According to the famous quip, taxes are one of the two things you can be certain of in life. But sometimes tax fraud schemes seem to be nearly as ubiquitous as taxes themselves. Earlier this month, a federal jury handed down a guilty verdict against an Orange County man whom prosecutors accused of filing false tax documents on behalf of customers.
According to the charges, the man engaged in a specific type of tax fraud involving 1099 OID forms. OID stands for original issue discount and is involved in the taxation of debt instruments. For example, when a taxpayer holds a bond or other debt instrument with a maturity date greater than one year in the future, he or she must pay tax on the bond's OID, which is defined as the bond's price when redeemed less its price when issued.
The man promised customers large refunds by suggesting that the government was obligated to help pay off personal debt. He would take customers' debt and wrongly list it as taxable OID income. He would then inform the IRS that the customers were entitled to a refund because they had already prepaid any OID taxes.
According to the Internal Revenue Service, OID fraud is relatively popular. This man alone filed more than 1,000 false forms on behalf of clients. For his crimes, the man will serve a prison sentence of 65 years. He is currently 55 years old.
But he was not the only one punished for tax fraud. The IRS went after two of his clients, who were later found guilty of tax crimes. It bears repeating that California taxpayers should be discerning when choosing a tax preparer. Those who promise clients suspiciously large returns may be offering something too good to be true. It is important to be wary of preparer fraud, because even victims can end up facing an IRS audit and potential penalties.
Source: Los Angeles Times, "Orange County man convicted of tax fraud," Andrea Chang and Tiffany Hsu, Mar. 17, 2012.