Form 1099-OID: Original Issue Discount (2014) - A Complete Guide

What Form 1099-OID Is For

Form 1099-OID is an IRS tax form used to report Original Issue Discount (OID) – a special type of interest income that builds up on certain debt obligations. Think of OID as "invisible interest" that accumulates over time when you buy bonds, certificates of deposit (CDs), or similar investments at a price lower than what they'll be worth at maturity.

Here's the key concept: if you buy a bond for $900 that will pay you $1,000 when it matures in five years, that $100 difference is OID, not regular interest. Even though you won't receive cash payments until maturity, the IRS requires you to report a portion of that discount as taxable income each year you hold the obligation. IRS Form 1099-OID Instructions

Financial institutions – including banks, brokerage firms, and bond issuers – must send you Form 1099-OID if your OID for the year totals $10 or more. The form helps you accurately report this income on your federal tax return, even though you haven't actually received the money yet.

When You’d Use Form 1099-OID (Late/Amended Filings)

Under normal circumstances, you'll receive Form 1099-OID from your financial institution by February 2, 2015 (for tax year 2014). You then use this information when preparing your 2014 tax return, which is typically due April 15, 2015.

However, several situations might require late or corrected filings:

If you're a recipient who discovers errors on your Form 1099-OID after filing your tax return, you should contact the issuer to request a corrected form. If the error resulted in incorrect income reporting, you may need to file an amended return using Form 1040X to correct your tax liability. IRS Guidance on Missing or Incorrect Forms

If you're a payer (financial institution) who issued an incorrect Form 1099-OID, you must file a corrected return by checking the "CORRECTED" box on a new Form 1099-OID and submitting it to both the IRS and the recipient. Corrected returns follow the same filing rules as original returns – paper forms by March 2, 2015, or electronic filings by March 31, 2015.

You might also receive a late Form 1099-OID if your financial institution discovered unreported OID obligations after the normal filing deadline. In such cases, you should amend your return to include this income and avoid potential penalties.

Key Rules or Details for 2014

The 2014 tax year introduced several important reporting requirements and rules for Form 1099-OID:

Filing Thresholds: Payers must file Form 1099-OID if the OID includible in gross income is at least $10, if any foreign tax was withheld on OID, or if federal income tax was withheld under backup withholding rules (even if the OID amount is less than $10). IRS About Form 1099-OID

New Covered Securities Reporting: 2014 saw enhanced reporting requirements for "covered securities" – debt instruments acquired with market discount, bond premium, or acquisition premium. Financial institutions must now provide additional detail about premium amortization and market discount accruals for covered securities. 2014 Instructions

Backup Withholding: If you failed to provide your correct Taxpayer Identification Number (TIN) to the payer, they must withhold federal income tax at a 28% rate on OID payments. This withheld amount appears in Box 4 of your Form 1099-OID.

Obligations Covered: Form 1099-OID applies to bonds, debentures, notes, certificates, and other debt instruments with terms exceeding one year. This includes corporate bonds, government agency bonds, CDs with terms over one year, zero-coupon bonds, and Treasury Inflation-Protected Securities (TIPS). Short-term obligations of one year or less are reported on Form 1099-INT instead.

Exempt Recipients: Corporations, tax-exempt organizations, retirement accounts (IRAs, HSAs), government agencies, registered securities dealers, and brokers don't receive Form 1099-OID because they're exempt from this reporting requirement.

Step-by-Step (High Level)

For Recipients (Investors):

• Receive the form by February 2, 2015, from any financial institution holding OID obligations on your behalf
• Review Box 1 (Original Issue Discount for 2014) to identify your reportable OID income
• Check for adjustments: Depending on when you acquired the obligation, whether you paid a premium or discount, and other factors, you may need to adjust the Box 1 amount using IRS Publication 1212
• Report on your tax return: Include the OID amount (adjusted if necessary) as interest income on Schedule B of Form 1040 if your total interest exceeds $1,500
• Claim deductions: If Box 3 shows an early withdrawal penalty, deduct this amount on Form 1040 as an adjustment to income
• Account for withholding: Report any backup withholding shown in Box 4 as federal tax withheld on your return

For Payers (Financial Institutions):

• Identify qualifying obligations in your records that generated at least $10 in OID during 2014
• Calculate OID amounts for each holder based on the portion of the year they owned the obligation
• Complete Form 1099-OID for each recipient, including all required boxes (recipient information, OID amounts, any withholding, premium amortization for covered securities)
• Furnish Copy B to recipients by February 2, 2015
• File Copy A with the IRS along with Form 1096 (transmittal form) by March 2, 2015, for paper filing, or by March 31, 2015, for electronic filing
• Retain Copy C for your records for at least four years

Common Mistakes and How to Avoid Them

Mistake #1: Reporting the Wrong OID Amount

Many taxpayers simply copy the Box 1 amount onto their tax return without realizing adjustments may be necessary. If you bought a bond between interest payment dates, acquired it at a premium, or purchased a stripped bond or coupon, Publication 1212 provides specific calculation methods. Solution: Consult IRS Publication 1212 or a tax professional if your situation involves anything beyond holding a bond for the entire year from its original issue date.

Mistake #2: Confusing OID with Regular Interest

Box 2 on Form 1099-OID shows "Other Periodic Interest" – this is regular stated interest, separate from OID. Both amounts must be reported as interest income, but they're different types of income. Solution: Add Box 1 and Box 2 together (after any necessary adjustments) to determine your total interest income from that obligation.

