Fact Sheet Form 1099-OID, Original Issue Discount, Refund Scheme The Internal Revenue Service is cautioning tax professionals to be aware of a refund scheme that has resurfaced in recent months. The scheme is based on false withholding credits and involves the filing of frivolous returns and claims that may contain: Form 1099-OID, Original Issue Discount Any type of Form 1099, U.S. Information Return Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains Other bogus financing instruments such as bonded promissory notes to make a false withholding claim Original issue discount is normally treated like the payment of interest. Any party issuing a financial instrument with original issue discount must issue an information return or Form 1099-OID. For more information on the correct use of Form 1099-OID refer to Publication 1212 and Publication 550. Characteristics of false withholding claims may include: Withholding reported on any Form 1099 that is equal to or greater than the income reported on Form 1040EZ, 1040A or 1040. Withholding reported on any series Form 1040 tax return that is equal to or greater than the “interest income” or “other income” lines on the return. Taxable income (before net operating loss or special deduction) on Line 28 of Form 1120 that is of an equal amount to a backup withholding credit on Line 32g. Excessive amounts claimed on Form 1041, U.S. Income Tax Return for Estates and Trusts, under “other payments,” line 24f, and/or on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, attached to Form 1041. Returns with unrealistically high withholding amounts, e.g., Form 1099 withholding amount that is 33% or more of the reported income. Lack of information return documents to support the withholding credit The IRS has successfully stopped the payout of many refunds under the 1099-OID Refund Scheme program from taxpayers filing both paper and electronic tax returns. However, tax returns that contain frivolous information are subject to a $5,000 civil penalty imposed by Internal Revenue Code § 6702(a). The IRS urges tax professionals questioning the legitimacy of a withholding credit to confirm with the taxpayer that the reported withholding was actually paid by a legitimate source. Any incident of a taxpayer seeking a refund or promoting a scheme based on false withholding credits should be reported to the IRS using instructions found by accessing www.irs.gov.
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