Talking to guards with punavit in the inventory gets it confiscated. This is normally fine, but it creates a problem in Bounty: Turedus Esdrecus where it will lower the reward, which is rather odd since the the theft is publicly known and you've been explicitly tasked with getting them back. While this quest is active and Turedus Esdrecus has been killed, guards should instead express relief at their retreival and give you directions to Indoril Ilvi (generic town dialog otherwise doesn't state where in town he is).