Mistake #3: Missing the Early Withdrawal Penalty Deduction

If you cashed in a CD early and forfeited interest (shown in Box 3), this is a valuable deduction that reduces your adjusted gross income. Many taxpayers overlook this. Solution: Always check Box 3 and claim this deduction on the appropriate line of Form 1040 (it's an "above-the-line" deduction).

Mistake #4: Failing to Report Market Discount

For covered securities acquired with market discount where you've made an election to include the discount in income, Box 5 shows the accrued market discount. This must be reported as ordinary income. Solution: If Box 5 has an amount, report it as interest income on your return.

Mistake #5: Incorrect Taxpayer Identification Numbers

Payers who use incorrect TINs face "second TIN notice" penalties and must implement backup withholding. Recipients who provide incorrect TINs will have 28% of their income withheld. Solution: Always verify TINs using Form W-9 before the first payment, and consider using the IRS TIN Matching service if you're a payer filing large volumes of forms.

Mistake #6: Filing Paper Forms Downloaded from IRS.gov

The IRS explicitly warns that paper Forms 1099-OID printed from their website cannot be scanned during processing and will be rejected. Solution: Order official pre-printed forms by calling 1-800-TAX-FORM or file electronically through an IRS-approved system.

What Happens After You File

For Recipients: Once you've included the Form 1099-OID information on your tax return, the IRS will match the income you reported against the information returns filed by financial institutions. If the IRS computer systems detect a discrepancy (you reported less OID than what payers reported), you'll receive a CP2000 notice – a proposed adjustment to your tax return. This typically arrives 12-18 months after you file. You'll have the opportunity to respond, either agreeing to the adjustment and paying additional tax, or explaining why your reported amount is correct (for instance, if you made legitimate adjustments per Publication 1212).

The OID income increases your adjusted gross income, which can affect your eligibility for various credits and deductions, including education credits, the Earned Income Tax Credit, and deductibility of IRA contributions.

For Payers: After filing Forms 1099-OID with the IRS, you must retain copies for at least four years. The IRS may audit your information returns to verify compliance with reporting requirements. Penalties for non-compliance include:

• $50-$280 per form for late filing (varying based on how late)
• $280-$580 per form for intentional disregard of filing requirements
• Additional penalties for failure to furnish correct statements to recipients

The IRS uses the information from Forms 1099-OID to pre-populate its systems and identify taxpayers who underreport income. This makes accurate, timely filing crucial for both payers and recipients.

FAQs

Q1: I bought a CD in July 2014 that matures in 2017. Why am I receiving a Form 1099-OID?

If your CD has a term exceeding one year and was issued at a discount, you must report a portion of the OID each year you hold it, even though you won't receive the full amount until maturity in 2017. The financial institution calculates your share based on the months you held the CD in 2014 (July through December).

Q2: The amount in Box 1 doesn't match my records. What should I do?

First, verify you're looking at the correct form and time period. If there's still a discrepancy, contact the issuer immediately to request a corrected Form 1099-OID. Don't simply ignore the form – the IRS receives a copy and will expect you to report that income. Keep documentation of your communications with the issuer in case of an IRS inquiry.

Q3: I sold my bond in September 2014. Do I report the full year's OID?

No. You should only report the OID that accrued during the portion of the year you held the bond (January through September). However, the Form 1099-OID you receive should already reflect this prorated amount. If you sold the bond through a broker, they're responsible for calculating the correct OID allocation.

Q4: What's the difference between covered and noncovered securities on Form 1099-OID?

Covered securities (generally acquired after January 1, 2014, for debt instruments) require more detailed reporting by financial institutions, including calculations for acquisition premium, bond premium, and market discount. For noncovered securities, payers only report the gross OID amount, and you're responsible for any adjustments. This information affects what you see in Boxes 5 and 6.

Q5: I'm holding bonds as a nominee for someone else. What are my reporting responsibilities?

If you received Form 1099-OID as the holder of record but the income actually belongs to someone else, you must file "nominee" Forms 1099-OID. You become the payer, listing each actual owner as the recipient, showing their allocable share of OID. File these forms with Form 1096 and furnish copies to each actual owner. This prevents the IRS from thinking you earned all the income.

Q6: Can I avoid paying tax on OID by holding the bond in a tax-deferred account?

Yes. If your OID obligations are held within an IRA, 401(k), or other tax-deferred retirement account, you won't receive Form 1099-OID and won't owe tax on the OID until you withdraw money from the account (typically in retirement). This is one reason retirement accounts are popular for holding long-term bonds.

Q7: What happens if I never received a Form 1099-OID but I know I have OID income?

You're still legally required to report the income even without receiving the form. Contact the financial institution to request your Form 1099-OID. If you cannot obtain it by the tax filing deadline, calculate the OID yourself using Publication 1212 and report it on your return. Keep records of your attempts to obtain the form in case of an IRS inquiry.

Additional Resources

IRS Form 1099-OID (2014)
Instructions for Forms 1099-INT and 1099-OID (2014)
Publication 1212: Guide to Original Issue Discount (OID) Instruments

This summary is for educational purposes and based on 2014 IRS regulations. Tax situations vary, so consult a qualified tax professional for advice specific to your circumstances.

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