Form 1099-OID: Original Issue Discount (2020 Tax Year)

What Form 1099-OID Is For

Form 1099-OID reports a special type of interest income called ""Original Issue Discount"" or OID. Think of it as interest that's built into certain bonds and debt instruments from the moment they're issued—not the kind that gets paid to you regularly like a bank account.

Here's how it works: Imagine a company issues a bond that will be worth $1,000 when it matures in 10 years, but they sell it to you today for only $900. That $100 difference is the OID—it's essentially prepaid interest that you'll earn gradually over the life of the bond, even though you won't actually receive the cash until the bond matures.

The IRS requires this ""phantom income"" to be reported each year because, from a tax perspective, you're earning interest annually even if you haven't received any cash payments yet. Form 1099-OID documents this annual OID income so you can properly report it on your tax return. IRS.gov

Common Debt Instruments That Generate Form 1099-OID

• Zero-coupon bonds (bonds that pay no periodic interest)
• Certificates of deposit (CDs) with terms longer than one year issued at a discount
• Corporate bonds issued below face value
• Certain mortgage-backed securities
• Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities)

If you're a financial institution, broker, or bond issuer, you must file Form 1099-OID when the OID includible in someone's gross income is at least $10, or if you withheld foreign or federal income tax on OID payments. IRS 2020 Instructions

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

Original Filing Deadlines for 2020 Tax Year

For the 2020 tax year, the deadlines were:

• February 1, 2021: Deadline for issuers to furnish Form 1099-OID to recipients (the investors)
• March 1, 2021: Deadline for paper filing with the IRS
• March 31, 2021: Deadline for electronic filing with the IRS

When to File Corrected or Amended Returns

You should file a corrected Form 1099-OID as soon as you discover an error. There's no specific ""late filing"" period—corrections should be made promptly regardless of when you find the mistake.

Common Reasons for Corrections

• Incorrect dollar amounts in the OID or interest boxes
• Wrong recipient name or taxpayer identification number (TIN)
• Missing information or wrong form type used
• Calculation errors in the OID accrual

The IRS provides two correction procedures depending on the type of error. Simple mistakes like wrong dollar amounts require just one corrected form marked ""CORRECTED."" More complex errors like incorrect TINs require a two-step process: first filing a form with zeros to void the original, then filing a completely new correct form. IRS General Instructions 2020

Key Rules or Details for 2020

Several important rules governed Form 1099-OID for the 2020 tax year:

• Reporting Threshold: Issuers must file Form 1099-OID if the total OID for a holder is at least $10 during the calendar year. However, you must also file if you withheld any foreign tax or federal income tax through backup withholding, even if the OID amount is less than $10.
• Who Must File: Financial institutions, brokers holding OID obligations as nominees, bond issuers, trustees of certain trusts (WHFITs and WHMTs), and Real Estate Mortgage Investment Conduits (REMICs) must file this form.
• Exempt Recipients: You don't need to file Form 1099-OID for corporations, tax-exempt organizations, IRAs, Health Savings Accounts, government agencies, or registered securities dealers. This saves considerable administrative burden for issuers dealing with institutional investors.
• OID Calculation Rule: For taxable obligations, the discount must be at least ¼ of 1% of the stated redemption price at maturity, multiplied by the number of full years to maturity, to count as OID. Smaller discounts are treated as zero.
• Covered vs. Noncovered Securities: For covered securities acquired with acquisition premium (when you buy a discounted bond at a higher price than original issue but still below par), issuers must report acquisition premium amortization. This reduces the amount of OID you need to report as income.
• Multiple Forms: If a holder owns multiple discount obligations, you must generally issue a separate Form 1099-OID for each one—unless they meet very specific identical criteria (same issue, same amount, acquired at the same time and price).
• Backup Withholding: If a recipient fails to provide a correct TIN, issuers must withhold federal income tax at the backup withholding rate on OID payments, but only on actual cash payments, not on the accrued OID itself. IRS 2020 Instructions

Step-by-Step (High Level)

For Recipients (Investors) Who Receive Form 1099-OID

Step 1: Review Your Form 1099-OID

When you receive the form (by February 1 following the tax year), check that your name, address, and taxpayer identification number are correct. Verify the amounts seem reasonable based on what you know about your investments.

