Most folks never report the interest "as earned" method 2 ... if they did they would not allow a bond no longer paying interest to go uncashed. So for those folks who did not use method 2 the interest is reported in the year it is cashed in ... that is the year the bank will report the interest to the IRS and is the path of least resistance. Although the IRS pub says differently this is something they will never notice, catch or audit. They are just happy the interest is reported at all and were thrilled that the bonds were not cashed in earlier and they got interest free use of the money for years.
