Internal Revenue Manual - 20.2.8 Restricted Interest

Part 20. Penalty and Interest
Chapter 2. Interest
Section 8. Restricted Interest

20.2.8.1 (07-31-2001)
Restricted Interest Overview

Interest may be limited to specific time periods or rates, or it may be statutorily prohibited; this gives rise to the term "restricted interest." Restricted interest is subject to the same variables (time, rate, amount) as "normal" interest calculated by the Service. The primary difference between normal and restricted interest is that the computer may not be able to identify all conditions involved in a restricted interest situation.
Certain freeze codes or certain transaction codes post to prevent the computer from calculating normal interest. As a result, interest must be manually computed and updated. Document 6209, " ADP and IDRS Information" provides information on the following freeze codes and transaction codes:
- Freeze codes: –I, I–, –C
- Transaction codes: TC 340, TC 341, TC 500, TC 534, TC 770, TC 772, TC 780.
Personnel with the expertise to accurately verify the interest computation should review all manual debit or credit interest adjustments in excess of $50,000.

20.2.8.2 (07-31-2001)
Provisions Restricting and Prohibiting Interest

The IRC contains provisions by which interest is either restricted or prohibited. See Exhibit 20.2.8 - 1. Provisions Restricting and Prohibiting Interest on Income Tax, Estate Taxes and Excise Taxes, which lists the section of the Code and certain provisions having the effect of law, which govern adjustments resulting in deficiencies or overpayments on which interest is restricted. It also lists an identifying title and the related provision which governs the computation of interest.

20.2.8.3 (08-01-2006)
Manual Computations

Do not unnecessarily restrict accounts; ensure that TCs 340/341 and TCs 770/772 are used appropriately. Management is required to perform random reviews of cases to verify that they are being restricted/computed correctly.
1. When manually computing interest, always attach the computation and the reason for the action taken to the adjustment source document.
2. When abating interest or inputting a TC 340 for zero amount, provide the reason on the adjustment source document.
3. It is not necessary to input manual debit interest restriction transaction codes (TC 34X) in ADJ54 or ADJ47 with a blocking series that will create a refile DLN if sufficient documentation is attached to the adjustment source document.
4. All manual debit interest transactions input through ADJ54 or ADJ47 must have an interest-to-date in the DB–INT–TO–DT field (MMDDYYYY format).
5. Use the non-restricting TC 190 for quick and prompt assessments when Master File can compute the interest.
Note:

A reversal of a Gas Tax Credit(s) will require a manual computation and restriction of interest if the taxpayer signed a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.
Transaction code (TC) 342 removes the interest restriction previously set by either a TC 340 or TC 341. TC 342 must be input for zero amount. Master File will consider all posted TCs 19X, 34X, and 33X amounts when assessing or abating additional interest as a result of a recomputation.
1. TC 342 may NOT be input without first securing the source document for the TC 340/341 that created the interest freeze.
2. The TC 342 may be input only if the TC 340/341 restriction was unnecessary.
3. A TC 340 .00 may indicate net rate interest netting.DO NOT INPUT TC 342.
4. When inputting TC 342, it is not necessary to use a blocking series that will create a refile DLN if sufficient documentation is attached to the adjustment source document
5. Attach a copy of the source document for the TC 340/341 to the TC 342 adjustment document.
Caution:

TC 342 will reverse ALL restricted interest transactions on the module.

20.2.8.4 (07-31-2001)
Credit Availability Date for Debit Interest Computation

To determine the credit "interest start date" on an overpayment, consider the credit availability date.
As applied to debit interest computations, credit is generally available as follows:
1. Prepaid credits (e.g. withholding) are available on the due date of the return.
2. Subsequent payments are available on the received date/transaction date shown on the transcript.
3. Credits transferred from another module are available on the effective transaction date.

20.2.8.5 (08-01-2006)
Software

The Service currently supports the automated computation tool (ACT) InterestNet by Decision Modeling, Inc. and IDRS (e.g. CC COMPA) to facilitate manual interest computations.
All current users of TIPS and other commercial off the shelf (COTS) software products, such as, Tax Interest Program by TimeValue Software, should contact MITS to install the latest version of ACT and to start using this tool for all their interest computation. ACT, InterestNet is available to all employees performing restricted interest computation.

Caution:

Only software approved by the Service should be used to compute interest.

