Information reporting for publicly offered OID instruments.

The following article was submitted by Cary Russ, who is the Chief, Technical Field Support, of the Internal Revenue Service's Financial Products and Transactions Program. Mr. Russ prepared the article in response to a U.S. General Accounting Office recommendation that the IRS increase its educational efforts in respect of the information reporting obligations associated with publicly offered original issue discount instruments. Specifically, the March 1996 GAO's report, entitled "Tax Administration: IRS Can Improve Information Reporting for Original Issue Discount (OID) Bonds," states that the IRS should "work with representatives of the securities industry to develop a means to inform and remind OID bond issues of their responsibility to file Forms 8281."

Information reporting is a vital tool for taxpayers and the Internal Revenue Service. Information reporting assists taxpayers in properly reporting their income and the IRS in promoting voluntary compliance with the federal income tax laws. IRS Publication 1212 is the primary tool for insuring for information reporting on original issue discount instruments.

In general, a debt instrument that bears no interest, or bears interest at a rate lower than the current market rate, will usually be issued at less than its face amount. This discount is known as original issue discount (OID) and is taxable as a form of additional interest. OID is reported as it occurs, whether or not payments are actually received. Some types of discounted debt instruments include corporate bonds, municipal bonds, certificates of deposit, stripped bonds, and collateralized debt obligations. There are a number of debt instrument exceptions to the OID rules.

OID bonds are to appear in IRS Publication 1212 after bond issuers -- primarily corporations -- supply IRS with information by filing Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. The issuer of a publicly offered debt instrument that has OID must file Form 8281 within 30 days of issuance, and issuers who willfully report late or not at all are subject to a penalty of 1 percent of the issue price, up to a maximum of $50,000. It is the issuer's responsibility to file Form 8281 with the IRS Detroit Computing Center in Detroit, Michigan.

IRS Publication 1212, List of Original Issue Discount Instruments, contains a list of OID instruments. Some information contained in the publication is compiled from the Forms 8281. The primary purpose of the publication is to help brokers and other middlemen identify publicly offered OID debt instruments, which they hold as nominees for the true owners, so they can comply with their responsibility to file Forms 1099-OID and Forms 1099-INT. A secondary purpose is to assist owners of publicly offered their income tax returns. Therefore, it si important that issuers of publicly offered debt instruments, that have OID, properly file Form 8281.

To help ensure compliance with the reporting requirements for publicly offered OID instruments, the IRS will be working with representatives of the securities industry to better inform and remind OID bond issuers of their responsibility to file Forms 8281. In addition, IRS will be monitoring the filing of Forms 8281, including assertion of penalties, where appropriate.

This article is one step being taken to remind issuers of OID bonds, as well as securities industry representatives, of the responsibility to timely file Forms 8281 within 30 days of the issuance of publicly offered debt instruments. Further information can be obtained from IRS Publication 1212 and Form 8281 filing instructions.

For further information contact: Cary Russ, Chief, Technical Field Support, IRS Financial Products and Transactions Program, at (847) 5812010.