News

Dealer Got Mad, Sent Customer a Fraudulent 1099 to Get Even

You Buy a Vehicle

You buy a new vehicle from your local dealership with zero percent financing. You complete all the paperwork, including the purchase order and vehicle registration, and leave the dealership owning the vehicle.

Dealer Oops

The next day, the dealership calls you and says there’s been a mistake: you are not eligible for zero percent financing. To correct the mistake, the dealership asks you to return and sign a new contract with an interest rate.

Recognizing a good deal when you see one, you refuse.

Dealer Mad

Your refusal makes the dealership mad; in retaliation, the dealership voids your vehicle registration. You complain to the Department of Motor Vehicles, which

  • reinstates your vehicle registration and
  • sends a written warning to the dealer.

Dealer Madder Now

Still upset and looking for a means to do damage to you, the dealer sends you a Form 1099-INT showing $2,997.60 of interest income, the amount of interest you saved on this transaction.

You are not happy about the 1099, so you write to the IRS and ask whether the dealership has a legal right to send you a 1099 for the interest you saved.

Bogus

Here’s what the IRS says: the 1099 is bogus.

In its letter, the IRS states that you do not pay interest to the dealer when you have a zero-interest contract; therefore, it is impossible for you to have cancellation of indebtedness income due to interest that you do not owe. The dealership forgave nothing, because you have a valid contract for zero interest.

Tax Law Damages

Even better, in the next paragraph, the IRS informs you that under Section 7434, you may bring a civil action against this dealer for willfully filing a false information return. If you win this case, the dealer will be liable for damages to you equal to the greater of

  • $5,000, or
  • actual damages, court costs, and reasonable attorneys’ fees.

If You Win, Tell the IRS

The IRS then tells you that if you bring this action for the false 1099, you should send the IRS a copy of the complaint when you file your claim with the court.

Zero Interest Rule

In the tax law, there is no such thing as zero interest. When an installment contract calls for less than the minimum interest, both the buyer and the seller must impute interest. The imputation is done individually, and no 1099s are involved.

Now, here’s a nice break. If this is a business vehicle for you, you

  • pay zero interest under the contract, but
  • deduct interest on your tax return using the imputed interest rates.

Dealer’s Trouble

Here’s another piece of news that will put a smile on your face.

The dealer also has to impute interest. For the dealer, this means reducing the sale price and recognizing imputed interest over the life of your installment payments. The dealer does this for both financial reporting and tax purposes. Thus, from a financial standpoint, the dealer

  • is out $2,997.60 of interest income that you will never pay,
  • must reduce current-year profits by the imputed interest amount, and
  • must recognize imputed interest income as you make payments.

You could say you really stuck it to this dealer. And you are not finished, assuming that you pursue the bogus 1099 penalties.

Takeaways

You have to love the fact that if someone is making trouble for you by giving you a fraudulent 1099, you have tax code remedies.

And when you consider everything, you can likely make far more trouble for the culprit than you suffer.

I had to tell you this story.

Sincerely,

 

P.S. Zero-interest loans have interesting consequences.

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