post-maturity savings bonds

Hi all,

I had a client come in to my office and plop down 116 series EE savings bonds worth over $70,000 (it took the poor bank teller 4 hours to enter them into the computer system). The issuance dates range from

1972 up until 1992. Some of the bonds are past their maturity date. The TP didn't claim the interest income in the years of maturity like she should have. All 116 bonds were redeemed at one time (in 2011). My questions are as follows:

  1. How do I amend the returns for those years not yet past the statute of limitations? Do I simply file a 1040X showing the additional income? There isn't a 1099 for those years that the income can be matched to.

  2. For 2011, I'm concerned that the redeeming bank is simply going to issue a 1099 showing all of the proceeds from the ,000 redemption. But since some of this income was or should have been reported in past years, not all of the income should be claimed in 2011. How do I handle this? Do we report the correct income and await a CP2000 regarding the discrepancy between the return and the 1099? Do we ask the bank for a correction (which I'm 99% confident they won't do)?

Your thoughts and advice are much appreciated.

Reply to
kastnna
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My first thought: If you have to ask such simple questions, maybe you shouldn't be in the tax preparation business (without additional training).

You need to see if the client EVER reported the accrued interest. I bet not, and you appear to say not. That given, all of the interest will be taxable in 2011, less any amounts used for higher education costs - see form 8815. There is nothing to amend.

Reply to
D. Stussy

A cash basis taxpayer reports income when actually received or constructively received. One exception to this is interest income from zero coupon bonds. The taxpayer is obligated to report the interest in the year it accrues. When you own series EE savings bonds, the taxpayer has the option to either report the accrued interest in each year, just like zero coupon bonds, or wait until the bonds are redeemed to report the interest. Very few taxpayers report the interest on savings bonds as it accrues. This taxpayer did not elect to report interest income each year when it accrued. As such, all the interest income gets reported in

2011, the year the bonds were redeemed and the actual interest was paid by the US Treasury. It does not matter that the interest could have been paid in an earlier year.
Reply to
Alan

Both prior responses ignored the fact that even a person waiting until redemption to report interest is required to report the interest the year the bond matures whether it's redeemed or not. (Pub 550, p 8) Yes, for the open years just file an amended return.

They will. You explain and make the adjustment on Schedule B of the

2011 return. It's covered in Pub 550.

Phil Marti VITA/TCE Volunteer

Reply to
Phil Marti

Thanks for the "help". I'm not in the tax prep business by the way, I'm a Certified Financial Planner(TM). This little old lady is a client and she was using an unregistered tax preparer that wasn't signing the returns and royally screwing them up in the process. In this case, the client is unwilling to pay for a CPA or accountant and so I offered to assist (being a better alternative than the previous preparer).

And by the way, people that live in glass houses.... The interest on series EE savings bonds must be reported in the year received or in the year that the bond matures, WHICHEVER COMES FIRST. That premise was the basis for my question. I clearly stated that some of the bonds were past maturity and thus should have been claimed in previous years. This has nothing to do with accrual vs cash basis reporting, nor was I asking about the income deferall options of savings bonds. Phil appears to have been the only respondent that was actually familiar with the taxation of savings bonds.

Thank you Phil for your response. It was exactly what I need to know. It occurred to me after I submitted that the bank's 1099 isn't going to show a taxable amount anyway. They have no way of knowing. They will simply report the total distribution and I will be able to report the amount that was actually taxable.

Reply to
kastnna

One is never to old to learn something.

Reply to
Alan

In article , snipped-for-privacy@verizon.net (Phil Marti) writes: | On Feb 23, 1:54 pm, kastnna wrote: | | > I had a client come in to my office and plop down 116 series EE | > savings bonds worth over $70,000 (it took the poor bank teller 4 hours | > to enter them into the computer system). The issuance dates range from | > 1972 up until 1992. Some of the bonds are past their maturity date. | > The TP didn't claim the interest income in the years of maturity like | > she should have. All 116 bonds were redeemed at one time (in 2011). My | > questions are as follows: | >

| > 1. How do I amend the returns for those years not yet past the statute | > of limitations? Do I simply file a 1040X showing the additional | > income? There isn't a 1099 for those years that the income can be | > matched to. | | Both prior responses ignored the fact that even a person waiting until | redemption to report interest is required to report the interest the | year the bond matures whether it's redeemed or not. (Pub 550, p 8) | Yes, for the open years just file an amended return. | | > 2. For 2011, I'm concerned that the redeeming bank is simply going to | > issue a 1099 showing all of the proceeds from the $70,000 redemption. | | They will. You explain and make the adjustment on Schedule B of the | 2011 return. It's covered in Pub 550.

Would you adjust the interest only for that which could be reported on amended open years or for all the interest that ever should have been reported?

Dan Lanciani ddl@danlan.*com

Reply to
Dan Lanciani

I disagree that I ignored it. I acknowledged that it was not reported in the prior years (whether or not it should have been). Most of those prior years are closed (if timely filed). In contrast, are you suggesting that the interest from the bonds for issuing years 1972-1977 should effectively be completely tax free because the required redemption time falls in closed years (assuming only the 3 year statute and not the 6 year gross omission statute)? For a cash-basis taxpayer who blew off constructive receipt, reporting it in the year of actual receipt is the next proper result.

Reply to
D. Stussy

You're welcome. Actually, the bank does know what portion of the redemption amount is interest, and that's what they report in box 3 of the 1099-INT. It's assumed to be 100% taxable unless you show otherwise on Schedule B. And remember that this is not taxable at the state level.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

Only the interest that's been reported.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

Not necessarily. (1) Isn't it the IRS's problem if they failed to catch it? (2) In the early years he may have had so little income that he had no filing requirement. That is, even if he reported the income, the AGI would have been less than the standard deduction + exemption. Or maybe he would have had to report it, but then after the itemized deduction and credits there is no filing requirement. Or maybe by reporting the income other credits like the EITC and making work pay credit of 1972 (if there were any) would be higher and total tax would be zero. It seems wrong to just add the old interest to the current year tax return.

Reply to
removeps-groups

So, your response is: In the absence of a demonstration of the prior years not meeting the filing requirement (which is not within what the OP said), it's perfectly fine to leave the tax fraud committed in the earlier years alone instead of taking a step to rectify it?

Reply to
D. Stussy

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