Is there an IRS penalty for holding old Savings Bonds?

I have been told that IRS is now imposing a penalty if Savings Bonds are not redeemed when they no longer draw interest. Is this true? Could you reference an IRS document or web site that I could print out for my father?

Tom’s response

The IRS says that the income tax is due in the year the bonds are cashed or they stop paying interest, whichever comes first.

You don’t have to look any deeper than the main instruction book for preparing your taxes, IRS Publication 17, Your Federal Income Tax. Pages 54 through 57 of this publication discuss federal tax treatment for Savings Bonds.

On page 54, at the bottom of the middle column, in the section called Reporting options for cash method taxpayers, you’ll find what you’re looking for.

When your father eventually cashes his Savings Bonds (remind him that he isn’t planning on letting the government have the money forever, is he?) a 1099-INT tax form will be sent to the IRS reporting the interest he has earned. He’ll also receive a copy.

If the organization submitting the form has their processes straight, the year on the 1099-INT will be backdated to the year the bonds matured. Consequently, your father will have to file amended returns for that tax year and pay a late-payment penalty for not paying the tax on time.

Meanwhile, your father is paying a second penalty that actually costs more than the IRS penalty - his money isn’t earning anything!

Another option would be to get him a copy of my book, . It goes into great detail about why investors should cash Savings Bonds when they stop paying interest, pay the taxes they owe, and reinvest.