1099-OID

The premium is an amount above par that you pay for an investment.  For example, if you buy a $10,000 bond for $10,500, you are paying a premium.  The higher price you pay results in a lower than stated interest rate of the investment.  If it is "covered" it is reported to the IRS.  If it is non-covered, it is not reported to the IRS.   

Several TurboTax users have noted that TurboTax claims that Charles Schwab 1099-OID’s for tax-exempt bonds with a positive bond premium in Box 10 must have Box 10 manually reduced to 0 because Schwab provides no Box 2 value and it is treated as being null (0). For young or lower income tax payers it is probably fine to change Box 10 to 0 and simply allow TurboTax to compute an erroneously high 1040 Line 2A value for the net tax-exempt income. After all that doesn’t affect their taxes due.

HOWEVER, for medicare eligible, higher income tax-payers, simply changing Box 10 to 0 might be a costly mistake. If you happen to be very near the top of one of the Medicare IRMAA income brackets you might possibly be subjected to as much as $2,900/year/couple in higher Medicare premiums. Even a single dollar of erroneously high net tax-exempt income could theoretically cause your MAGI (taxable AGI plus net tax-exempt income) to bump you into the next higher IRMAA bracket. Unfortunately the exact IRMAA brackets for 2023 Medicare premiums won’t be announced until December 2022 (much later than when you file your 2021 taxes that are used for determining what your 2023 Medicare premiums will be).

After several failed attempts to get Schwab to send me and others corrected 1099’s, I have decided to change the 1099-OID Box 10 value to 0, AND TO REPORT in TurboTax for the Schwab 1099-INT a positive “adjustment to interest” of type “T --- Bond premium on tax-exempt”. The positive amount of the adjustment is the total amount of the 1099-OID box 10 value that had to be set to 0. This seems to then allow TurboTax to compute the correct net tax-exempt income for Line 1040 Line 2A. Schwab clients shouldn’t have to know how to make these manual adjustments (that could be error prone) in order to get the proper net tax-exempt interest for 1040 Line 2A.

After careful reading of IRS Pub 550 and Instructions for Forms 1099-INT and 1099-OID it is clear that for tax-exempt bonds subject to OID reporting, the IRS requires the payer to report the usually relatively insignificant net tax-exempt OID as Box 11 minus Box 6 of the 1099-OID (and I agree that Schwab must generate a 1099-OID with Box 11 and Box 6 populated for the bonds subject to OID reporting). The IRS also describes two options for payers to report net tax-exempt income (for the usually much larger semi-annual interest payments). It can be reported VIA 1099-INT (Box 8 minus Box 13) OR VIA 1099-OID (Box 2 minus Box 10).

Without any apparent justification in those IRS documents, the dimwits at Schwab (or their subcontractors) apparently decided to report the total gross tax-exempt income (for all OID and non-OID bonds) on 1099-INT Box 8 but to only report the non-OID bond premium in Box 13. Without any apparent justification, they decided to separate out and report the individual bond premium for OID bonds on individual 1099-OID’s Box 10 without reporting the gross tax-exempt interest for those bonds in the same 1099-OID’s Box 2 (as implied by the IRS instructions giving payers the option to report the semi-annual periodic interest for those bonds in the 1099-OID rather than the 1099-INT).

There appear to be absolutely no IRS instructions telling tax payers or tax prep software developers that they should match up gross tax exempt interest on the single 1099-INT with the bond premiums on multiple 1099-OID’s Box 10. It appears perfectly valid for TurboTax to complain about the Schwab 1099-OID’s. While I have no easy way of knowing, I seriously doubt that other tax-prep software would handle the bizarre reporting by Schwab any better, and I seriously doubt that the IRS would adjust the 1040 Line 2A value before passing it along to CMS/Medicare for IRMAA based premium calculations. It would seem reasonable and probably required by the IRS to treat a negative value for 1099-OID Box 2 minus 1099-OID Box 10 as 0 rather a negative value to be used as an adjustment to Form 1040 Line 2A. At least TurboTax warns about the reporting error. Some tax-prep software might silently discard the adjustment that should reduce the Form 1040 Line 2A value.

