The Florist - 1099 data reliance
Ep. 1 - 1099 data reliance
The florist is a fictional accounting dystopia set in the fictional nation of the Combined States of Atlantica. This is a continuing series and you can get caught up on the background here:
Upon closing up his florist shop for the day, securing the door, and shutting off the lights; Mr. Profitt proceeded to his office to start working on his tax returns on his newly acquired second hand laptop. He thought that the laptop seemed odd, it was bulkier than what he was used to and had some slightly sticky spots where old sticker labels had been peeled off.
He booted up the computer to be greeted by a loading screen that said; “Welcome to the Receipts and Revenue Service, authorized users only”. His eyes went wide and he realized that this was not a refurbished computer, someone had forgotten to remove the data before putting it up for resale. He felt faint and especially paranoid as not only was this a government computer, but he was at risk of being jailed under the ban on practicing accounting.
He quickly closed the laptop, picked it up, and proceeded to walk down to the desk in the basement of the building to have more privacy. “Well, if they didn’t want this data getting out, they should have erased it.” He thought.
Under a single dim lamp in the basement, he booted up the computer again. He got to the main screen, and then was surprised when there were no login credentials required. Upon the main desktop there was only one icon. It said “Alpha test only.” His curiosity had gotten him this far, and figured he was just as guilty having the computer as running it. So he clicked on the icon and was greeted by an even more surprising splash screen than his first login. It said “Tax GPT; Internal Research AI”.
This was close to, but not quite the same as what he saw on the television news every tax season. Those public service announcements were directing people to the RRS (Receipts and Revenue Service) site to input their tax filing questions to “Taxpayer GPT, the world’s most advanced tax help bot.”
Tax GPT
He pulled up the public site for Taxpayer GPT on his smart phone to see if maybe he was just misreading the title. Sure enough, it said “Taxpayer GPT”, but his laptop said “Tax GPT”. Mr. Proffit decided to test it. He typed into his smartphone on the Taxpayer GPT prompt box; “Do I have to file 1099 forms for all of my vendors?” Taxpayer GPT responded back, “Yes, all of your vendors should be issued a form 1099 by Jan 31 of each year. Failing to do so could result in criminal charges and civil fines.”
On the laptop, Mr. Proffit then typed the same prompt into Tax GPT. The response came back as “You should only file form 1099-NEC for vendors that are sole proprietors or single member LLCs that you did not pay via credit card or third party payment processor. Filing a 1099-NEC otherwise risks posting double income reporting to the recipient.”
Mr. Proffit the Florist was astounded. This was much more detailed than the interaction on the public website. He decided to pry into it some more. He typed another inquiry. “What are you?”
The software posted a reply. “I am an AI developed as a research tool for accountants in the year 0007.” Profit realized that this date was much earlier than the year that accounting was banned in the CSA. He thought that this software may have something to do with that ban, especially if it was hidden away on this computer.
Mr. Proffit glanced at the time on the screen and saw that he was running late. He decided to delve into conspiracy theories later. He needed to get some taxes and bookkeeping done before he left. He also saw that there was a ‘voice’ option in the Tax GPT software.
He clicked on the microphone and asked, “Tax GPT, how do I address you?” The software answered back in a robotic voice. “Please address your questions to Karen or Capone before asking, this will set the angle of response to your question.”
Karen, Capone and 1099s
Proffit gave it a shot. “Karen, What happens if I don’t file 1099 forms?” He asked.
“You will be fined between $50 and $580 per form not filed, and you can be fined twice. Once for not filing and once for not giving a copy to the payee. You also undermine the integrity of the tax data systems as there are fewer points of data available to the RRS to ensure that all taxpayers are paying tax on all income.” It replied.
He tried the same question again, but addressed to Capone. “Capone, What happens if I don’t file 1099 forms?”
The computer answered, “If you don’t file the forms, and are issued a notice, and you lose the appeal to that notice. You could be on the hook for between $50 and $580 per form, twice per form. Not filing those forms means that you don’t rat out other people and let them decide for themselves if they are going to report that income on their taxes. No one likes snitches.”
