How to I change from the accrual method to the cash method to report the interest income on my Series EE and Series I bonds?

[tuffykeechy]

I previously used the accrual method to report interest income on my past Series EE bonds (which I cashed in a few years ago).  I would like to switch from Method 2 (accrual)  to Method 1 (cash) for the Series I bonds that I purchased in 2022, and would like to know the correct and easiest way to obtain permission from the IRS to do this.  I haven't filed my 2022 tax return yet, and I have looked at Form 3115 and am overwhelmed with the form and not certain how to fill it out properly.  Is there a better way to obtain permission to switch back to the cash method?

[DianeW777]

Yes, you can use the cash method for your new Series I  bonds purchased. The new purchase of Series I bonds are not connected to the old Series EE bonds. A Form 3115 is not required for these bonds (Series I).

The original Series EE bonds have been cashed and all interest required to be reported on the Series EE bonds should now be completed since they were cashed. If  you had wanted to change methods on these bonds before they were cashed, then you would have needed Form 3115 to do that.

[tuffykeechy]

Publication 550 states that "Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for for any you get later, unless you request permission to change.

[JamesG1]

Have you previously made an IRC §454 election?  

IRC §454 permits cash-basis taxpayers to elect to recognize interest income currently on certain non-interest bearing discount obligations.   If the election is made, the amount which is recognized in a taxable year is the actual increase in the redemption price that occurred during the year.

IRS revenue procedure 2022-14 (pages 321-324) describes designated automatic accounting method change number '131' which "applies to a taxpayer that previously made an election under § 454 to report as interest income the increase in redemption price on a bond occurring in a taxable year, and that now wants to report this income in the taxable year in which the bond is redeemed, disposed of, or finally matures, whichever is earliest."

IRS revenue procedure 2022-14 specifically mentions Series E, EE or I U.S. savings bonds.

IRS revenue procedure 2022-14 goes on to explain describe in the detail "the statement in lieu of a Form 3115 that is permitted under this section 17.01 is considered a Form 3115 for purposes of the automatic consent procedures of Rev. Proc. 2015-13."

@tuffykeechy 

[tuffykeechy]

Thank you JamesG1 for the information.

Yes I have previously made an  IRC §454 election.  I do plan on filing an Amended return and attaching a statement to it  to request permission from the IRS to return to the cash method of reporting interest on the savings bonds.  Any tips on what information is required to be on the statement would be greatly appreciated.

[JamesG1 · Accepted solution]

IRS revenue procedure 2022-14 (pages 321-324) says that the statement that you prepare 'is considered a Form 3115".

The requirement to file the duplicate copy of the 'considered Form 3115' is waived. 

Per page 322, the statement must include the following information:

• (i) the designated automatic accounting method change number for this change, which is “131”; 
• (ii) the taxpayer’s name and employer identification number or social security number, as applicable; 
• (iii) the year of change (both the beginning and ending dates); 
• (iv) the Series E, EE or I U.S. savings bonds for which this change in accounting method is requested; 
• (v) a statement that the taxpayer will report all interest on any U.S. savings bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and 
• (vi) a statement that the taxpayer will report all interest on the U.S. savings bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of any interest income previously reported in prior taxable years. 

@tuffykeechy 

[tuffykeechy]

I appreciate the help JamesG1.  Thank you!