Tax Administration:

IRS Can Improve Information Reporting for Original Issue Discount Bonds

GGD-96-70: Published: Mar 15, 1996. Publicly Released: Mar 15, 1996.

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GAO provided information on the Internal Revenue Service's (IRS) efforts to ensure that taxpayers report investment income earned from bonds sold at original issue discount (OID), focusing on the completeness and use of IRS Publication 1212.

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 for Executive Action

  1. Status: Closed - Implemented

    Comments: The AC Collection will be responsible for monitoring OID bond issuance reporting via the Detroit MFCT. For example, MFCT will be responsible for determining the most effective means of monitoring compliance with the OID bond issuance reporting requirements and, in coordination with the office of the AC for Examination, will develop a system for generating enforcement leads on potential nonfilers and taking appropriate enforcement action.

    Recommendation: To help IRS better meet its responsibility to provide middlemen with complete and reliable information that can be used for OID information reporting, and to help better ensure that the billions of dollars of OID income are properly reported for tax purposes, the Commissioner of Internal Revenue should assign organizational responsibility for monitoring and enforcing the OID bond issuance reporting requirement to specific organizational units and establish formal linkages between the units so that each can effectively carry out its responsibilities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS Examination contracted with a commercial reporting service, WSC Investment Services of New York, to provide information on long-term OID bonds that were issued in 1996. On November 12, 1997, WSC provided a listing to Examination of the OID bond issuances identified by WSC Investment Services that did not file the Form 8281 with the IRS and, therefore, were not included in Publication 1212. Examination will follow up on those OID issuances not reflected in Publication 1212.

    Recommendation: To help IRS better meet its responsibility to provide middlemen with complete and reliable information that can be used for OID information reporting, and to help better ensure that the billions of dollars of OID income are properly reported for tax purposes, the Commissioner of Internal Revenue should develop procedures, such as periodically matching the list of OID bonds in Publication 1212 with those contained in databases outside of IRS, to improve and help ensure the completeness and reliability of Publication 1212 as an authoritative source of OID information for middlemen.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: The Technical Field Support Section of the Office of Finance Products and Transactions took the lead in drafting and finalizing a newsletter item of OID reporting requirements, then ensured that this information would be disseminated throughout the financial securities industry as well as being made available to other interested parties. A number of organizations/associations have been given this information. The OID information has also appeared on the IRS web site, and was incorporated in the Coordinated Examination Program (CEP) newsletter, CEP Extra. Lastly, a series of memoranda were issued to the Regional Compliance Officers, for distribution to all Field Examination Groups, regarding the filing requirement of Form 8281.

    Recommendation: To help IRS better meet its responsibility to provide middlemen with complete and reliable information that can be used for OID information reporting, and to help better ensure that the billions of dollars of OID income are properly reported for tax purposes, the Commissioner of Internal Revenue should work with representatives of the securities industry to develop a means to inform and remind OID bond issuers of their responsibility to file Forms 8281.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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