Case Study 1: Form 1099-INT or Form 1099-OID
Gloria withdrew $5000 from a one-year, deferred-interest certificate of deposit in the current tax year. She had to pay a penalty of three months' interest and claim the penalty amount as an adjustment to income.
Taxpayers can adjust their income by deducting penalties they paid for withdrawing funds from a deferred interest account before maturity. Ask if the taxpayer and/or spouse made any early withdrawals during the tax year. If so, ask to see Form 1099-INT, Interest Income, or Form 1099-OID, Original Issue Discount, documenting the penalty.