Frankly, I could find no REALLY REALLY explicit IRS instructions specifically forbidding the bizarre Schwab manner of reporting bond premiums, but then why should they have to forbid all cases of stupidity. Rather than this possible omission tacitly implying that Schwab has reported the data properly, I believe that it is merely indicative of the IRS document authors simply never considering that any payer would be so incredibly naive as to split up the reporting of gross interest and the associated premium onto separate forms (as Schwab has done). The 1099-INT Box 13 instructions seem clear enough to me that Box 13 is supposed to contain the bond premium for any bond interest reported in 1099-INT Box 8 (that seems to implicitly include bonds subject to OID if the payer has chosen to report the semi-annual gross tax-exempt income in 1099-INT Box 8). The instructions very definitely DO NOT say ANYWHERE that it is OK for the payer to report the semi-annual gross tax-exempt income in 1099-INT Box 8, report $0 premium in 1099-INT Box 13, and then turn around and report the premium associated with that gross income in a completely different form (in this case 1099-OID Box 10) where the premium will be ignored by tax-prep software rather than used to compute the correct net tax-exempt income.

It appears to me that Schwab (or their subcontractors) had incredibly poor understanding of proper accounting methods to report an adjustment to income on a completely separate form from the form that reports the associated gross income that needs to be adjusted. I have repeatedly asked that this issue be escalated to the proper level, but I have repeatedly been told that Schwab thinks what they have been doing is correct and that their software cannot generate the corrected consolidated 1099 that I have requested (at least I agree that bad software cannot magically become good software without putting some effort into fixing it). I understand that this issue is again being reviewed, but so far after several alleged reviews I have heard no credible justification for the manner of reporting that Schwab has done for years. I have so far gotten no commitment from Schwab to correct their software and otherwise take responsibility for what sure appears to be improper reporting for several years.

For many years Charles Schwab has failed to comply with the official IRS payer instructions for reporting interest on OID bonds.  If you have a bond that is NOT in default and TurboTax flags it as an error saying that 1099-OID box 2 cannot be less than Box 10 (and the bond is not really in default) then you probably have a situation where the brokerage has reported the interest on the 1099-INT and the associated premium for that bond has been incorrectly reported on 1099-OID.   TurboTax will require that you 0 out Box 10 and suggest that you can take a deduction on schedule A for what appears to them to be lack of interest on a bond that they have reason to believe is in default.   If the bond really paid interest that was reported on 1099-INT taking a deduction on Schedule A is not correct.  If you really want your proper net interest calculated on the Form 1040, you probably need to enter an adjustment to interest on the 1099-INT as described below.  Also, please be sure to ask/demand that your brokerage (probably CS) provide a corrected consolidated 1099 that complies with IRS payer instructions by reporting interest and associated premium on the same form (per IRS payer instructions).  You should not have to deal with this.  TT properly handles all 4 IRS sanctioned means of reporting net interest, but they cannot really distinguish a true default situation from incompetent payer  reports of interest and associated premium on two different forms such as Charles Schwab insists on doing.

Here are gory details of the problem:

EXECUTIVE SUMMARY:

For many years, Charles Schwab has knowingly exposed customers to the risk of financial harm by failing to comply with published IRS instructions on how to report net income on bonds subject to OID reporting on the 1099-OID. The official IRS publications require bond interest payers like Charles Schwab to report net income to their customers and indicate that Tax Prep software like TurboTax is to then report their lower net (rather than gross) income on the IRS Form1040.

Unfortunately, the ridiculously complicated official IRS payer instructions allow payers to report net interest in 4 different ways (rather than requiring 1 clear way). The official payer instructions indicate that when gross interest is being reported the associated premium should be reported on the same form as the interest (either the 1099-INT or the 1099-OID, but not both). Because Charles Schwab inappropriately insists upon reporting the gross interest for those OID bonds on the 1099-INT (with no premium adjustment on that form) and the associated premium for those bonds on the 1099-OID (with no interest reported there), their non-compliant reporting forces TurboTax to treat a single OID bond as if it is two separate bonds. The 1099-INT tells TurboTax that the full gross interest has no associated premium (without indicating whether there is net OID associated with that instantiation of the bond). The 1099-OID falsely tells TurboTax that the premium is associated with a second un-linked bond that has OID reporting requirements but is in default (because no gross interest is reported on the 1099-OID). TurboTax complies with IRS requirements and forces the user to discard the premium for these bonds that appear to be in default and offers (in this case inappropriately) that the presumed lack of interest on the bond that appears to be in default can be used to claim an itemized deduction on Schedule-A. Because Charles Schwab has totally destroyed the linkage between the gross interest and the associated premium, there is absolutely no way for TurboTax to know that the premium is associated with the gross interest that was improperly reported on the different form. Charles Schwab has repeatedly suggested to me and others that this is deficiency in TurboTax when in fact it represents out-right incompetency in Charles Schwab reporting format and their customer complaint handling. Rather than questioning the competency of TurboTax, Charles Schwab should question the competency of their tax adviser.