Step 2: Understand the Key Boxes

• Box 1: Shows the taxable OID you must report as interest income
• Box 2: Shows any other periodic interest paid on the same obligation
• Box 8: Shows OID on U.S. Treasury obligations (reported separately)
• Box 11: Shows tax-exempt OID (like municipal bonds)

Step 3: Report on Your Tax Return

Add the Box 1 amount to your other taxable interest income on Schedule B (if required) and Form 1040. Box 8 amounts also go here. Box 11 tax-exempt OID goes on Form 1040, line 2a (tax-exempt interest) but doesn't increase your taxable income.

Step 4: Keep Records

Retain the form with your tax records for at least three years, as it supports the income you're reporting.

For Issuers and Payers Filing Form 1099-OID

Step 1: Determine Filing Obligation

Calculate the OID for each holder. If it's $10 or more, you must file. Also file if you withheld any taxes, regardless of amount.

Step 2: Gather Information

Collect correct names, addresses, and TINs for all recipients. Verify issue prices, redemption prices at maturity, and calculate daily OID portions for the period each holder owned the instrument.

Step 3: Complete the Form

Fill out Form 1099-OID with the calculated OID (Box 1), any periodic interest (Box 2), and other required information. Use Publication 1212 (Guide to Original Issue Discount Instruments) to help with calculations for publicly offered instruments.

Step 4: File with IRS

Submit Copy A with Form 1096 (transmittal) to the appropriate IRS service center by March 1 (paper) or March 31 (electronic). File electronically if you're submitting 250 or more forms.

Step 5: Furnish to Recipients

Provide Copy B to recipients by February 1. You can use the IRS fillable PDF or an acceptable substitute statement.

Common Mistakes and How to Avoid Them

• Mistake #1: Confusing OID with Regular Interest
  Many people report OID on the wrong line or confuse it with regular interest from Form 1099-INT. How to avoid: Remember that OID is still interest income—it just accrues differently. Report Box 1 OID amounts with your other interest income on your tax return.
• Mistake #2: Incorrect OID Calculations
  Issuers sometimes miscalculate the daily OID portions, especially for obligations held part of the year or those with acquisition premium. How to avoid: Use IRS Publication 1212, which lists OID calculations for many publicly offered instruments. For complex calculations, consult the regulations or a tax professional.
• Mistake #3: Wrong or Missing Taxpayer Identification Numbers
  Filing with incorrect TINs triggers IRS notices and potential penalties. How to avoid: Verify TINs using Form W-9 requests before filing. Consider using the IRS TIN Matching System to validate numbers before submission.
• Mistake #4: Filing Paper When Electronic Filing is Required
  If you file 250 or more information returns, you must file electronically—but many issuers forget this threshold and file paper returns. How to avoid: Count all your 1099 forms (not just 1099-OID) toward the 250 threshold, and set up electronic filing through the IRS FIRE (Filing Information Returns Electronically) system well before deadlines.
• Mistake #5: Not Reporting Small Amounts Under $10
  While the general threshold is $10, you must still file if you withheld any taxes, regardless of the OID amount. How to avoid: Always file Form 1099-OID whenever backup withholding or foreign tax withholding occurred, even for small OID amounts.
• Mistake #6: Failing to File Corrected Returns Promptly
  Some issuers delay filing corrections, hoping the error won't matter. Late corrections can result in penalties. How to avoid: File corrected returns as soon as you discover errors. The correction procedures are straightforward, and prompt action demonstrates reasonable cause if penalties are assessed.
• Mistake #7: Reporting the Wrong Type of Obligation
  Short-term obligations (one year or less) with OID should be reported on Form 1099-INT, not Form 1099-OID. How to avoid: Check the maturity date at issue. If it's one year or less, use Form 1099-INT instead. IRS 2020 Instructions

What Happens After You File

For Recipients

Once you file your tax return including the OID income, the IRS matches the amounts you report against the Forms 1099-OID submitted by issuers. If everything matches, no further action is needed. If there's a discrepancy, you may receive a notice (typically CP2000) proposing additional tax, interest, and possibly penalties. You'll have the opportunity to respond and explain any legitimate differences.

