Form 1099-OID Fraud
Oct. 10, 2008
The IRS cautions taxpayers to avoid getting caught up in a new tax fraud disguised as a debt payment option for credit cards or mortgage debt. The fraud is also marketed as a way to reduce taxes or pay outstanding tax liabilities. It involves the filing of Form 1099-OID, Original Issue Discount, and/or bogus financial instruments such as bonded promissory notes or sight drafts.
This fraud has evolved from an earlier frivolous argument that a “strawman” bank account has been created at the Treasury Department for each U.S. citizen, and that individuals could use such “strawman” accounts to pay debts and claim withholding credits.
The IRS addresses the “strawman” argument in Revenue Ruling 2005–21 and Revenue Ruling 2004-31, and discredits the use of this position for income tax purposes. Moreover, the courts that have reviewed the “strawman” argument and other similar arguments have found them frivolous.
