During tax filing season, fraud incidents involving falsifying income increase across multiple states.
Organized crime rings create bogus 1099 forms and use stolen identities to file fraudulent unemployment claims, apply for loans, open credit card accounts, collect benefits, receive medical services, or even get jobs. Some taxpayers use the opportunity to fabricate income and maximize refundable tax credits.
Banks and other lenders can easily get entangled in such incidents, leading to unnecessary lawsuits and hefty penalties.
That’s why it’s important to check statements and tax forms carefully.
In this post, we'll cover how faulty tax documents impact lenders and how you can spot a fake 1099 to prevent fraud.
Why do banks/lenders ask for 1099s? How do they use them?
A Form 1099 is a record of income from a business or client that isn't an employer to an independent contractor.
The payer (client) fills out the form and sends a copy to the contractor for tax reporting purposes and another to the IRS to report non-employment income.
Unlike W-2 forms, a 1099 form shows only the income you received during the year for earnings working as a freelancer or independent contractor. It doesn't show tax deductions, since it's up to the contractor to pay for it themselves.
Form 1099 also reports income payments like rental income, royalties, gambling winnings, dividend and interest income, gains and losses in brokerage accounts, and more.
Banks or lenders use a form 1099, one to two years’ worth of tax returns, and other financial documents to:
- Verify income stability (for at least two years)
- Know the source and type of income
- Determine how much is eligible toward a loan application
- Assess someone’s ability to repay the loan without financial difficulty
- Ensure the loan is affordable over a period
- Feel comfortable that the income is likely to continue
- See credit history, and whether debts have been managed
- Check whether federal tax debt is owed
Depending on the applicant's unique financial picture, the bank/lender might request additional documentation. For instance, a self-employed person may be required to provide copies of their Profit and Loss (P&L) statements.
Most banks and lenders only require verbal confirmation to verify your income information. Some will seek email verification, request related documentation, and obtain federal tax return transcripts from the IRS.
Why might someone need or create fake 1099s?
In 2020, Congress approved the CARES Act, which included the distribution of funds (Economic Impact Payments, and enhanced unemployment benefits) through the Internal Revenue Service (IRS) and states.
Identity thieves and scammers sprung into action, tricking people into disclosing their data so they could steal it, regardless of the pain caused.
Some people, who never filed for unemployment, received 1099 forms saying they earned unemployment benefits.
Award-winning columnist and author Michelle Singletary's husband was also a victim of fraud. Someone stole and used his Social Security number to get contract work with a company in Scottsdale, Arizona. Then he got a bogus 1099.
Major data breaches are to blame for the financial havoc they’ve caused for identity theft victims such as Singletary’s husband.
As part of its list of tax scams, the IRS warns about schemes that falsify income, including the fake 1099 forms.
The IRS compiles this list annually, describing the common scams taxpayers may encounter, many of which peak at tax time.
A good example is the fake 1099-MISC form, Miscellaneous Income scheme, which is disguised as a debt payment option for mortgage or credit card debt.
Con artists make up a bonded promissory note purporting to be a debt payment method for the victim’s debt.
The scammer offers a fake Form 1099-MISC appearing to be issued by a large bank the unsuspecting victims may have used in the past. Sometimes the scammers use Form 56, Notice Concerning Fiduciary Relationship, to assign lenders fiduciary responsibilities.
Sounds daunting, but take action if you receive a faulty 1099. Otherwise, you could get a tax bill from the IRS for earnings you never received.
The IRS holds you legally responsible for what’s on your tax return, even if someone else prepared it.
How fake 1099s can negatively impact a bank or lender
Reporting false income can lead to serious consequences for the taxpayer, including:
- Potential loss of licensure
- Criminal tax prosecution
- Potential jail time
For banks or lenders, the consequences could be dire.
The IRS deems tax fraud as “wilful and material submission” of false documents or statements based on an application and/or return. To establish fraud, IRS investigators look for indicators, including:
- False SSNs
- Under-reported income
- Falsified documents
- Intentional failure to file taxes
If these are absent, the investigators will assume it’s an unintentional mistake because of negligence. You might not face prosecution or criminal charges for tax fraud, but you may pay penalties for inaccuracies.
So verify all tax documentation and information for accuracy before approving anything.
Your bank or lending company might also end up in court for handling fake documents, leading to financial and brand reputation loss.
How to spot a fake 1099 form
Scammers are constantly on the prowl for unsuspecting victims. So be vigilant whenever you receive 1099 forms because they may not always be valid. Financial criminals know what a real 1099 looks like, and they go to painstaking lengths to mimic genuine documents.
Here are some things to check before authenticating a 1099 form:
- Your name and address: Fake 1099 forms usually have misspelled names or appear in an incorrect order different from what’s on the applicant's official documents. Sometimes the address may be correct, but the names don’t match the applicant's or anyone in their household.
- Income amounts: If the amounts reflected on the 1099 are inaccurate or don’t match what's on the employer’s records, the 1099 is probably fake.
- Unexpected benefits: In most fake 1099 cases, victims receive 1099-G forms reflecting unemployment benefits they didn't receive.
- Location/state: A fake 1099 may also be from a different state than where the applicant lives.
These are just a few telltale signs of a fake 1099. However, if you feel that the form sounds legit, but you still have doubts or questions, contact the IRS tax department directly.
Prevent fraud when verifying the validity of a 1099
As a lender, it can be overwhelming to identify genuine documents with the right information, fight fraud, and protect yourself.
With the right technology, you can quickly identify fraudulent claims and react to protect your company and customers. Inscribe uses machine learning and rules-based fraud detection capabilities to analyze and verify the validity of 1099 forms.
Contact our sales team today to learn how Inscribe can help you detect fraudulent activity and stay compliant.