20.2.8.6 (08-01-2006)
Reasons for Restriction

Some of the reasons for restricting interest on a tax module are as follows:
1. Form 2285, Combination adjustments.
2. Tax Motivated Transactions.
3. Net Rate Interest Netting.
4. Rev-Rul. 99-40 (May/Sequa).
5. Multiple 870 waiver dates.
6. Error or delay in ministerial or managerial acts.
7. Ascertained date under IRC 6502.
8. Non Master File assessments.
9. Form 8697, Look Back Method.
10. Estate Tax Returns.
11. Combat Zone.
12. Offers in Compromise.
13. Large Corporate Underpayment.
14. Disaster areas.
15. Tax module reinstated from retention.
16. Reversals of Gas Tax Credits
Due to the complex and changing nature of interest, this list is not all-inclusive.

20.2.8.7 (08-01-2006)
870 Waiver—Interest Suspension Period

If an assessment is not made and a bill is not issued within 30 days after a Form 870 Waiver is received according to IRC section 6601(c), interest will not be computed on the deficiency or on the interest on the deficiency for the period beginning on the 31st day after the waiver date and ending on the assessment date (23C date). Master File programming will not compute interest during this period and it is not necessary to restrict the tax module for this reason alone. However, Master File programming cannot accurately compute interest involving more than one Form 870 waiver, therefore, interest on those tax modules must be manually computed and assessed with TC 340.

Note:

Reversals of Gas Tax Credit(s) covered by an 870 Waiver will also require a manual computation and restriction of interest with TC 340. A manual computation and restriction is required because there is no systemic means for Master File or IDRS to distinquish a Gas Tax Credit reversal (TC 767) from any other type of credit reversal that uses TC 767 and allow the waiver period against the Gas Tax Credit reversal.
The suspended interest period applies only to the tax, penalties, and interest related to the TC 300 assessment. Exhibit 20.2.8 - 2, Interest Suspension Period—870 Waiver, shows the effect of a period of suspended interest on a debit interest computation for the following example:

A subsequent examination resulted in a tax increase of $6,719.00. The Service received a signed agreement to the tax increase on July 12, 2000. Interest on the tax accrued from the return due date to 30 days past waiver date (August 11, 2000) is $186.77. Interest is then suspended on the additional tax ($6,719.00) and related interest ($186.77) from the 31st day after the waiver date until the 23C assessment date; August 28, 2000 for this example.
To allow the suspension period, CC FTPIN will post a TC 9990 with a credit amount equal to the amount on which interest must stop. In this example, tax and interest total $6,905.77. Note that the TC 9990 date is August 12, 2000. To resume computing interest, CC FTPIN will post a debit TC 336 with the same amount, using the 23C date of the assessment, which in this example is August 28, 2000.

Note:

Interest accruals continue on all other liabilities to which the interest suspension period does not apply.
While Master File programming can accurately compute interest if there is one waiver date (870-DT>) on the tax module, it can not if there are multiple adjustments with different 870-DT>. These accounts must be manually computed and restricted.
To update interest on an account with an 870-DT>:
1. Using current TXMOD or Master File information, compute interest on the accompanying TC 30X (including additions to tax and penalties) to the 870-DT> + 30 days.
2. Suspend interest on the tax, penalties and interest for that TC 30X until the 23C date of the assessment.
3. Resume normal interest computations as of the assessment date.
4. With multiple 870-DT> dates, it is usually necessary to do multiple interest suspensions.

20.2.8.8 (08-01-2006)
Documentation

It is imperative that all restricting adjustment source documents have sufficient documentation to determine how and why the interest was computed and restricted. This applies not only to the original restricting document, but also to any adjustment document updating the interest. As it is no longer necessary to use a blocking series that will generate a refile DLN, it is even more important that documentation is attached to every interest adjustment.
At a minimum, adjustment source documents should contain the following:
1. A print of the interest computation (i.e. ACT, CC COMPA)
2. Relevant Forms (i.e. Form 2285, Form 8668, Form 2322)
3. Any other relevant information (i.e. Combat Zone/Disaster dates, large corporate start date)
4. It is not necessary to attach Master File or IDRS transcripts.
You must attach documentation of your interest computation to the adjustment source document, even if you retain a copy in your area. All restricted interest computation must have documentation.

20.2.8.9 (08-01-2006)
Combination of Adjustments (Form 2285)

