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									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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