Myself and others have found that we can get TurboTax to accurately generate net income on the form 1040 by telling TurboTax that we need to adjust the gross interest that is reported on the 1099-INT. If done correctly that, causes TurboTax to compute the same net income as any of the 4 official IRS means of reporting net interest. I believe it is totally unacceptable for Charles Schwab to tell their customers that they need to consult a tax advisor or search for a complicated error prone adjustment when TurboTax perfectly handles all 4 of the official IRS means of reporting net interest.

For themselves and others, I believe that Charles Scwhab customers that get a 1099-OID that incorrectly indicates to TurboTax that a bond is in default should demand that Charles Schwab comply with the offficial IRS payer instructions by reporting gross interest and its associated premium on the same form. You may also want to file an IRS SAMS complaint. You may at your own risk want to tell TurboTax that you need to adjust the interest that was erroneously reported on the 1099-INT without the associated premium. You might want to consider moving your account to Vanguard who complies with the official IRS payer instructions.

If you have lost money due to Charles Schwab’s incompetent reporting that fails to comply with the official IRS payer instructions, you should probably ask Chales Schwab for compensation and if necessary consider seeking a law firm that will file a class action lawsuit against Charles Schwab and their tax adviser.

You should know that Charles Schwab claims they will no longer talk to me about this problem, but I claim they have repeatedly failed to properly address the issues I have presented. They have repeatedly failed to provide proof that there is anything in the official IRS publications that explicitly gives them an option to report interest and associated premium on the separate forms (trust me, if there were such an option the IRS publications would need to have a huge amount of additional text detailing yet another option and all the restrictions when using utilizing that option). Charles Schwab has repeatedly failed to provide proof that TurboTax should be expected to handle their bizarre reporting format and yet they repeatedly suggest that this is a deficiency in TurboTax. I see this as raising serious questions about the integrity of Charles Schwab and their tax adviser (that has apparently told them that they do not need to change their reporting). I understand that the initial decision on how to report premium for OID bonds was probably a case of accidental incompetence and it is possible that the IRS may have inadvertently given some form of inappropriate approval for their idiotic reporting format, but the repeated failure to resolve this customer affecting issue raises significant questions about the integrity of their complaint resolution process and appears to me to represent gross incompetence (or possibly an attempt to fraudulently conspire to avoid taking full responsibility for the on-going reporting errors that cause financial harm and confusion for their customers).

ADDITIONAL DETAIL AND ISSUES:

Charles Schwab exposes clients to risk of financial harm by their on-going failure to comply with IRS payer instructions for tax-exempt (and possibly taxable) OID bonds. For several years Charles Scwhab (CS) has failed to comply with the IRS published payer instructions for reporting purchase price premium for tax-exempt municipal bonds for which they are required to report OID (original issue discount). (See the section below for a possible similar issue for taxable OID bonds.) As described below, the on-going CS failure to properly report OID bond premium causes TurboTax (TT) to complain that there is a reporting error. Unless you make a manual adjustment, the net effect is that TT ends up reporting the full larger gross interest rather the proper net interest for these OID bonds on the 1040 Line 2a. This causes the IRS to calculate an erroneously high Modified Adjusted Gross Income (MAGI) that is the sum of taxable and tax-exempt income. This erroneously high MAGI in turn might cause a couple to pay an extra $2,900 per year in Medicare premiums when the erroneously high MAGI bumps them into the next higher Medicare IRMAA surcharge bracket. An erroneously high MAGI might disqualify CS clients for energy saving tax credits, electric vehicle tax credits or other benefits that are restricted to a maximum MAGI. Admittedly, not all customers will be affected on a regular basis, but CS’s refusal to comply with the official IRS payer instructions may cause the most problems for customers with large muni bond holdings.

The amount of erroneous extra income that CS causes TT to report is the Total Bond Premium that has incorrectly been placed in summary 1099-OID Box 10. Given that CS has chosen to report the associated interest on 1099-INT Box 8, the IRS payer instructions indicate that the disputed amount should have been added to the 1099-INT Box 13 and zero should have been reported on 1099-OID Box 10 (since the interest and associated premium are supposed to be on the same form). If CS cared about their customers and properly complied with the official IRS payer instructions so as to generate proper 1099 forms you would never need to worry about this and TT would compute the correct net TE income for 1040 Line 2a.

