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A CD's EWP Tax Break And The IRS

senda
  |     |   126 posts since 2015

Hello,

From past experience with my tax guy, I know you can write off, on your taxes, the EWP you have to pay a bank/CU if you break a CD early. I remember at least once receiving a printed notice from a large CU (was it NavyFed?) stating how much I had paid them as a penalty that year, along with the normal 1099-INT info, but can't recall if every FI sent such notices at the end of the year.

I'm trying to figure out if the IRS has to receive corroborating info from the Bank/CU as well or not, if you claim such EWP on your taxes.

This year I broke several CDs (and paid an EWP) at a few different places, but the one that was quite large (well over 5k EWP) was with a tiny local 1-branch credit union that doesn't seem like the kind of place to send out such things to the IRS. My online statement shows NO penalty listed or any proof that a penalty was paid. The only proof I have is the tiny receipt from the day I closed the CD early in person. The receipt does say "Certificate Penalty" followed by the amount. I'm keeping that receipt of course, but other than that, there seems to be no proof of the penalty paid in their system.

So I'm wondering if this is something that the IRS would immediately flag if they didn't receive corroborating info from the Bank/CU as well, or not? Is there a particular Form # the CU needs to send to the IRS? (Like a 1099-INT for interest). Or is it just you reporting a figure and the IRS taking your word for it (as long as you have proof later on to back it up if needed).

Thanks.

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2


Answers
alan1
  |     |   877 posts since 2015
senda is "trying to figure out if the IRS has to receive corroborating info from the Bank/CU" concerning early withdrawal penalties.

The answer is "yes".

senda asks: "Is there a particular Form # the CU needs to send to the IRS? (Like a 1099-INT for interest)."

The answer is "yes".

The "particular Form # the CU needs to send to the IRS" is 1099-INT.
see https://www.irs.gov/pub/irs-pdf/f1099int.pdf
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senda
  |     |   126 posts since 2015
alan1,
Thank you. I would certainly receive a 1099-INT from the CU, as I have every year while I had the CD. Hopefully they will also put the "Penalty" amount on there. If not, any suggestions? I wouldn't normally ask, except this is a tiny 1-branch kind of place where things are kind of done on the fly... :)

By the way, I'm sure a LOT of people here at DA broke CDs this year, so a whole lot of people will hopefully be writing off their EWPs on their taxes...
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alan1
  |     |   877 posts since 2015
senda -- I would suggest that you carefully check the 1099-INT to make certain that a correct entry was made with respect to the early withdrawal penalty. I once received a Form 1099-INT where the institution failed to include that entry. It was a bit of a hassle getting them to issue a corrected Form 1099-INT.
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LongTimeDAFan
  |     |   69 posts since 2022
I've taken EWPs before with 2 different CUs. One of them listed the EWP separately from the interest earned on the same 1099-INT. The other one reduced the interest earned amount by the EWP amount. Your year-end statement should show how much interest you earned, except in the case where the CU lists the EWP separately. This year I will have a negative interest earned amount from a CU, so I'm curious to see how that CU will list it. Either way, I make sure they got it correct and to the penny!
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111
  |     |   672 posts since 2019
Senda - The Financial Institution may or may not be required to send you a separate notice for an EWP, but they are required to list the EWP amount in Box 2 of the 1099 itself, which is labeled “Early Withdrawal Penalty” on one of the most common formats of Form 1099. (Now, there is more than 1 format of Form 1099 that FIs are allowed to use, and some formats, for example, do not even list a “Box 2” even with a $0.00 amount, IF there are no EWPs for that FI for that year. They instead list only those items that contain non-zero data. Apparently that format is OK with the IRS, because I get a few of them every year.)

If you request the free “Wage and Income Transcript” from the IRS for the tax year in question, and look in the “Form 1099-INT” section, you'll see that for each FI payer the interest paid, interest withheld, and “interest forfeiture” is identified, along with several other items. I've not had an EWP in many years (although I expect that to change soon), but my vague recollection is that this “interest forfeiture” is the EWP amount for that account. So, the IRS is getting the data electronically, directly from the FI.

Note - if you do wait to file your taxes before getting that Wage and Income Transcript from the IRS, you may have to file for the automatic 6-month extension. In my experience the IRS has been increasingly late in making this data available - in some cases not until summer of the following year.
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