One of the more popular tax fraud schemes is the OID scheme. The idea is that there’s a “secret account” held by the US government and you can obtain a refund from that account. All you have to do is send in 1099-OIDs and magically you get a refund. A helpful hint to anyone so inclined: Don’t do it. There are no such secret accounts.
A tax preparer in California tried a variation of this scheme.
On Schedule B, Interest and Ordinary Dividends, of her 2008 return petitioner reported banks as the source of her interest income in the following amounts: Union Bank for $55,150, Washington Mutual for $9,071, Bank of America for $1,366 and $94, and Wells Fargo for $597…
Petitioner did not receive any interest from Union Bank, Washington Mutual, Bank of America, and Wells Fargo during 2008.
Well why would anyone lie and put extra income on their tax return? Because she claimed extra withholding–that most of the interest income never reached her because it was withheld by the banks. She claimed that $60,225 was withheld rather than the actual $573. Unfortunately, she received her refund based on the phony withholding.
But she wasn’t done; she filed an amended return asking for another $14,800 based on a “1099 OID erroneously included in income.” While her return was modified by the IRS, the refund wasn’t issued.
Before the amended return was filed, the petitioner had another “brilliant” idea. Why not transmit phony 1099-OIDs through the FIRE system? That way she could get big refunds for others! (The FIRE system is what tax professionals use to electronically file information returns, such as 1099-OIDs, with the IRS.)
When the IRS discovered the original issue–that there was no withholding–the petitioner attached five phony 1099-OID forms and five phony 1099-A forms to a letter where she alleged that these were filed through the FIRE system.
The petitioner continued with the same strategy on her 2009 and 2010 returns. Unfortunately, the IRS didn’t catch the phony withholding on her 2009 return until after they sent her an $83,976 refund.
When the IRS sent a notice of deficiency, the petitioner challenged it in Tax Court. She never filed a response to the IRS allegations, so they were deemed accepted. So she owes the tax and the fraud penalties.
What is amazing to me is that the petitioner has not, as far as I can tell, been criminally indicted. She should count her lucky stars on that.
Case: Young v. Commissioner, T.C. Memo 2015-18
