What is a form 1099-IOD?

The 1099-OID scam will earn you criminal fraud charges and a $5000 penalty.

The IRS service centers are well aware of this scam and are on the watch for it.

Additional post:
"I went to a meeting"<<So? It's still fraud.

"The person ...is an accountant"<<So? He's still a scammer
"who will charge $3,000.00"<<So, he gets $3000 and when you owe $5000 to the government, you won't be able to find him.

"a 'donation' of 18% of your refund" <<Still fraudulent. Calling it a donation just means he's announced he plans to cheat on his taxes as well.

"It sounded too good to be true" <<It always is.

"swears with their life that the 1099-OID is a true"<<Again, he will be gone as soon as the IRS shows up to arrest you.

"The mortgage company requested the amount as much as 16 or 26 times from the goverment." <<The circulation value of money is Economics 101. I learned that in college and it has NOTHING to do with tax law. The rest of this explanation is pure BS.

Here's the IRS post on this:
8. Contention: A Form 1099-OID can be used as a debt payment option or the form or a purported financial instrument may be used to obtain money from the Treasury.
Advocates of this contention encourage individuals to use a Form 1099-OID, Original Issue Discount, or a bogus financial instrument such as a bonded promissory note as what purports to be a debt payment method for credit cards or mortgage debt. This scheme has evolved somewhat from an earlier frivolous position under which a secret bank account (sometimes referred to as a “straw man” account) was supposedly created at the Treasury Department for each U.S. citizen that individuals could use to pay tax and non-tax debts and claim withholding credits. Those who put forth this theory often argue that the proper way to redeem or draw on the account is to use some form of made-up financial instrument. This has frequently involved what looks like a check drawn on the United States Treasury or other similar paper instruments, e.g., bonded promissory notes.

More recently, this redemption theory asserts that persons can draw on the secret or “straw man” Treasury account by sending a Form 1099-OID to a creditor and the creditor can present the form to the Treasury Department and receive full payment of the debt. The proponents appear to assert that the Form 1099-OID permits them to access their secret Treasury Account for an amount equal to the face amount of the Form 1099-OID in the form of a tax refund.

Proponents of this theory appear to additionally argue that they have sold or transferred their debt or obligation to the person to whom they issued the Form 1099-OID in a transaction subject to sections 1271 through 1275 and that the debt or obligation is transferred with a discount of the full face amount. The issuer of the Form 1099-OID then treats the face amount of the Form 1099-OID as “other income” on the individual’s return. The “other income” amount, however, is not included in the taxable income line.

Persons asserting this theory often significantly overstate withholding and claim an excessive refund in an amount close or identical to the inflated withholding.

The Law: As the instructions to the Form 1099-OID indicate, the purpose of the form is to report the original issue discount of holders of OID obligations, like certificates of deposit, time deposits, bonds, debentures, bonus saving plans, and Treasury inflation-indexed securities, having a term of more than one year. OID is simply the excess of the stated redemption of the deposit, bond, or other financial obligation at maturity over its issue price. Under section 1272, OID is taxable as interest over the life of the obligation and must be included in the holder’s gross income each taxable year that the obligation is held. Certain obligations are excepted, including United States savings bonds and short-term (less than one year) and tax-exempt obligations.

The Form 1099-OID is in no way a financial instrument. It is not a legitimate method of payment of any public or private debt, and it is not a means to withdraw or redeem money from the Treasury. Furthermore, as the federal Court of Appeals for the Sixth Circuit stated in United States v. Anderson, 353 F.3d 490, 500 (6th Cir. 2003), cert. denied, 541 U.S. 1068 (2004), the Treasury Department does not maintain depository accounts against which an individual can draw a check, draft, or any other financial instrument. The notion of secret accounts assigned to each citizen is pure fantasy.

In addition to potential civil and criminal tax penalties for misuse of the Form 1099-OID, persons who fraudulently use false or fictitious instruments may be guilty of federal criminal offenses, such as under sections 287 and 514(a) of title 18.

