1099 OID (Original Issue Discount)
We have received a number of calls from citizens who are (or suspect that they might be) under IRS investigation after they or someone on the citizen’s behalf filed an IRS Form 1099 OID (Original Issue Discount).
Hindsight and the 1099 OID
We’re all familiar with the feelings of alarm, embarrassment, and fear which come when it’s pointed out to us that we’ve done something wrong. Sometimes, though, we’re blissfully unaware of what that something is, or what the consequences of that action might be. Others, presented with the possibility that they may have acted wrongfully, express a casual disregard for their actions, having been told that “other people are doing this, and nothing is happening to them.” Sometimes we rely upon others because they are experts in a particular field. For instance, we might rely upon a mechanic to fix a problem with our car. If you’re reading this, you may be one of the people above – you’ve probably filed a Form 1099 OID, and you’re wondering if it was a proper thing to do. You may even be wondering if you’re in some sort of trouble. Maybe – maybe not – but at least by wondering, you’re doing something right.
1099 OID and the IRS’s Hit List
You (or your tax preparer) may be first-time filers of Form 1099 OID – you might have just heard of it in these past few months – but issues with the form are neither new nor a secret. The IRS regards abuse and misuse of form 1099 OID as one of its biggest problems, and while that abuse has waned somewhat in recent years, 1099-OID schemes remain on the IRS’s (and FBI’s) list of top priorities.(1) The IRS frequently goes after citizens who it believes are using form 1099 OID improperly. That includes individuals with honest intentions who have filed it believing that it was perfectly legitimate, and fair-minded individuals who have had it filed (even unknowingly) on their behalf.
And, it is not simply the tax preparers that the IRS investigates – the IRS has a record of going after the tax preparers’ citizen clients too! (2)
Below are some of the more frequent terms that appear in these 1099 criminal prosecution (or persecution!) cases:
- commercial redemption
- debt termination
- redemption kits
- bonded promissory notes
- tax recovery kits
- secured party creditor
- recoupment process for debt relief
- DTC account
- tax freedom
- private exemption accounts
How do I know if I’m in trouble?
YOU DON’T.
The IRS views all improper submissions of Form 1099 OID as potentially criminal in nature. Consequently, the IRS is more likely to proceed with a criminal rather than civil action (although they can pursue both). Because of this, the IRS is not required to tell you anything. It might not send you a Frivolous Tax Return letter demanding immediate compliance. It might not issue you an IRS Summons requiring you (with your financial records) to appear before an IRS Special Agent. It might not give you any sign that you are the subject of a criminal IRS Investigation. In fact, you might not know you’re in trouble until Special Agents – essentially the criminal law enforcement officials of the IRS – show up at your door. With guns (yes, they can carry guns). And a Special Agent at your door does not signal the beginning of an investigatory process. Rather, the presence of a Special Agent may signal that an organized, focused investigatory process has been under way for quite some time, and you are likely to be in very big trouble. The Special Agent might inform you of your Miranda Rights – the right to remain silent, as anything you say can be used against you.
What can I do?
The first thing you may wish to do is seek qualified legal counsel and professional financial assistance. Determining whether or not you might be in trouble, and to what extent, is the first step on the road to resolving any issues you might have – and the sooner the better.
For further information, see IRS Investigation, IRS Summons, Frivolous Tax Return Letter, Criminal Tax Evasion/Fraud, or Contact us.
(1) ”IRS Releases the Dirty Dozen Tax Scams for 2012” (IRS website)
(2) The IRS routinely orders indicted tax preparers to hand over their complete client lists. For example, Penny Jones – recently sentenced to 12 years in prison for a 1099 OID fraud conviction – was ordered to identify her clients over a five-year period from 2005-2009 (“Federal Court Bars Idaho Woman From Promoting ‘Form 1099-OID’ Tax Scheme” (DOJ website)).