An adjustment to a taxpayer's income may result in an underpayment or overpayment of tax on which interest is restricted or prohibited. An examination of the return may involve income adjustments under more than one section of the law (usually carryback adjustments). These underpayments and overpayments attributable to the different Code sections are often offset against each other resulting in a net no change, net underpayment, or net overpayment within the same tax module. A Form 2285 should accompany the Examination or Appeals report that shows the tax increase or decrease attributable to each applicable year. A copy of the Form 2285 may be sent to the taxpayer.
Examination and Appeals employees prepare Section I of the form when income tax adjustments fall under more than one section of the Code and a combination of adjustments is needed.
1. The amounts of the deficiencies and overpayment on which interest is to be computed are shown on line 11 of Form 2285, in columns (a) through (e).
2. The net amount to be assessed as a deficiency or to be allowed as an overpayment is shown in column (f).
Section II is sometimes used as a worksheet to compute interest when Section I reflects a net deficiency or overpayment in column (f), resulting from offsetting adjustments in any of the columns from (a) through (e). It is not necessary to complete Section II if the adjustment is clearly identified on an attached interest computation print. Manually compute interest only when it is determined that the computer cannot calculate the correct interest. See Exhibit 20.2.8 - 3. Form 2285–Section I and II
1. Recompute the module using a "running module balance" including interest due on deficiencies shown in any of the columns from (a) through (e) whether or not there is a net deficiency in column (f).
2. Reduce the "running module balance " by overpayments shown in columns (a) through (e) and compute allowable interest when the running module balance is overpaid.
3. Use current TXMOD or Master File module information.

Generally, combination adjustments have been assessed with restricting transactions for both overpayment and underpayment interest. However, Master File programming can accurately compute the interest in some situations. If possible, do not restrict the account, but instead use the following:

IF a General Adjustment Is:	AND a Carryback Is:	THEN Master File Programming Can Compute Interest When:
Assessment	Allowance	Input a TC 309 with the Interest Computation Date using a partial blocking series and Hold Code 4.
		Then input TC 300 using a final blocking series and Posting Delay Code 1.
		Exception: When the G/A (+) amount equals the C/B (-) amount, Master File cannotcorrectly compute the interest.
		Exception: When the G/A (+) amount is less than the C/B (-) amount - Master File cannotcorrectly compute the interest.
Assessment	Recapture	Input TC 300 - AND
		TC 308 with the Interest Computation Date
Abatement	Allowance	Input TC 301 - AND -
		TC 309 with the Interest Computation Date.
Abatement	Recapture	Input TC 301 - AND -
		TC 308 with the Interest Computation Date
		Exception: When the G/A (-) amount equals the C/B (+) amount, Master File cannot correctly compute the interest.
		Exception: When the G/A (-) amount is less than the C/B (+) amount - Master File cannotcorrectly compute the interest

Caution:

When trying new processes such as cycling or combining transaction codes on IDRS/Master File to adjust interest, monitor the adjustment to confirm all have posted correctly.

See Exhibit 20.2.8 - 4. for a case involving Form 2285 interest

When updating manually assessed interest on a tax module, you must attach a copy of Form 2285 or other relevant information to identify the overpayment and/or underpayment amounts and dates
Consider the use of the non-restricting TC 340 to update manually assessed combination adjustment interest.
If the net tax adjustment is zero or a credit, but there is still a balance owing for deficiency interest, input a REQ77 with TC 550 using the 23C date plus ten (10) years to extend the CSED.

20.2.8.9.1 (07-31-2001)
Application of Overpayment

When Form 2285 is used to compute overpayment and/or underpayment interest, compute interest using a "running module balance" with current TXMOD or Master File information.
1. Apply all normal interest considerations (i.e. Revenue Ruling 99-40) in recomputing the tax module.
2. Apply carryback allowances with the loss year filing date for years after Oct. 4, 1982.
3. When applying carryback recaptures, consider Revenue Ruling 99-40 and within module netting procedures as appropriate. Allow credit interest on general adjustment decreases to the liability date of carryback recaptures.

20.2.8.9.2 (07-31-2001)
Interest on Barred Assessments

A deficiency in column (a) of Form 2285 is sometimes barred by statute from assessment because the period for assessment has expired, even though column (f) of Form 2285 shows an overassessment which is not barred from allowance. Compute interest on the deficiency; do not assess the interest. On the allowance document, show the amount of interest as a deduction from the overassessment and add a suitable explanation for the taxpayer.

20.2.8.9.3 (07-31-2001)
Corrections

If an error is found in a tax adjustment, Examination Division should prepare a "corrected" Form 2285.

Note:

The original and corrected adjustments must be annotated in adjacent columns of Section I.
Examine the original Form 2285 and verify the amounts shown in each column with the amounts on the corrected form. Recompute the interest using the corrected amounts and adjust the interest as appropriate.
If an obvious error is discovered in the interest computation on Form 2285 during an update of the interest, correct the error with the update.

20.2.8.9.4 (07-31-2001)
Non Examination Combination Adjustments

Areas processing requests for carryback allowances will also encounter combination adjustments, generally on a claim for a carryback allowance. Instructions for processing multiple carryback adjustments can be found in IRM 21.5.8.5.10.

