7 Defendants Found Guilty in $33 Million False Refund Scheme Using False 1099-OIDs

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7 Defendants Found Guilty in $33 Million False Refund Scheme Using False 1099-OIDs

On Tuesday, the Department of Justice issued a press release announcing that seven Fresno-area men were found guilty of participating in a scheme in which they attempted to claim $33 million in federal tax refunds.  Another stolen identity refund fraud scheme?  Surprisingly not.

The ridiculous thing about this case is, though the IRS should know to check each return with a 1099-OID and withholding by this point, the IRS actually issued $400,000 in false refunds.

Actually, this was for the defendants’ own returns, part of a long-stale frivolous tax scheme involving the use of false Form 1099-OIDs.  These are supposed to be used for “Original Issue Discounts,” something most people are not familiar with, but can be a legitimate information return where a bond is sold at a discount lower than face value due to the time-value of money while waiting for the bond to mature to its face value (it is discounted at its original issue date, and the difference between the original issue price and the cash-in date would be income).  In some tax-defier circles, however, an individual would create a false 1099-OID, usually naming some creditor as a payer, but sometimes also claiming a large false withholding that would be falsely claimed for a a refund on a return.

The ridiculous thing about this case is, though the IRS should know to check each return with a 1099-OID and withholding by this point, the IRS actually issued $400,000 in false refunds.  Though the IRS touted the conviction as a victory, it should be ashamed of the IRS’s shortcomings in detecting the crime highlighted by this case.

Per the DOJ press release:

According to court documents and testimony at trial, between August 2008 and October 16, 2008, Bolanos and Georgner conspired to submit false claims for income tax refunds. Bolanos and Georgner worked with others, including Combs, Uptergrove, Calles, Schwartz, and Ladonna Lee Moon to submit false tax returns in an attempt to eliminate their debts and receive sizable tax refunds by submitting their tax returns with false claims of interest income and withholding citing IRS Form 1099-OID.

As part of the scheme, the defendants submitted false tax returns to the IRS seeking more than $33 million in fraudulent tax refunds. As a result of these fraudulent tax refund claims, the IRS issued approximately $400,000 in fraudulent refunds. The tax returns were fraudulent because the defendants listed their debts, bills, and other non-income items as interest income. The defendants then claimed that almost all of that interest income had been withheld and paid to the IRS, even though none of the purported interest income was ever withheld. Based on the reported withholdings, the defendants claimed they were owed millions of dollars in refunds by the IRS.

 

Daniel Layton, the author of this post, is the principal of Tax Attorney OC.

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