Savings bonds.

[TAX4US]

Ok I need help. TP inherited savings bonds from spouse.22 years ago. TP deceased in 2018. I found these as executor buried in bottom of drawer. Maturity dates 1998-2007. Interest never reported. When I look at the old returns for all those years which I have tp does have a liability. If I add in the interest for each of those years TP will have liability. Now that I am cashing in all those bonds what MUST or Should I do with 33k of interest? Your thoughts.

[ATSMAN]

The executor should have the estate pay the tax and request an abatement of the penalty. Interest will be charged.

[Anarchrist]

Interest is reported the earlier of maturity date or date cashed. 98-07 are all closed years.

[New York Enrolled Agent]

Interest is reported the earlier of maturity date or date cashed. 98-07 are all closed years.

It may not be that simple.


Some of you may know the site of Kaye Thomas at fairmark.com. While he is clearly not a source of authority he believes it would not be so easy to dismiss the interest as being taxable in the year the bonds were cashed. Probably IRD

FWIW
The original message raises the question whether the interest could become nontaxable if the year it should have been reported is outside the limitations period by the time a savings bond is cashed in. We're assuming the failure to report was inadvertent (not fraudulent) and that a tax return was duly filed for the year the interest should have been reported, so the limitations period is truly closed.

I'm not sure if there are reported cases dealing with this specific issue (some quick research didn't turn up any) but I'm confident the answer is no. The IRS would surely say that if you didn't report the interest at final maturity and that year is closed by the statute of limitations, you have to report the interest when you cash in the bond. If nothing else they can rely on the judicial doctrine that says taxpayers have a duty of consistency.

An example of this doctrine would be a case from a few years ago (Estate of Ashman) where a taxpayer made a bad rollover to a retirement plan (outside the 60-day window) but reported it as a good rollover. When she took the money from the second plan she argued she shouldn't have to pay tax on that distribution because the tax should have been paid in the year of the bad rollover, which was closed by the statute of limitations. The court held that the second distribution was taxable based on the duty of consistency.

The general rule when cashing in a savings bond is that any interest not previously reported is taxable at that time. If the taxpayer failed to report the interest in an earlier year that is now closed by the statute of limitations, the duty of consistency requires reporting of the income in the year the bond was cashed in.

Kaye Thomas
Fairmark.com

[TAX4US]

Are we saying the estate(form 1041) should report the interest and let heirs pay the tax or can we include them on Final return of TP? or as stated above, since it was not intentional of fraud then that interest would not be taxable by statue. I remember amending a return for a closed year to add income and the IRS sent the payment back stating they could not collect. Could the same be true here?

[Anarchrist]

Are we saying the estate(form 1041) should report the interest and let heirs pay the tax or can we include them on Final return of TP?

Thomas at fairmark is probably saying one of those two options (or something similar) should be done.

the IRS sent the payment back stating they could not collect. Could the same be true here?

Yes. There's numerous reports of preparers amending returns for old matured bonds and the irs refunding the payment.

[Burke]

TP died and the bonds were still active. The estate is now responsible for liquidating the existing bonds and distributing the funds to the heirs. The interest cannot be put on the final 1040 of the deceased. His tax year ended at his death. If the funds are distributed to the heirs the taxation of those funds passes through to the heirs and is reported on their individual tax returns. This may be a much more favorable result than having the estate pay the tax on its return. Choosing a fiscal year for the estate may be advantageous and should be explored. A fiscal year does not have to be 12 months. I have one right now where the initial return will be a fiscal year of 8 months. A large IRA distribution was made to the estate in the 9th month, and the majority of expenses were also paid after that date. So they can be deducted in the 2nd fiscal year.

[TAX4US]

Burke I appreciate your answer. Problem may lie in that all the bonds matured 12 to 20 years ago. Every thing I read says the EARILER of cashing or maturity. Looked at years in question and maybe 1 to 4% income change. Nothing even coming close to that magical penalty of understatement of income. Does this make a difference?

[New York Enrolled Agent]

TP died and the bonds were still active. The estate is now responsible for liquidating the existing bonds and distributing the funds to the heirs. The interest cannot be put on the final 1040 of the deceased. His tax year ended at his death.

Burke - take a look at Rev Ruling 68-145. I'm pasting a snip from Rev Ruling 79-409 which recaps the first Rev Ruling:

Rev. Rul. 68-145, 1968-1 C.B. 203, concludes that when a decedent had not previously elected to accrue the annual increments in value of Series E United States savings bonds for federal income tax purposes, the fiduciary having the responsibility for filing the decedent's final federal income tax return assumes the powers and duties of the decedent for this purpose pursuant to section 6903 of the Code and therefore may elect to treat the increment in value of the bonds as interest in the decedent's final return.

[Burke]

Thank you for the reference. You are correct. The executor has to make a decision, then, whether it is more advantageous to put the entire interest accrued on one return (the deceased's final 1040) or divide between the heirs by claiming on the estate 1041 and distributing the funds. While putting it on the final 1040 would be convenient, it may be less tax due if divided among the heirs, depending on their individual tax situations. $33k of ordinary income on the final 1040 would for sure incur a liability which the estate would have to pay on behalf of the deceased. Also, the bank needs to report it under the correct SSN or EIN depending on the election made.

[Raygun99]

Just a twist to the question ? What to do if these bonds were discovered in a subsequent year after the final 1041?

[taxmom34]

I have a question. are you required to turn in those bonds because of the maturity date or can you report interest when bonds are cashed , like divide it for the next couple years.

[Anarchrist]

Just a twist to the question ? What to do if these bonds were discovered in a subsequent year after the final 1041?

Makes no difference.

are you required to turn in those bonds because of the maturity date or can you report interest when bonds are cashed , like divide it for the next couple years.

As mentioned a few times above, interest is taxable the earlier of maturity or date cashed.

[marlenew]

Interesting!!

[Dude]

You are caught in a Catch-22 but you may have to prove it by filing at least one amended return and having the unreported interest payment returned to you. Afterwards when/if penalties are assessed you can contend that you were left with no other option than to cash the bonds in and use the 1099 to report the interest. My vote would be for the estate to be on the hook for subsequent penalties. If passed along, it may haunt an unsuspecting heir.