Please help yourself and others to have accurately computed MAGI. Because CS has repeatedly refused to correct their reporting to comply with the published IRS instructions, I am planning to share this article with tax-advisors, CS clients, etc. I ask that you review this article and if you or your tax-advisor agree that CS should correct their reporting, please ask/demand CS that CS provide a corrected 1099 that complies with IRS requirements by reporting the interest and associated premium for OID bonds on the same tax form. Also please consider spreading the word to others that might be affected. It is way past time that CS treat their customers fairly in this regard. I have found that many bond holders seem to have been unaware of the risk of an erroneously high MAGI.

There is absolutely no indication that Congress has intended or authorized that MAGI be computed using gross rather than net tax-exempt income for OID bonds. CS has acknowledged being aware that TT users are getting an erroneously high MAGI, but CS has done absolutely nothing constructive to resolve this problem. They have repeatedly suggested without proof that TurboTax is deficient, but CS has failed to acknowledge that the real problem is their reporting. The CS reporting that fails to comply with the official IRS published payer instructions leaves TT with no choice but to force the user to discard the misplaced premium.

In all fairness, there are several issues that have been poorly handled on this matter by multiple parties, but I believe that CS ultimately bears the most responsibility for the failure to resolve this issue. Their poor handling of this dispute raises serious questions about their competency, integrity, and commitment to meeting their fiduciary responsibility to accurately report income in compliance with published IRS instructions (so that the net tax-exempt interest can be properly calculated). I truly believe that there are very serious problems with their complaint resolution teams.

The IRS has added extreme complexity requiring payers to calculate a relatively minuscule amount of net OID (Box 11 minus Box 6). In my case the disputed misplaced reporting of 1099-OID Box 10 premium is 39 times the miniscule amount of net TE OID. For my bonds, the full gross interest is at least 10% higher than the net interest that should be calculated. Some clients might have an even larger discrepancy if they paid a substantial premium for their bonds. I sympathize with brokers that may resent all the work to properly report net OID, but that is no excuse for CS to improperly report the much larger premium that should be used as a downward adjustment to the periodic interest paid for OID bonds. (FYI, This premium is not really income. It is return of principal paid for an after-market bond bought at an above par price, and the premium is a prorated return of the above par principal to the call date. The lower than coupon rate yield to call when the bond was purchased reflects the fact that you are really getting less net interest than the nominal coupon rate).

The IRS instructions are are admittedly ridiculously complicated. The IRS payer instructions authorize 4 separate ways (rather than 1) to report the net periodic interest. For some bizarre reason, the IRS payer instructions give the payer the option to report the larger semi-annual net interest on either the 1099-INT or the 1099-OID. Furthermore, the IRS instructions give the payer the option on either of those forms to report just the net interest (with 0 entered in the premium field) or to report both the gross interest and the associated premium on the SAME form as the interest. I and others have verified that TT correctly computes the net tax-exempt interest if any of these 4 authorized reporting options are used. A lot of the problems addressed in this article could have been avoided if the IRS had simply stated one and only one way for reporting the net TE interest. Both IRS forms have a field for reporting the premium that must be reported when gross rather than net interest is being reported on that form. It would have helped a lot if the IRS instructions had made it explicitly clear that the premium MUST be reported on the same form as the associated gross interest. But, there is absolutely no indication that there is an option/choice to report the interest and associated premium on different forms.

CS has repeatedly listened to their tax advisor that has apparently advised them to report the interest and associated premium for OID bonds on separate forms when in fact the IRS instructions indicate that the interest and premium should be placed on the same form. CS asserts they have the right to use a fifth reporting method that simply does not appear ANYWHERE in the official IRS payer instructions. CS has acknowledged that they could report using one of the 4 IRS sanctioned reporting options, but that they “CHOOSE” to continue reporting as they have been doing. There is absolutely no indication in the official IRS publications indicating that there is a fifth option such as they have been using. CS claims without proof that their tax advisor, IRS, and industry peers worked out the reporting approach they use and that the IRS provides them with guidance that allows them to use this fifth undocumented option. I have asked to talk to CS executive management and/or CS lawyers and they have denied that request. I have repeatedly reported to them that the IRS payer instructions for reporting premium do not allow them to report the premium on a separate form than the associated interest. A CS Client Advocacy Team Manager has repeatedly claimed (without proof) that the payer instructions allow CS to report the interest and associated premium on different forms. She has repeatedly claimed that we will just have to “agree to disagree.” I strongly reject the claim that I must “agree to disagree”. For both forms, the payer instructions say that the payer MUST report the premium (unless net interest is reported), and both forms provide a field for reporting the premium associated with the interest on that form. If the official IRS publications really authorized reporting the premium on either form when the interest is reported on the 1099-INT, then the instructions would need to explicitly say there is an option to do so and there would be all sorts of additional complexity required to ensure that the premium (from either form) is not double counted if the payer has elected to report the net (rather than gross) interest on the other form. If the IRS really authorized reporting interest and associated premiums on separate forms there would have to be really complicated instructions in Pub 550 telling TT and other preparers how to calculate net interest using data from two separate forms. There is no such complexity in Pub 550 because there is absolutely no authorization in the published instructions for payers to report interest and associated premium on separate forms as CS has been doing. I don’t know how CS got the impression that they have the option to report interest and associated premium on separate forms, but it is a flat out lie to claim that the official payer instructions provide them with that option.