For Issuers

After filing Forms 1099-OID with the IRS and furnishing copies to recipients, your filing obligation is complete for that year—unless you discover errors requiring corrections. The IRS processes the forms and uses the information for compliance matching. Keep copies of all filed forms and supporting documentation for at least three years.

IRS Processing

The IRS enters the 1099-OID data into their Information Returns Processing (IRP) system, which cross-references the information with individual tax returns. This automated matching helps identify taxpayers who may have underreported income.

Recipient Inquiries

Recipients may contact you with questions about their Forms 1099-OID. You should retain sufficient records to respond to inquiries and explain calculations.

Potential Penalties

If the IRS discovers filing failures or errors, you may receive penalty notices. These can often be abated by showing reasonable cause and demonstrating that you've corrected the issues promptly. IRS General Instructions 2020

FAQs

Q1: I received a Form 1099-OID but never received any cash payments. Do I still owe taxes?

Yes. OID is taxable as it accrues each year, even though you haven't received any cash. This is often called ""phantom income."" The theory is that the increasing value of your bond represents interest you're earning. You'll need to pay tax on the OID reported in Box 1, even without cash flow. When the bond matures and you receive full payment, much of that gain will already have been taxed through these annual OID inclusions, avoiding double taxation.

Q2: What's the difference between Form 1099-OID and Form 1099-INT?

Form 1099-INT reports regular interest paid during the year—like interest from your savings account or annual coupon payments from bonds. Form 1099-OID reports original issue discount, which is interest built into discounted debt instruments that accrues over time. Some debt instruments may generate both forms if they have both OID and periodic interest payments. However, issuers can choose to report everything on a single Form 1099-OID, showing the OID in Box 1 and periodic interest in Box 2.

Q3: I bought a bond mid-year. How is my OID calculated?

The issuer or broker should calculate your OID based only on the period you actually owned the bond. OID accrues daily, so if you held the bond for six months, you should receive credit for roughly half the annual OID. The person who sold you the bond should receive Form 1099-OID for the period they held it. This daily accrual method ensures each holder reports OID only for their ownership period.

Q4: What happens if my Form 1099-OID has errors?

Contact the issuer or broker immediately. They're responsible for filing corrected forms with the IRS and sending you a corrected copy. If you've already filed your tax return with incorrect information, you may need to file Form 1040-X (Amended U.S. Individual Income Tax Return) once you receive the corrected Form 1099-OID. Don't wait until the error is officially corrected if you know the right amount—you can file with the correct information and attach an explanation.

Q5: Do I need to file Form 1099-OID for municipal bonds?

Tax-exempt OID from municipal bonds is reported in Box 11 of Form 1099-OID. While this OID isn't taxable, it must still be reported to the IRS. Recipients report it as tax-exempt interest on their returns. Issuers must file Form 1099-OID if the tax-exempt OID is $10 or more, using the same filing procedures as for taxable OID.

Q6: What are the penalties for late filing or not filing at all?

For the 2020 tax year, penalties for issuers were:

• $50 per form if corrected within 30 days (maximum $565,000; $197,500 for small businesses)
• $110 per form if corrected by August 1 (maximum $1,696,000; $565,000 for small businesses)
• $280 per form if corrected after August 1 or not filed (maximum $3,392,000; $1,130,500 for small businesses)
• At least $560 per form with no maximum for intentional disregard

Separate penalties apply for failing to furnish correct forms to recipients. However, penalties can be avoided if you can demonstrate reasonable cause and show you acted responsibly. IRS General Instructions 2020

Q7: Can I file Form 1099-OID electronically, and is it required?

Yes, you can file electronically through the IRS FIRE (Filing Information Returns Electronically) system. Electronic filing is mandatory if you're filing 250 or more information returns of any type during the calendar year (not just Forms 1099-OID—this includes all Forms 1099, W-2, etc.). Electronic filing offers the advantage of an extended deadline (March 31 instead of March 1) and typically results in faster processing with fewer errors.

Sources

About Form 1099-OID
2020 Instructions for Forms 1099-INT and 1099-OID
2020 General Instructions for Certain Information Returns

This guide is for informational purposes only and does not constitute tax advice. For specific situations, consult with a qualified tax professional or refer to the official IRS publications.

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