Should You Use Form 1099-OID to Pay Your Debt?

Your Guide to State, Local, Federal, Estate + International Taxation

You may have better luck getting the straw man from with Wizard of Oz to pay your debt than using the straw man in this scheme.  Advocates of this contention encourage individuals to use IRS 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 redemption theory put forth by some assert that persons can draw on the secret or “straw man” Treasury account supposedly created at the Treasury Department for each U.S. citizen.  That by sending a Form 1099-OID to a creditor, 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 also argue that they have sold or transferred their debt obligation to the person to whom they issued the Form 1099-OID in a transaction subject to code sections 1271 through 1275 and that the debt 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 tax return.  The “other income” amount, however, is not included in the taxable income line.

This is considered a frivolous argument by IRS.  In addition to civil and criminal tax penalties for misuse of the form 1099-OID, other criminal offenses may apply as demonstrated in the case history.

Dale F. Jensen, CPA


  1. Ed says:

    Setting aside the fraudulent use of this, this actually works sometimes? I just have trouble believing that John Doe could mail in a 1099-OID for a car loan or credit card and ever have that “credit” applied.