Question: I would appreciate your advice concerning handling charges and accrued interest on the purchase of securities. Specifically, I buy first-mortgage notes and bonds from a Wisconsin-based securities firm. Routinely, they include a $3 handling charge on each transaction. Often there is accrued interest too. I have received conflicting instructions from the IRS as to how to report these two items on my income tax return. Can you help me?

Answer: Well, I'll give it my best shot. The $3 handling charge is really the same as a broker's fee. It should be added to the cost of the security; as such, it doesn't give you any immediate tax deduction, but increases the cost basis and is reflected in your capital gain or loss at the time of sale.

The accrued interest, you understand, represents interest earned by the note or bond from the date of the last interest payment (or date of issue, on a new security) up to the date of your purchase.

You are not entitled to interest earned prior to your purchase, but you will receive that accrued interest as a part of the next interest payment. So you have to advance to the previous owner (who may be the broker or underwriter) the interest he is entitled to but which you will later receive.

There are two separate steps in connection with that accrued interest figure. In the first place, do not include the accrued interest as a part of the cost of the security. If it's included in the total cost on the broker's statement, pull it out.

Then at the end of the year, subtract the amount of accrued interest you had paid from the amount of interest received on the note or bond.

Since you were not entitled to receive it--and in fact didn't, since you had paid it to someone else in advance--you aren't liable for income tax on that part of the total interest.

To clarify what you are doing for the IRS, I suggest that you don't simply report the net interest on your tax return. Instead, enter as interest income on Schedule B the full amount of interest as shown on the Form 1099 from the payer.

Then on a blank line near the bottom of the "interest" column print "prepaid accrued interest" together with the total amount of such interest paid during the year. Put the amount in brackets and remember to subtract that figure when adding up the column.

Q: I received a shock today when I turned in to my bank for redemption five coupons valued at $28.75 each and was told I would be charged $7.50 for each of the coupons. I was further advised that this is a new regulation of the IRS. I hope you will take up this matter and find out how and why the IRS decided on the fee. I am sure there are many more retired people on fixed incomes who cannot afford to pay a fee of $7.50 for a $28.75 coupon.

A: I asked the people at the IRS about this and they plead not guilty; they know nothing at all about any new fee for collecting coupon interest.

I'm sure the bank wasn't referring to tax withholding. In the first place, they would have been rather premature; then the amount would only have been $2.88 (10 percent); and finally, "coupons" generally refer to municpal bond interest, on which there would have been no withholding anyway.

I can only assume this was a new bank charge, and if so it was not an imposed requirement but a bank decision. I suggest you go back and ask the bank manager about it; if they persist in charging you for collection you can look for another, more accommodating financial institution.

You do have another choice. You are permitted to mail the coupons yourself to the bank serving as registrar for the issuer of the bonds.

The only problem with that is the need to send the envelope by registered mail, since the coupons are not registered and are negotiable. Having a bank or other institution collect for you is the easiest way--but not very cost effective if it carries a 26 percent fee.