Schedule B Interest Income

[helptax]

Hello all,
My new client, by someone referred to me, they had interest income from bank institution and last year tax preparer waived all those interest income by typing "ACCRUED INTEREST" in description and minus out the whole interest. End it up, this client didn't need to pay any tax on all the interest income. What do you think of that? Can you do like that? The interest income was $2561. If it's OK under tax law, I could do to my other clients too. They all will love me, that's for sure... Ha ha ha ha. Please give me response, thanks in advance for any input. I think this is not right at all!!!!

T

[Joe Btfsplk]

Accrued Interest

I believe it is taxable if it is available to the taxpayer. Even if it is 'accrued' and not available, it will be available the next year, so all this does is delay the tax on the interest.

He probably either needs an amended return or needs to pay the tax this year on the interest he deferred last year.

If the payer reported the intrerest on a Form 1099 INT, I would think it is taxable in the year reported.

[BOB W]

Yep.....

... the interest needs to be reported this year or amend last year's return. You will have a new 1099 int this year, if you defer this he will only have last years to report this year, if not he will be reporting two years.

What to do?.... I always like to let sleeping dogs sleep, but to each their own. I would report 2 years this year and move on.

The other accountant was applying, in his mind, "cash basis" taxpayer and "constructive receipt" rules. Maybe he was correct and maybe not, probably not.

[Luis Mopeo]

I would report 2 years this year and move on.

No.

There are legitimate situations where accrued interest is backed out from the 1099 amount, such as when bonds are purchased between interest payment dates. Such interest is taxable to the seller, but is reported to the new owner. It's treated like nominee interest.

Could the interest be incorrectly reported? Sure, but I wouldn't be so quick to jump to conclusions that it's incorrectly reported without at least knowing something about the situation. And I'm not sure it's your job to audit the client's prior year tax return and throw out deductions. If you have reason to believe there's been an error or omission, you need to inform the client. But just having accrued interest by itself isn't a reason to believe there's been an error.