IRS thinghy revisited

Paul: So, I posted this, which started another discussion: >>>>>>>>>>>>>>>>>>>>>>

I'm VERY surprised the IRS lets it slide. This means you can wait. Especially if you foresee a huge drop in income. Wait until THAT year. Cash it in at a much lower tax bracket.

Mel

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4 responses: >>>>>>>>>>>>>>>>>>>>>>>>>>

If the bond earnings are so great as to need a tax strategy, you'd probably want to redeem the now zero interest matured bonds to get that money working somewhere else. >>>>>>>>>>>>>>>>>>>>>

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I'm more surprised the law doesn't require the interest be taxable in the year the savings bond is redeemed and NOT the year it matured. If I found a savings bond that matured 10 years ago, the unreported interest for tax year 2012 is so far beyond the statute of limitations there doesn't appear to a way for the IRS to tax it at all. I'm more surprised the law doesn't require the interest be taxable in the year the savings bond is redeemed and NOT the year it matured. If I found a savings bond that matured 10 years ago, the unreported interest for tax year 2012 is so far beyond the statute of limitations there doesn't appear to a way for the IRS to tax it at all. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

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Unless the IRS thinks you did it on purpose to avoid paying taxes on that income. In that case it would be fraud, and there is no statute of limitations on fraud. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

My understanding is that after 30 years, the bond is fully matured and taxes on the accrued interest are due in full. So if you wait until year 32 (or 40), you are now two years (or eight years) delinquent in paying those taxes. Assuming you cash the bond in year 32 (or year 40), the financial institution where you cash the bond would issue a 1099-INT which would be reported to the IRS. If you now report that interest on your tax return for year 32 (or year 40) as though it were due in the year of filing, it's anyone's guess if the IRS would catch that or would you bill you for any late payment on the taxes owed. While amending your return might technically be the correct thing to do, I think I would just report the interest in whatever year you cash the bond and let the IRS bill you if they catch it. Since you will have paid the full amount of the taxes owed (the bond doesn't earn interest after year

30), what the IRS might bill you for is the interest and penalty you could owe for under paying in year 30. I say "might" because it is possible you had enough money withheld in year 30 to cover the extra tax you should have paid that year.

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But think about this from practical standpoint. The IRS computers keep track of things like W2s and 1099s being sent to them which they try to track to returns. I don't think they are sophisticated enough to track

30-year savings bonds and know that certain bonds are past 30 years old and haven't had tax reported. So nothing is going to trigger them until a 1099 is issued, let's say in year 32 or year 40. Now I don't recall exactly what's on the 1099 that's issued for a savings bond redemption, but I don't think it includes the date the bond was opened, so what is going to trigger the IRS to know the interest is being reported late? And yes, I know that somewhere there probably is a computer file that shows the dates that savings bonds were originally issued, but I don't think the IRS ties into that.

You have to realize the IRS system is pretty old and has been patched up and held together with wires and gum for decades. I don't think it is quite as sophisticated as some people may think, especially when to something like this.