If CS truly believes that the IRS advises them (or even allows them) to report interest and associated premium on separate forms, they should be asking the IRS why they provide that guidance to CS and then apparently instruct TurboTax to discard the premium value for what appears to be a bond in default. There has been no indication from CS that they have tried to resolve this discrepancy and it appears that CS has been overly eager to avoid making any change despite the harm caused to their customers.

CS has apparently accepted without question the results of apparently sham investigations by the same tax advisor that improperly advised them to report interest and associated premium on separate forms. CS has claimed that they checked multiple times with their tax advisor and CS has repeatedly claimed that they are authorized to report as they do so. If there really was this bizarre fifth reporting option a competent accounting firm should be able to address the issues I have raised above, but CS has repeatedly failed to adequately address these issues. I truly believe that it is way past time for CS to accept responsibility for correcting their reporting, offer a sincere apology to their clients, explain how to determine if they were adversely affected, and offer to compensate clients that can demonstrate adverse effects. Since CS has rejected this proposal in the past, it is perhaps time for a class action lawsuit or perhaps mass transfers of assets out of CS.

There is absolutely no indication in the official IRS publications that CS has the option to report as they are doing or that TurboTax should be expected to handle their reporting. The IRS instructions provide absolutely no indication that there is an option for the interest and associated premium may be reported on separate forms (as done by CS). The IRS Pub 550 tells tax preparers to calculate the net tax-exempt interest by subtracting the premium from the gross interest that has been reported on the same form, but there is absolutely no indication that the IRS expects tax prep software to handle gross interest and the associated premium reported on separate forms.

Vanguard reports properly, but Charles Schwab does not. Both CS and Vanguard report NON-OID bond interest and premium on the 1099-INT. Both companies properly report the relatively minuscule net OID on 1099-OID Box 11 minus Box 6. Both companies report all periodic gross interest on 1099-INT Box 8 (for all OID and Non-OID bonds). Vanguard complies with IRS payer instructions by reporting the bond premium for OID and non-OID bonds on 1099-INT Box 13 (ie. on the same form as the interest). CS reports, as they should, the premium for the non-OID bonds on 1099-Int Box 13. However, for the OID bonds, CS goes rogue and completely disregards the instructions that indicate CS should also report the premium for those OID bonds on 1099-Int Box 13 (since that is the form where they reported the gross interest). CS ignores the IRS payer instructions and inappropriately reports the premium on numerous OID bonds in 1099-OID Box 10. Because CS leaves 1099-OID Box 2 blank, that means that they are reporting no periodic interest on that form, and it is completely inappropriate to report the premium adjustment on that form that shows no periodic interest to be adjusted (1099-OID Box 10 is supposed to be an adjustment to gross interest that is reported on 1099-OID Box 2 but CS has “chosen” not to report any periodic interest on the 1099-OID). Hence TT is completely justified in treating their reporting as an error. There is nothing in the IRS Pub 550 instructions that tells TT how to handle the misplaced premium value. Perhaps following IRS guidance (or at least reasonably given CS on-going failure to comply with official payer instructions) TT to treats this situation as an indication that the bond is in default and paid no interest that can be adjusted (and hence forces the user to discard the premium value).

The IRS has been uncooperative in investigating this problem. The IRS SAMS team has repeatedly refused to address these issues that I reported in SAMS issue 58587.

The IRS has been complicit in this problem by forwarding erroneously high MAGI values to Medicare, etc. While I recognize that the IRS is merely forwarding self-reported 1040 Line 2a values, the IRS probably should have noticed that there were a very large number (apparently 100%) of 1099-OID forms reported to them by CS with non-zero bond premium values and no TE interest reported on those same forms (CS 1099-OID forms don’t even include Box 2 which is where gross interest should be reported).

