How to Spot a Fake 1099

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. These criminals generate bogus 1099 form documents to facilitate their schemes. 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. Verifying all tax information for accuracy is essential to prevent fraud and ensure compliance with IRS regulations.

In this post, we’ll cover how faulty tax documents impact lenders and how you can spot a fake 1099 to prevent fraud.

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Introduction to 1099 Forms

Form 1099 is a crucial set of tax forms used by the Internal Revenue Service (IRS) to track and report various types of income that aren’t covered by traditional employment wages. These tax forms help ensure that all income, including miscellaneous income, is accurately reported for tax purposes.

The most common types include Form 1099-MISC, which covers miscellaneous income such as payments to independent contractors, and other forms like 1099-INT for interest income and 1099-DIV for dividends.

Form 1099-NEC is specifically used for reporting nonemployee compensation, which was previously reported on Form 1099-MISC. The main difference is that Form 1099-NEC is now the designated form for nonemployee compensation, while Form 1099-MISC is used for other types of miscellaneous income.

Businesses are required to issue a form 1099 to any individual or entity that has received income payments above certain thresholds, typically $600 or more for nonemployee compensation. This process helps both the IRS and taxpayers maintain accurate records and claim appropriate tax deductions. Accurately reporting all income on the correct 1099 form is essential to avoid issues with tax compliance and to ensure that your tax return reflects your true financial situation.

Why do banks/lenders ask for 1099s from the Internal Revenue Service? 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, aquatic life, attorney payments, fishing boat proceeds, healthcare payments, and royalties paid, among others.

The most common types include Form 1099-MISC, which covers miscellaneous income such as payments to independent contractors, and other forms like 1099-INT for interest income and 1099-DIV for dividends. Form 1099-MISC is also used to report payments to non employees, such as independent contractors and unincorporated businesses.

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

Physical copies of Form 1099-MISC can be obtained at an office supply store.

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 statement.

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 for tax fraud?

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. It is important to follow IRS guidelines when filing and verifying 1099 forms to avoid falling victim to these scams.

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. Some scammers promote fake 1099 forms as part of fraudulent "debt elimination" schemes, falsely claiming these forms can be used to eliminate or pay off debts. Some transactions, such as those involving credit card or third-party network payments, are reported on form 1099 k instead of 1099-MISC.

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 consequences for submitting or receiving a fake 1099 can vary depending on the severity of the error and the intent behind it.

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. Submitting a fake 1099 can be considered a material misstatement on a tax return, which may trigger an IRS investigation and penalties. 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. Banks and lenders should also conduct regular audits of their 1099 filings to identify errors or suspicious activity.

Your bank or lending company might also end up in court for handling fake documents, leading to financial and brand reputation loss. It is crucial to train employees to recognize and prevent scams related to fake 1099 forms.

Handling fake documents also puts sensitive tax and financial information at risk, so implementing strong data security measures is essential.

Proper documentation is key—ensure you store and organize all filed forms, such as IRS Form 1099-MISC, for compliance and audit purposes.

How to spot a fake Form 1099

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.
• Street address: Verify that the street address of both the payer and recipient is accurate and matches official records, as this is a key identification detail on the form.
• 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.
• Tax year: Ensure the tax year on the form matches the period for which the income was earned, as discrepancies can indicate a fraudulent or incorrect form.
• 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.

Being aware of common mistakes when reviewing 1099 forms can help prevent falling victim to fraud.

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.

Common Errors to Avoid

When dealing with 1099 forms, even small mistakes can lead to big problems with the IRS. Some of the most common errors include entering incorrect information, such as a wrong taxpayer identification number or misspelled names, which can delay processing or trigger audits. Failing to report all income payments, omitting a form, or using the wrong type of 1099 (for example, confusing 1099-MISC with 1099-NEC) are also frequent issues.

Another common mistake is not matching the amounts reported on your 1099 forms with your own financial records, such as bank statements or payment card reports. This can result in discrepancies that may raise red flags with the IRS. To avoid these pitfalls, double-check all details, ensure you have received all relevant forms, and keep an eye out for duplicate or missing forms. Filing electronically can also help reduce errors and ensure compliance with current tax regulations.

Exemptions and Exceptions: When 1099s Are Not Required

Understanding when you are not required to file a Form 1099-MISC is essential for ensuring compliance with Internal Revenue Service (IRS) tax laws and avoiding unnecessary paperwork. Generally, payments made to corporations, including S corporations, are exempt from Form 1099-MISC reporting. However, there are notable exceptions—payments to attorneys and for medical or healthcare services must still be reported, even if the recipient is a corporation.

Additionally, certain types of payments do not require a 1099-MISC at all. For example, payments for merchandise, telegrams, telephone, freight, storage, and similar items are excluded from 1099-MISC reporting requirements. It’s also important to recognize that payments made via credit card, payment card, or through certain third-party networks are reported on Form 1099-K by the payment settlement entity, not on Form 1099-MISC.

