the concept of felony fraud? Which is what creating one of those qualifies as. This is particularly big in the ranks of the delusional for precisely the reason that they have no idea what a 1099-oid is supposed to be, and someone has sold them a bill of goods that this is the latest magic bullet. The only way it will go away is when the IRS starts prosecuting not ONLY the preparers, but the users for fraud.

[.]

I bet the terms "present value" and "imputed interest" have no meaning to them

That's much too sophisticated. You have to start with "bond." And the fact that since they neither own nor issue any, they have no reason to have anything to do with a 1099-OID from any standpoint.

Whereupon any discussion would immediately devolve into the secret "special" straw-man account we all have at the U.S. Treasury, or is at the Fed, er, whatever, blah, blah, blah, ad nauseam.

Most of these people, unfortunately, are beyond hope.

[notorial dissent]

......
Most of these people, unfortunately, are beyond hope.

or at the very least beyond reason.

[Imalawman]

I bet the terms "present value" and "imputed interest" have no meaning to them

That's much too sophisticated. You have to start with "bond." And the fact that since they neither own nor issue any, they have no reason to have anything to do with a 1099-OID from any standpoint.

Not to stray from the point, but the 1273 and 1274 regs apply to a great number of situations - not just bonds. For instance, say T sells Greenacre, a parcel of unimproved land, to A for $6,000,000, payable without interest on January 1, Year 6. A gives T her promissory note to that effect, along with a mortgage of Greenacre. This situation would be subject to the OID rules and regulations. Practically, though, you're correct, its not used much outside of the bond market.