However, we found no IRS organization with primary responsibility for monitoring issuers’ compliance and assessing the penalty, and no evidence that IRS had ever assessed the penalty. IRS had no record of Forms 8281 being filed for the 37 bonds we found missing from Publication 1212. IRS Did Not Use Other Means to Obtain Compliance

IRS receives other information that it could use to help ensure that OID issuers file Forms 8281. Middlemen’s Reliance on Publication 1212 May Result in OID Underreporting

Because Publication 1212 is incomplete, middlemen relying on its information to meet their OID information reporting requirements may not be reporting on all OID bonds they hold for their customers. Bond holders, consequently, may not report such income on their tax returns. Although IRS has continued to issue the publication, it has done little to ensure that the publication contained information on all the appropriate OID bonds. Recommendations to the Commissioner of Internal Revenue

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, we recommend that you 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; 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; and 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. Tax Policy and Administration: IRS’ Efforts to Ensure Corporate Tax Compliance (GAO/T-GGD-91-21, Apr.
Why GAO Did This Study

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.

What GAO Found

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.