20.2.8.10 (07-31-2001)
Overpayment of Original Tax When Liability Exists for Interest

Sometimes additional tax and interest are assessed for a taxable year and later an overpayment is determined for the same year. In such cases, the interest assessed on the deficiency is not always refunded in full. For example, the overpayment attributable to a net operating loss carryback.
Determine the dates of overpayment. If the payment was specifically designated to pay interest (TC 680), the interest liability in the account is considered paid on the actual date of the payment. The same is true with a designated penalty payment (TC 690).
Always consider the impact of a carryback allowance on previously assessed interest. Using a current TXMOD or Master File transcript, compute a running module balance on the entire tax module to determine if the underpayment interest needs to be adjusted based on the carryback.

20.2.8.11 (07-30-2001)
Look Back Method (NMF)

Taxpayers required to account for long-term contracts entered into after February 28, 1986, (under either the percentage of completion-capitalized cost or the percentage-of-completion methods), must use Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to compute and report the look-back interest due or to be refunded, as determined in IRC section 460(b)(2). Form 8697 is due when the taxpayer files a Federal income tax return (including extensions) for the tax year in which one or more long-term contracts are completed.
1. If interest is due, the taxpayer must file Form 8697 with the related return. The amount of interest due is included in the total return tax. Full paid and balance due original Forms 8697 are filed as an attachment to the related income tax return.
2. If interest is to be refunded, the taxpayer should file Form 8697 separately. Overpaid and separately filed amended Forms 8697 are processed using NMF procedures.
Additional interest on interest is compounded daily from the due date of the return for the contract completion year to either the date the interest is paid or the date Form 8697 is filed, whichever is earlier.
1. If the net balance due is not paid with Form 8697, compute additional interest from the Form 8697 received date to either the payment date or billing date, whichever is earlier.
2. If a refund is due the taxpayer, compute additional interest from the due date of the completion year to the refund schedule date.
3. Normal interest rules, such as large corporate underpayment (2%) and GATT apply.

20.2.8.12 (07-31-2001)
Assessments Against Treasury Department Embezzlers (NMF)

IRC section 7803(c) provides for assessments against any Revenue Officer or employee of the Treasury Department who fails to account for and pay any money or property collected under the Internal Revenue laws.
1. Notice and demand must be issued for the amount owed before the assessment can be made. See IRM 3.17.46.0, Automated Non-Masterfile Accounting.
2. Upon failure to pay the amount demanded, an assessment is made as specified in IRM 3.17.46.0.
Interest is charged at the underpayment rate from the date of embezzlement to the date of full payment.
- The first notice includes interest computed from the date of embezzlement to the 23C date of the notice.
- If the date of embezzlement is unknown, interest accrues from the date of the first notice.

20.2.8.13 (07-31-2001)
Non-Restricting TC 340

The non-restricting TC 340 is an enhancement to Master File programming to allow a systemic interest update on a tax module after it has been restricted. This is especially useful in, but not limited to the following situations:
1. Multiple date waivers
2. Combination adjustments (Form 2285)
3. Disaster area adjustments
4. Abatements due to a delay or error in a ministerial or managerial act
5. Combat Zone participants
Entering the module balance on the COMP-INT-AMT field causes Master File to resume normal interest computation on that amount from the date entered in the INT-TO-DATE. See Exhibit 20.2.8 - 5.
1. The module balance includes any tax, penalty and/or interest unpaid on the INT-TO-DATE except accrued Failure to Pay Penalty (TC 270) that will be posted with the adjustment.
2. The INT-TO-DATE is the date normal interest accruals should resume.
  
  Example:
  
  For Exam/Appeals tax assessments with an 870-DT> waiver, the INT-TO-DATE is the 23C date of the assessment, not 30 days past the agreed date. For interest updates the INT-TO-DATE is generally the 23C date of the adjustment.
The non-restricting TC 340 should not be used in situations where normal programming can not correctly update the interest. Some examples are, but not limited to:
1. Tax Motivated Transaction Interest (TMTI), 120%
2. Large corporate underpayment interest, 2%
3. Modules reactivated from retention. (TC 370 with doc code 52 sets a permanent debit interest restriction, unless the TC 370 contains a Julian Date of 999, in which case the module is not restricted.)
4. Net rate netting cases.

20.2.8.13.1 (07-31-2001)
Subsequent Manual Interest Accrual Processing

After the posting of a non-restricting TC 340 certain conditions on a module will prevent Master File from correctly updating subsequent interest accruals. These conditions include
1. Any subsequent adjustment to tax
2. Any other subsequent adjustment with a transaction date prior to the INT-TO-DATE
3. A subsequent credit transfer with an availability date earlier than the last posted INT-TO-DATE
  
  Caution:
  
  The –I freeze will not be present on the module. The adjustment transaction will unpost unless the TC 340 is identified and addressed with the adjustment. A manual interest update is required.