CS has repeatedly acknowledged being aware of this issue, but has falsely claimed that they have the right to CHOOSE to report as they do (via an undocumented fifth option). They have suggested that I should consult a tax advisor since they say “(we) understand that TurboTax is unable to accurately utilize the information received from Schwab”. The explicit implication that TurboTax is at fault is grossly unfair to TurboTax when the real problem is that CS insists on reporting in a format that is not authorized in any of the official IRS publications. What CS apparently fails to understand (or deliberately chooses to disregard) is that their ill-advised non-compliant reporting for a single OID bond convinces TT that the single bond is effectively two entirely different bonds with no linkage between them. This causes different results than would happen if CS would merely comply with the official IRS instructions (by using any of the 4 documented reporting options). For each individual OID bond that CS reports en-mass on the 1099-INT (along with all the other non-OID and OID bonds), they report only interest and no premium. That inappropriately tells TT that there is no premium associated with that specific OID bond when there really should be a premium adjustment for that bond. The IRS instructions indicate CS should really be reporting the premium on the 1099-INT (just like they do for non-OID bonds) because that form is where they have chosen to report the interest. CS reports the OID for that same bond on an individual 1099-OID record that has absolutely no visible connection to the gross interest that was reported on the 1099-INT. TurboTax reasonably assumes that the OID bond record is for a second unrelated bond with premium but no interest (ie. TT is effectively told that the second bond that is in default). TT reasonably tells the tax-payer that the tax-payer MUST zero out the non-zero premium (because the bond appears to be in default) and offers that the user can report the presumed loss on Schedule A. Since the bond is not really in default, there really is no loss that should be reported on Schedule A. Instead the correct thing to do is to make an adjustment to interest reported on the 1099-INT. CS and their tax-advisor apparently assume that TT should be able to magically figure out that the OID record is for a bond that isn’t really in default. They have made the ridiculously stupid assumption that TT should be able to figure out that the individual OID record should somehow be associated with some part of the gross interest reported en-mass on the 1099-INT. There is absolutely no linkage between those two forms and absolutely no indication that the IRS would condone TT trying to make that connection. How in the world is TT expected to be able to distinguish a bond that in default from bonds like these for which CS has “chosen” to misplace the premium. TT probably should tell their clients that they should ask for corrected 1099 forms if the OID bond is not in default and has interest that is inappropriately on a different form than the premium.

As stated above, I feel that the IRS has created incredible complexity in an attempt to include a negligible amount of net TE OID interest in the 1040 Line 2. Because CS has refused to provide proof that the IRS authorized their claimed right to use a fifth reporting option, I have no way of knowing if that was ever the case. Regardless, that does not excuse CS’s repeated failure to properly resolve complaints made by me and others before me. CS has “CHOSEN” to continue reporting in the non-compliant format even though they are aware that TT is calculating an erroneously high 1040 Line 2a gross rather than net interest value. It appears there is a serious integrity problem with CS’s tax-adviser and within CS.

I believe that there should be investigation into whether the CS tax-adviser, CS management, and/or the IRS have (fraudulently?) conspired to improperly conceal the fact that CS customers have been adversely affected by the incompetent reporting that CS has continued to use for years despite numerous complaints. CS has repeatedly failed to properly address my claim that the IRS Pub 550 provides absolutely no indication that TT should magically handle interest and associated premium on separate forms. They have conducted a sham investigation of this problem and repeatedly refused to comply with the IRS official publications.

I have a solution that I am using, but it is EXTREMELY unfair of CS to expect their clients to search out and use such a solution to get the proper calculation of the net TE interest. For 2023 tax year, I plan to again comply with the TT requirement to replace 1099-OID Box 10 with 0 rather than the reported premium, I will ignore the inappropriate TT suggestion to report the premium on schedule A, and I will instead report the improperly placed premium as a positive adjustment “for premium paid on a tax-exempt bond” on Form1099-INT. I have again verified that this will result in the proper net interest calculation. Several TT users in past years have confirmed that this work around correctly computed their net tax-exempt interest, and some described it as a brilliant solution. A few comments have understandably expressed concern about such an adjustment triggering an audit, but a self described “tax expert” has commented that tax payers are entitled to make legitimate adjustments like this. Several have expressed disgust that CS and TT have allowed this issue to remain unresolved for so long. At least one has moved funds out of CS in disgust. Apparently more customers need to complain to CS, IRS, SEC, etc. Or perhaps more customers will move assets to VG (or elsewhere that properly reports TE interest for OID bonds) and hopefully they will tell CS that they are disgusted that for many years CS has refused to comply with the IRS payer instructions. I cannot officially recommend this adjustment to others or guarantee that an incompetent IRS auditor won’t make a stink about it. If I get audited I plan to respond “This adjustment was necessary because CS has repeatedly refused to comply with IRS published payer instructions that indicate interest and premium for TE OID bonds should be reported on the same form. The adjustment is the amount of premium for which interest was reported on the 1099-Int and the associated premium was inappropriately reported by CS on the 1099-OID. Please require CS to comply with the official IRS published payer instructions that indicate that TE interest and associated premium are to be reported on the same form”.