The IRS provides detailed guidelines on these exemptions and exceptions, and the rules can change as tax regulations evolve. If you’re unsure whether a specific transaction requires a 1099, consulting a tax professional is the best way to ensure compliance and avoid potential penalties. Staying informed about IRS requirements will help you accurately report income and maintain proper tax records.

Penalties and Consequences of 1099 Fraud

Engaging in tax fraud by submitting or accepting fake 1099 forms can have serious and far-reaching consequences. The Internal Revenue Service (IRS) treats the willful and material submission of false documents or statements on tax returns as a criminal offense. If you are found to have participated in fraudulent financial transactions or filed false documents, you could face substantial fines, penalties, and even criminal charges.

For individuals, tax fraud can result in heavy monetary penalties, interest charges, and, in severe cases, imprisonment. Businesses and financial institutions that handle fraudulent 1099 forms may suffer business license cancellations, lawsuits, and significant damage to their reputation. The IRS investigates tax returns for signs of fraud, such as discrepancies in reported income or suspicious documentation, and the absence of clear intent may still result in penalties for negligence.

To protect yourself and your organization, it is critical to verify all tax documentation for accuracy before approving loans or processing financial transactions. Practicing due diligence and following IRS guidelines can help prevent costly mistakes and safeguard against the legal and financial risks associated with 1099 fraud.

Amending a 1099 Form: What to Do If You Find a Mistake

Mistakes on a Form 1099-MISC can happen, but it’s important to correct them promptly to ensure accurate tax reporting and compliance with IRS guidelines. If you discover an error, the payer—not the recipient—must complete a new Form 1099-MISC, clearly marking the “Corrected” box at the top of the form. The corrected form should then be sent to both the IRS and the recipient to update the official records.

Filing electronically is encouraged and, for those submitting 250 or more forms, required by the IRS. The IRS FIRE (Filing Information Returns Electronically) system streamlines this process, but you’ll need to set up an account and obtain a Transmitter Control Code (TCC) before submitting corrected forms. Using a trusted tax professional or reputable tax software can help ensure the correction process is handled accurately and efficiently.

Timely corrections help prevent issues with tax reporting, reduce the risk of audits, and ensure that both you and the recipient have the correct information for tax purposes. Always follow IRS guidelines and keep thorough records of any amendments made.

Retaining Records

Maintaining accurate and organized records of your 1099 forms and related financial documents is essential for tax reporting and future reference. Good record-keeping also plays a crucial role in supporting accurate 1099 reporting and compliance with IRS requirements. The IRS recommends keeping copies of all tax forms, including 1099s, for at least three years after you file your tax return. This documentation can be invaluable if you need to verify income, respond to IRS inquiries, or resolve disputes about other income payments.

Store your records in a secure location, whether digitally or in a physical file, and include supporting documents such as bank account statements, employment verification, and receipts for services rendered. Payroll providers and tax professionals often advise conducting regular audits of your records to ensure everything is up to date. Good recordkeeping not only helps you accurately report income but also protects you in case of an audit or if you need to file a corrected form.

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. 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.

Frequently Asked Questions

Q: What should I do if I suspect my employer falsified a 1099 form?

A: If you suspect your employer falsified a 1099 form, it's crucial to take immediate action. Start by documenting any discrepancies and then consider reaching out to the IRS or seeking advice from a tax professional. You may also want to keep a record of your communication with your employer regarding the issue.

Q: How can I verify the authenticity of a 1099 form for employment verification?

A: To verify the authenticity of a 1099 form for employment verification, carefully check the details such as your name, address, and income amounts. Look for any unexpected benefits or discrepancies. If you have doubts, it's advisable to contact the IRS tax department directly for clarification.

Q: What are common signs of a fake 1099, and how can I spot them?

A: Fake 1099 forms may exhibit signs such as misspelled names, incorrect address orders, inaccurate income amounts, or unexpected benefits. Additionally, be cautious if the form is from a different state than where you live. If you're unsure about the legitimacy of a 1099, consider contacting the IRS for verification.

Q: Can receiving a fake 1099 impact my financial and legal standing?

A: Yes, receiving a fake 1099 can have serious consequences, including potential penalties, legal repercussions, and financial difficulties. It's essential to verify all tax documentation for accuracy to avoid facing charges related to tax fraud. If you suspect a fake 1099, take prompt action to rectify the situation.

Q: How can lenders protect themselves from handling fake 1099 documents?

A: Lenders can protect themselves by implementing robust verification processes, utilizing technology like machine learning for fraud detection, and staying informed about common scams. If there are doubts about the authenticity of a 1099 form, lenders should exercise due diligence before approving any financial transactions