The IRS has issued Revenue Ruling 2005-21, 2005-1 C.B. 822 (“straw man”) and Revenue Ruling 2004-31, 2004-1 C.B. 617 (commercial redemption) warning taxpayers of the consequences of making such frivolous arguments.

In November 2008, a federal jury convicted Winfield Thomas and Jeanne Herrington, who promoted bogus financial instruments called “Bills of Exchange,” of conspiracy to impede the IRS. Herrington was also convicted of corruptly interfering with the administration of the internal revenue laws. Thomas and Herrington claimed taxpayers could use the “Bills of Exchange” to pay their tax liabilities. Thomas was sentenced to 30 months imprisonment and three years of supervised release. Herrington was sentenced to 96 months imprisonment and three years of supervised release. http://www.justice.gov/opa/pr/2009/May/09-tax-532.html.

In August 2009, Rodney K Justin, a North Carolina doctor was convicted of four counts of corruptly obstructing the administration of the internal revenue laws for sending “Bills of Exchange,” fictitious financial instruments, to the IRS as payment for over $350,000 in taxes. http://www.justice.gov/opa/pr/2009/August/09-tax-879.html.

Recently, the Department of Justice has successfully brought several injunction cases against tax return preparers who utilize the 1099-OID scheme. In August 2009, the District Court for the Eastern District of California granted a preliminary injunction against Teresa Marty individually and through her return preparation business Advance Financial Services, LLC, barring Marty and her business from acting as a federal return preparer. United States v. Marty, 09-cv-006000, 2009 WL 3111823 (E.D. Cal. Aug. 31, 2009); http://www.justice.gov/opa/pr/2009/September/09-tax-937.html. The court found that Marty prepared and filed fraudulent tax returns with false federal tax withholding. The court ordered Marty to provide the United States with a customer list and to notify her customers of the court’s order.

In November 2009, injunctions were granted against three tax returns preparers who used Form 1099-OID to claim inflated refunds for their clients. Specifically, a preliminary injunction was granted against Tennessee tax return preparer Karen Liane Miller. Miller v. Commissioner, 2009 WL 4060274 (M.D. Tenn. Nov. 23, 2009); http://www.justice.gov/opa/pr/2009/November/09-ag-1260.html. And permanent injunctions were granted against California tax return preparers Susan Guan, individually and through her company SRN Financial Services Inc., and Jacqueline Cornejo, individually and through her company J.C. Income Tax Services, barring them from preparing tax returns. http://www.justice.gov/opa/pr/2009/November/09-tax-1261.html; United States v. Guan, 2009 WL 4609654, 104 A.F.T.R.2d 2009-7471 (C.D.Cal. 2009); http://www.justice.gov/opa/pr/2009/November/09-tax-1276.html; United States v. Cornejo, 2009 WL 4609602 (C.D.Cal. 2009).

Relevant Case Law:
United States v. Heath, 525 F.3d 451 (6th Cir. 2008) - defendant was convicted of presenting a fictitious financial instrument under 18 U.S.C. § 514(a) for sending to the IRS a so-called “Registered Bill of Exchange” that appeared to be a certified check but for which there was no actual account.

United States v. Anderson, 353 F.3d 490, 500 (6th Cir. 2003), cert. denied, 541 U.S. 1068 (2004) - upholding criminal convictions relating to a conspiracy involving the creation and offering of almost 200 fictitious sight drafts purporting to be drawn on the United States Treasury with an aggregate face value of more than $550 million.

United States v. Oehler, 2003 WL 1824967 (D. Minn. Apr. 2, 2003), aff’d, 116 Fed. Appx. 43 (8th Cir. 2004) - jury convicted Oehler of 30 counts of presenting a fictitious obligation with intent to defraud. As part of his defense, he testified that he believed that every citizen has an account with the United States Treasury containing hundreds of thousands of dollars and that those funds can be accessed using sight drafts drawn on the Treasury.