If you use this solution for your tax return, you do so at your own risk. Once again it is extremely unfair to you that CS places you in the position of having to decide whether to use a solution like this. If CS were to report using any of the 4 IRS sanctioned options, you would not need to search for or use error-prone manual adjustments to get a proper MAGI value. If you choose to use this option please complain to CS that you are also disgusted that they fail to comply with IRS official payer instructions. If you have an OID bond that is actually in default, you should probably not include the premium (if any shown) for that bond in the adjustment that you report for the 1099-INT.

The preceding TT work-around has several drawbacks. It requires the CS client to be aware of the issue and possible work-around. It requires extra effort that would not be necessary if CS would simply comply with the published instructions. It could be error-prone and if used improperly it might fail to calculate the proper net TE income. It might trigger an audit. The IRS auditor may be as incompetent as the CS tax advisor seems to be. Most importantly, I have no way of reaching all the TT users that might assume their MAGI will be computed correctly if they follow the TT instructions to 0 out the premium.

Does this problem apply to taxable OID as well as tax-exempt OID bonds? I really don’t know, but it appears likely and I offer the following for others to investigate and evaluate. Since I only have tax-exempt OID bonds, I do not have access to examples of CS’s reporting for taxable OID bonds. Given that the CS Form 1099-OID (at least for my tax-exempt OID bonds) does not even provide Box 2 (effectively reporting 0 for Box 2 for all bonds on my consolidated 1099), it seems likely that that the CS Form 1099-OID generated for taxable OID bonds might also fail to report a 1099-OID Box 2 value. If for taxable OID bonds, CS reports taxable interest for OID bonds in 1099-INT Box 1, nothing or 0 in 1099-INT Box 11 (which is supposed to be the bond premium if any for taxable interest in Box 1), nothing in 1099-OID Box 2, and a positive value in 1099-OID Box 10, then it seems likely to me that CS may also be failing to properly comply with the official IRS payer instructions for taxable OID bonds. If so, that would probably be far more detrimental to CS customers because TT would probably again treat the 1099-OID as if the second instantiation of the single bond is in default. TT would assess taxes based on the full gross taxable interest (in 1099-INT Box 1) rather that net taxable interest (since 1099-INT fails to provide the interest adjustment that should have been reported there instead of in 1099-OID Box 10). Again I suggest this issue may need to be investigated by others, but it is possible that people that bought taxable OID bonds at above par prices in after-market trading may be paying more taxes than the official IRS publications indicate they should owe. The CS potential liability (if such were imposed by court order) would seem to give CS incentive to try to hide the possible incompetence of CS and their advisor (especially as it seems that they may have managed to fool people for years). Some questions in the TT peer-to-peer help seem to imply that there may be an issue for taxable OID as well as tax-exempt OID bonds, but again that would need to be verified by tax advisors with access to consolidated 1099 records for that type of bond.

The IRS payer instructions clearly say:

Reporting interest and bond premium. For a debt instrument with OID that is a covered security, if you choose to report qualified stated interest in box 2 of Form 1099-OID, report any bond premium amortization allocable to the interest in box 10 of Form 1099-OID and not in boxes 11–13 of Form 1099-INT.

Because CS has not chosen to report interest in box 2 of Form 1099-OID (at least for tax-exempt bonds), the 1099-INT boxes 11-13 are to be used for reporting bond premium for interest reported on the 1099-INT. If TT is providing a similar rejection of taxable OID bond records that report Box 10 premium, no Box 2 interest, and interest included with other bonds on Form 1099-INT Box 1, then it appears that without making a similar manual adjustment, CS clients are probably being forced to pay taxes on the full interest rather than proper net interest. I can find absolutely no indication in the IRS publications that the IRS intended for or authorized that clients be taxed on the full interest. In fact there is enormous detail telling how to compute the proper net interest.