The surly Capone computer response seemed intriguing, so Profitt continued to address that persona. “Capone, do people abuse the 1099 filing system?”
Capone replied: “Definitely. There have been times where people that weren’t happy with a vendor would file a revenge 1099 against them. They would invent an artificial item of income under the vendor’s name, say for $10,000 and then send the form into the RRS system and make sure to not send the vendor a copy. A few months later, that vendor gets a nasty letter from the RRS saying that they didn’t report $10,000 of income on their tax return and owe tax on that, plus penalties and interest. The vendor either has to hire someone to show the RRS is fake and malicious, or pay the fake tax. Either way they are out time and money.”
Profitt followed up with, “Capone, can’t these people filing fake forms go to prison?”
Capone replied; “I’m sure there could be some kind of criminal fraud charges, but under the way the forms are generally set up, there are only penalties for NOT filing a form, not for filing a malicious form and there is no perjury attestation box on the forms either, unlike a regular tax return.”
“Karen, does the RRS system audit the integrity of these 1099 forms that are submitted?” He asked.
Computer Karen replied, “The RRS knows that taxpayers file these forms with the utmost integrity and so only directs resources to complaints of false returns.”
Profit followed up; “Karen, if two people colluded to file false 1099s with each other, its unlikely they would ever be detected?”
Computer Karen replied, “Each party would be reporting false income on their regular tax return and be caught that way, even if they weren’t caught on the 1099.”
True Data Assumption
Profit realized that based on the AI answers, there was a large problem. The RSS computer system was assuming by default that the data on 1099 forms was true. It then used this “true data” assumption to chase after taxpayers and demand unreported income tax from them, without testing the underlying 1099 data first.
He decided to test Capone to see just how it could respond to more complex questions. Profit asked, “Capone, how could 2 parties collude with each other using fake 1099 forms?”
Capone replied once more. “Sure. A party needing a false source of income could collude with a business needing a false deduction to issue mutually beneficial 1099 forms. The party needing false income could use a false 1099 form to show just enough earned income to not pay income tax, but also qualify for social programs for the working poor as well as refundable tax credits in the thousands of dollars. A party needing false income at a higher level could use that information on a tax return to create fraudulent loan applications.”
Capone continued; “On the false deduction side, a business issuing an artificially inflated 1099 form would claim an expense deduction that would reduce their net profits subject to income tax. Assuming that neither party complained to the RRS the 1099 data would likely be accepted as true.”
Proffit, saddened at the vulnerabilities of the system, but morbidly curious continued to prod. “Capone, what about other types of income besides business income?”
“A person could use stolen information, or a willing partner to issue themselves false 1099-B brokerage statements that show capital losses that would offset their legitimate capital gains.” Says Capone.
Exhausted, Proffit thought he would try one last uplifting question. “Karen, what can a person do if they receive a 1099 form that has obvious wrong information on it?”
Computer Karen cheerfully replied, “The recipient should contact the issuer of the 1099 and request that they file an amended 1099 to correct the error.”
“Ok, Karen, what happens if the issuer refuses to amend, or ignores the request, is the recipient stuck with that data?”
“An error has occurred. Noncompliance is not an option, every citizen must uphold the integrity of our voluntary tax system. Thus there is no way to resolve that situation.” Said computer Karen.
Proffit, frustrated, asked again. “Karen, is there an upper limit to the number of 1099 forms a person can receive? Could a malicious actor just spam their enemy with tens of thousands of fake 1099 form submissions and destroy their tax account while creating an astronomical fake tax bill?”
The program responded with: “Session timeout, please restart program and try again”
By this point it was late, and Proffit’s eyes were burning with eye strain from staring at the screens. He needed some rest and food. He slipped the laptop into one of the ceiling tiles in the basement of the floral shop, both disillusioned with the RRS system and watching over his shoulder with acute paranoia.
He didn’t even get his taxes started, he resolved to try again tomorrow.