Always A New Wrinkle

[Christian]

A client called today to advise that her mother has some 182 matured series ee savings bonds which have matured some time ago. She is concerned that her mother will incur a penalty if these are cashed as many matured some years back. I have had clients cash mature bonds well after their date of maturity and never recall seeing the Service exact any penalty. The client merely paid the tax on all the accrued interest. HOWEVER, I now am given to understand the bonds should have been cashed in the year they matured and since they were not the interest must be applied to the year in which the bonds matured by amending the mother's return for that year with appropriate late filing penalty. Since not a few bonds matured well beyond the three years for filing an amended return this poses another problem. Some years ago the woman cashed in a number of series ee bonds which had also been long matured. The Service did not impose penalties of any kind. Any experience along this line would be appreciated. I rather suspect this is one of those rules which do not get enforced all that often.

[Crank]

I have never heard of this, but then again I havent thoroughly researched.

Edit.

See here: http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eetaxconsider.htm#when

When must I report the interest on my tax form?

You have a choice. You can

• report the interest every year
• put off (defer) reporting the interest until you file a federal income tax return for the year in which the first of these events occurs:
  • you redeem (cash in) the bond and receive what the bond is worth, including the interest, or
  • you give up ownership of the bond and the bond is reissued, or
  • the bonds stops earning interest because it has reached final maturity
  • And from Pub 550 http://www.irs.gov/publications/p550/ch01.html#en_US_2012_publink10009895

[RitaB]

I was studying for SEE exams (I passed!) and learned that you are supposed to report savings bond interest the earlier of when they mature or you cash them.  (Just considering cash basis for this query; I'm not concerned about the folks reporting interest every year.)  Anywho, I'd bet a dollar to a donut that I've had clients that didn't know this either, and IRS never got called them out on it.  Have any of you seen IRS catch that savings bond interest was not reported in the year a bond matured but it was reported in a later year?

[SaraEA]

I am sure the IRS, which is part of the Treasury Dept (that issues the bonds) do not communicate on this one.  The old bonds actually list the buyer's Soc Sec number right on the face of the certificate.  Since these bonds were issued well before everything became computerized, I'm sure they have no way of cross checking.  Leaves those of us who "know the rules" in a conundrum.  I would think that when the bonds finally get cashed and the IRS finally gets its share, no harm done. We're not exactly following the rules, but the IRS is still getting paid.  I recently had two clients who called when they found some really old bonds that matured 12-20 years ago.  I wouldn't even know how to access their returns from that long ago to amend them, and I'm sure the IRS has no record of them either.  My advice was just not to cash them all in one year.  I'm known to be a stickler for the rules (my boss says he often feels like asking me for my badge number), but I feel no guilt on this one.

This resurrected thread brings me to an insight we might all use to help elderly clients.  Some Series EE bonds were issued for 30 years.  Some owners who bought them a long time ago are now in nursing homes.  These people could take advantage of claiming the interest on a yearly basis.  The first year they choose to do so they will have to report all the interest accumulated so far, but their nursing home bills will likely wipe that out so they will pay no tax.  I have a 97 year old client who has a bunch of these bonds, still earning interest, with over $80k in accumulated interest.  I plan to report it all in 2017, then deduct his $120k nursing home costs, which even with the 7.5% haircut will wipe out the income.  The heirs will receive the bonds tax free.

I have several clients who bring in an elderly relative's tax docs. and this year I plan to ask them all about uncashed bonds.

[RitaB]

19 minutes ago, SaraEA said:

I am sure the IRS, which is part of the Treasury Dept (that issues the bonds) do not communicate on this one.  The old bonds actually list the buyer's Soc Sec number right on the face of the certificate.  Since these bonds were issued well before everything became computerized, I'm sure they have no way of cross checking.  Leaves those of us who "know the rules" in a conundrum. 

Exactly!  So in January,  I see a 2016 1099-Int for $15,000, and it could be income that should have been reported years earlier.  That would be so terrible, for IRS to charge interest on the tax on that, especially when the Treasury used that money interest free all that time.  I'm a stickler for rules, too, but if my clients have gotten away with one here, and I don't know of anyone who did, but I'd bet it's happened, I'm not losing sleep over it.  I almost wish I didn't know the law, though, because now I'm thinking about it and worrying if I need to have this discussion with people. 

 

 

[TAXMAN]

A lot of these bonds don't even get found until after the owner has passed on and we are cleaning out drawers, closets, etc. What a pain to get cashed in then. I try to remind my clients every year but sometimes they just don't listen. Going back to the original post, I would just report as you became aware. Lets see what others may think.

[RitaB]

43 minutes ago, TAXMAN said:

A lot of these bonds don't even get found until after the owner has passed on and we are cleaning out drawers, closets, etc. What a pain to get cashed in then. I try to remind my clients every year but sometimes they just don't listen. Going back to the original post, I would just report as you became aware. Lets see what others may think.

Yes, it could be a big deal if IRS wanted to pursue it.  Series EE bonds purchased for $15,000 in 1985 would have earned $54,192 in interest when they matured in 2015.  Not everybody who invested in bonds was an old codger just giving a disappointed grandkid a $25 bond.  There are bound to be people who unknowingly hold them past maturity thinking next year will be a better time to redeem these...

[SaraEA]

I wouldn't lose sleep over it.  When that 1099 comes to us, we have no idea when the bonds matured, just when they were cashed.  Most likely the client doesn't know either.  And if they matured years ago, even the IRS can't retrieve their tax return to determine what bracket they were in back then.  All we can really do is report the interest when it's reported to the client.

[Lion EA]

And, if (that's a big if) you do know when a bond matures and report it properly, the client will get a Form 1099-INT when he cashes the bond years later.  You can try "in and out" on his return, but he's going to get an IRS letter re unreported income.  You'll be writing letters in response and printing his return from the year of reporting to attach.  And, he'll think you did something wrong!  I don't lose sleep over a 1099-INT in a current year that matured earlier.  I do ask and I do try to help clients in low-income years find things like Sara explained.  But, what the IRS requires as reporting on tax returns and what they require of banks as reporting on 1099s is different and one of many things that make our jobs harder.  Just another example of the people passing the laws not reading the laws.

[Christian]

Like most of you I try to follow the regs. However, after the stuff I've seen in more recent years I really don't break a sweat over a lot of these matters. Since the service deep sixed a bunch of applications for tax exempt status from a bunch of conservative organizations (and tried to cover their tracks) the congressional Republicans have cut funding so much (mod edit to hide political commentary) ...there has been a noticeable effect on enforcement [due to funding cuts (added for clarity)]. I read an article recently that somewhere in Texas some guy owed several hundred thousand dollars in taxes and the Service advised they had insufficient staff to pursue claims for amounts less than one million. Go figure. 

Edited September 6, 2016 by jklcpa
removed political commentary