If you are quite sure that CS has failed to properly report premium for a taxable OID bond, you might choose to make an adjustment very similar to the one I have been using for TE OID bonds (described above). The only difference is that for taxable bonds you would want to indicate that the 1099-INT positive adjustment is for “amortizable bond premium” rather than for “premium paid on a tax-exempt bond”. In a quick test it seems that TT will subtract that premium adjustment from the gross interest that appears as taxable interest on schedule B. The deduction that appears on schedule B, is identified as ABP Adjustment. Once again I cannot officially advise you to make such an adjustment and I cannot guarantee that an IRS auditor will accept the adjustment. Once again I suggest that you should request/demand that CS provide a corrected 1099 if their reporting causes TT to tax you based on the full gross interest rather than the net interest (that utilizes the bond premium as an adjustment). If you are sure that CS is improperly reporting interest&premium on taxable OID bonds, please let other customers know via TT peer-to-peer help or other means.

Please spread the word and complain to CS and the IRS. If you or your tax-advisor agrees that CS should comply with the official IRS instructions and report interest and premium on the same form, please make sure you assertively and somewhat respectfully let them know that you want/demand a corrected 1099 ASAP. Please feel free to share this information with others that may be cheated by CS’s non-compliant reporting. Remember, even if you aren’t expecting to be close to one of the MAGI thresholds, that could change in future years, therefore you may want to make a formal complaint to CS even if you see no need this year to make the 1099-INT adjustment described above. For IRMAA surcharges, you might not know until late fall or winter after filing taxes whether you just went over the threshold (and it will be too late to file an amended return to get the lower Medicare premium). It would be a shame to loose a $7500 electric vehicle credit due to CS’s incompetence.

I am amazed that tax advisers have allowed CS to get away with this travesty for so long. Do others agree with me that a class action lawsuit may be needed to get compensation for CS clients that have been financially harmed by their incompetent reporting?

I have tried to work with CS to resolve this reporting problem for 2 years, but all I get is responses indicating that they “CHOOSE” to continue reporting as they have been doing. They have failed to address the above issues in any detail and have failed to provide any concrete evidence that they are reporting according to IRS guidance as they assert.

I realize that CS has reaped no direct immediate financial reward from incorrectly reporting the premium on OID bonds, however their repeated refusal to comply with the official published instructions could be a fraudulent attempt to avoid compensating clients for the losses that result from the non-compliant CS reporting error. I am amazed that they have tried so hard to avoid what should be a relatively simple software change to their tax reporting software.

I realize that some CS employees may honestly believe that they were authorized by the IRS to report as they have been doing. Since CS has refused to provide proof that the IRS somehow mistakenly approved their reporting, I have no idea whether an approval was mistakenly granted by an incompetent IRS agent or even approved by the IRS in the first place. Even if years ago the IRS mistakenly approved the CS reporting, it seems unlikely that they would/should stand by that mistaken approval given that the CS reporting clearly contradicts the “letter and spirit” of the official IRS instructions that clearly indicate that 1040 line 2a should contain the net rather than gross TE interest. The repeated failure of CS to constructively work to fix this problem knowing that there are financial detriments to their customers is at best a very callous failure to accept responsibility for their reporting errors. Does knowingly exposing clients to financial harm to avoid the cost of compensating them for losses incurred and the cost of complying with IRS published reporting requirements constitute fraud?

DISCLAIMERS:

I have no financial interest in widely reporting this reporting problem (other than making it clear that I am justified in adjusting the premium that should have been reported on the 1099-INT). I do it because I sincerely believe that CS is knowingly exposing their customers to the risk of financial loss. I think it is kind of scary that concerned people like me have to expend so much effort to get CS to do the right thing. I think CS owes me a big apology and should voluntarily (or upon court order) compensate any clients that have incurred financial harm (I have not incurred loss since the IRS has been accepting my adjustments so far).

I obviously have no shares in Vanguard stock since the company is owned by by the mutual fund share holders, but I do have funds and individual bond holdings at VG. Years ago I had to wait for them to correct several cost basis errors, but that problem has been resolved. More to the point it seems that VG reports OID bond premium according to official IRS instructions.

CS claims that their tax-adviser reports that other industry players have been doing the same improper reporting. I have not seen any other companies listed in the TT peer-to-peer help comments indicating that other companies have been erroneously reporting the premium, but if so, they should also be encouraged/forced to comply with the official IRS payer instructions. Please use TT peer-to-peer help to let others know what other companies fail to comply with IRS instructions.

I am not an accountant by formal training, but feel that I am far more competent in reading and interpreting the IRS publications than anyone I have had the opportunity to talk with at CS.

I have tried to avoid false or libelous statements in this article, but as you can see I have become seriously frustrated by CS’s repeated refusal to bring their reporting into compliance with the official IRS publications. I am not sure how long I will leave funds at CS due to this issue.