QUESTION: Somewhere in the past I remember learning that a 1099 should be filed whenever an institution suffers a loss to an individual you can identify. Charged off loan, criminal asset loss as examples. Where can I find this in writing? I know the SAR requirements, I just need the IRS 1099
information.
ANSWER: I contacted IRS - Criminal Investigations (CI) on 01-03-00. IRS has no policy and there is no applicable regulation that mandates that anyone report crimes. The agency's position is that it encourages victims of any fraud loss -- not just embezzlement -- to file form 1099 - Miscellaneous Income, naming the known suspect. Filing a 1099 should be in addition to -- not a replacement for -- an SAR if one is mandated. SARs are obviously handled through other channels.
An individual may file a 1099, as well as an entity. Both individuals and entities may take a legitimate tax deduction for the personal/business loss on that year's income taxes -- a point often overlooked. Both individuals and entities may file the 1099 at any time during the year and they don't have to wait to file their tax returns. There is a "safe harbor" provision that's not found in any regulation -- but it has been interpreted in existing case law.
When IRS - CI receives a 1099 involving a crime -- preferably with a law enforcement agency's crime report attached -- it conducts its own investigation. Although a crime report isn't mandatory, it helps the IRS identify and track other victims. In addition to determining responsibility for the violation -- income tax evasion -- IRS - CI locates assets that may be seized to pay the outstanding tax, penalties and interest. After the tax judgement is satisfied, IRS - CI notifies other documented (as in having
filed a law enforcement crime report) victims and tells them where the other, remaining assets are located. These remaining assets are not held in trust by the IRS -- the agency simply makes other victims aware of their existence. There is no regulation that mandates that the IRS must do this --
but the agency's authority for this action rests, again, in case law.
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