We've discussed this topic a few times here, but this is a slightly different wrinkle.
Taxpayer cashed in a US Government EE paper Savings bond in 2020 and received a 1099 showing accumulated interest of $6890. As allowed by the IRS, taxpayer had changed the tax reporting on the bond in a prior year to an accrual method meaning that he had already paid most of the taxes and only owed tax on $184 for the bond in 2020.
Per IRS instructions as defined in Publication 590, the correct way to report this is to list the recorded amount from the 1099 ($6890 in this case) on Schedule B under item 1, put in a subtotal of all item 1 entries, then put in a line that says "U.S. savings bond interest previously reported", which in this case was $6706, and then subtract the $6706 from the other entries and list the net total as normal in item 2.
Around a year ago, I believe someone posted here that there was a known problem with the IRS in doing e-Files for this type of situation, but I have heard that problem was corrected and it is now possible to e-File a return like this. If that's the case, Taxpayer wishes to e-File for 2020 but does not wish to incur the costs of using a product like Turbo Tax or H&R Block, both of which apparently handle this situation correctly. His income and other filing requirements are such that he has always been able to file for free in prior years, so he'd like to do that again. Surprisingly, he can only find two free products that calculate his tax correctly:
Credit Karma Free Tax Filer
Unfortunately, while both products calculate his tax correctly, neither has the IRS mandated wording. In the case of Credit Karma, there is no extra wording at all. That product lists the bond taxable interest at its original $6890 and it subtracts the $6706 from the Schedule B totals but it does not explain what it is doing. So the result is that the total listed on Schedule B item 2 does not match the raw arithmetic total of the entries on Schedule B.
Free Tax Filer does a little better. In this product, it treats the $6706 as accrued interest (which is technically a different situation), and it correctly shows a subtotal and it shows the $6706 being subtracted. But the wording says "Less accrued interest" and not "U.S. savings bond interest previously reported". So the numbers and the format of Schedule B are correct but the wording is wrong.
My thought is that the return generated by Credit Karma is likely to be bounced for no other reason than that the numbers don't add to the total on line 2. But the Free Tax Filer return has a shot at being accepted since the math is all correct and the "less accrued interest", while wrong for this case, at least makes logical sense. I wonder if there would be a strategy of using the Free Tax Filer for the e-File and then filing an amended return to correct the wording on the Schedule B, if that's even possible.
By the way, the IRS Free File fillable forms does not work because it will not accept subtotals or negative amounts on schedule B. That product assumes only positive numbers are entered on the form.
Any thoughts on this?