Savings bonds -- cash accrual method

All correct assumptions except your terminology is reversed. You actually go from cash to accrual and not the other way around. Cash (which the IRS calls "Method 1") means you don't report any interest until you actually cash the bonds in. Accrual (which the IRS calls "Method 2") means you report the interest earned each year even if you don't cash any bonds in.

IRS Publication 550 explains how to do this:

"Change from method 1. If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next."

When I did this, I reported all the interest on Schedule B with this notation:

"US EE Savings Bond Interest Accrued To Date".

The other tricky part is that when you finally cash the bonds in, you will receive a 1099 which will assume you followed Method 1 and will this list all the interest earned to date. If you've converted to Method 2 at some point, this amount will be overstated by the amount you paid each year following conversion to Method 2. Here are the instructions for reporting this:

"On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow these steps.

1. Several lines above line 2, enter a subtotal of all interest listed on line 1.
2. Below the subtotal enter ?U.S. Savings Bond Interest Previously Reported? and enter amounts previously reported or interest accrued before you received the bond.
3. Subtract these amounts from the subtotal and enter the result on line 2."

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Appreciate your thorough explanation.