Tax Administration

IRS Can Improve Information Reporting for Original Issue Discount Bonds Gao ID: GGD-96-70 March 15, 1996

Information reporting is a vital tool for the Internal Revenue Service (IRS) in promoting voluntary compliance with U.S. income tax laws. This reporting, which is done through a series of returns designed to report nonwage income on IRS Forms 1099, is intended to ensure that taxpayers know of and report investment and other income on their tax returns. This report focuses on IRS efforts to ensure that investment income earned from bonds sold at "original issue discount" is reported. Those efforts center on an IRS publication--List of Original Issue Discount Instruments--that furnishes data for use in preparing Form 1099. GAO discusses (1) whether the publication provides a complete list of existing original issue discount bonds, (2) how IRS ensures that the list is complete, and (3) whether the publication's target audience uses the publication in preparing Form 1099.

GAO found that: (1) IRS asserts that OID bond issuers can rely on Publication 1212 to identify all publicly offered OID bonds and compute OID income, but Publication 1212 did not list at least 37 bonds worth billions of dollars; (2) although IRS primarily relies on its sizable penalty to ensure that OID bond issuers file IRS Form 8281 to report OID bond issues, no IRS organization has primary responsibility for monitoring such compliance and there is no evidence that IRS has ever assessed the penalty; (3) IRS has not assessed penalties for late filings of Forms 8281; (4) IRS does not use other information it receives, such as corporate tax returns, to help ensure compliance with Form 8281 reporting requirements; (5) because Publication 1212 is not complete, those relying on the publication to determine their information reporting requirements may not be reporting on all OID bonds; and (6) although some banks and middlemen consider Publication 1212 to be incomplete, they indicated that the publication does serve as a starting point, authority, and reference source.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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