Information reporting for publicly offered OID instruments.

• Author: Ross, Cary

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...