The Internal Revenue Service (IRS) assumes interest is paid over the life of the bond so, with zero-coupon bonds, investors must pay tax on interest they don't receive.

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This is true. Zero-coupon bonds do not pay regular interest but are priced at a discount to face value. The discount represents the interest that will be earned over the life of the bond, which the IRS considers taxable income even though the investor does not receive it until maturity. As a result, investors in zero-coupon bonds must pay taxes on the imputed interest each year, even though they do not receive any cash payments.

The Internal Revenue Service (IRS) Assumes Interest Is Paid Over