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Part 20. Penalty and Interest

Chapter 2. Interest

Section 10. Interest on Estate Tax, Foreign Tax, and Excise Tax

20.2.10  Interest on Estate Tax, Foreign Tax, and Excise Tax

20.2.10.1  (07-31-2001)
Interest on Estate Tax Returns

  1. Estate tax payment may be extended and paid in installments as provided in section 6166 and interest assessed at a reduced rate. These tax modules are identified by MFT 52 TXPER 000000 with notice status of 14. Instructions for determining the portion of estate tax that may be subject to the reduced rate are found in IRM 3.17.243.8.4 (rev. 01/01/2000)

  2. Interest is charged at 2 percent for decedent whose date of death is later than December 31, 1997.

  3. Interest on the amount that exceeds the 2 percent portion shall be paid at 45 percent of the normal interest.

  4. Prior to December 31, 1997, the reduced interest rate was 4 percent. Executors of estates of decedents who died before January 1, 1998 may elect to have the 2 percent rate apply to installments that are due after the effective date of the election. See Rev. Proc. 98-15-4 I.R.B. 25

20.2.10.1.1  (07-31-2001)
Installment payments on Form 706 Estate Tax Return

  1. If all or a portion of a deficiency assessment is paid in installments, compute and assess interest as required by Form 4351, Interest Computation-Estate Tax Deficiency on Installment Basis. Form 4351 is completed by Examination Division.

    1. If Form 890, Waiver of Restriction on Assessments and Collection of Deficiency and Acceptance of Overassessments, is attached to the Examination report, the Service must issue notice and demand within 30 days of the date the waiver was signed.

    2. If notice and demand is not sent within 30 days, interest on the deficiency cannot be charged from the 31st day after the waiver is signed to the date of notice and demand.

    3. To prevent the loss of interest, it is necessary that notice and demand is issued within the 30 day period.

  2. If an extension of time to pay an estate tax deficiency assessment has been granted under IRC section 6161(b)(2), compute interest on the entire balance due from the due date of the return to the date of payment.

  3. If an extension of time to pay the tax shown on the return has been granted under IRC section 6161(a)(2) or 6163:

    1. compute interest on the deferred amount from the due date of the return to the date of payment.

    2. compute interest for the period of the extension of time to pay an installment under IRC section. 6161(a)(2) at the rate of 4% from the due date of the installment to the date of payment.

  4. IRC section 6601(j), applicable to estates of decedents who died before January 1, 1998, provides that a 4% rate applies to a portion of the estate tax if an extension of time to pay under IRC section. 6166 applies.

    1. The 4% rate is limited to $345,800 in tax (less the Unified Credit). The amount in excess of the limit is subject to normal interest.

    2. If the tax payable in installments exceeds the limitation, then payments received that relate to accounts or amounts subject to this limit must be prorated to the amount subject to the 4% interest as shown below:

    1. Divide the amount subject to 4% interest ($345,800 less the Unified Credit) by the total deferred amount.

    2. Multiply the payment amount (net of any interest included in the payment) by the quotient computed above (computed to 6 decimal places).

    3. Apply the amount determined against the amount subject to the 4% limit. The remainder of the payment is applied against the amount in excess of the limit.

    4. Installment bills sent to the taxpayer must take this computation into account.

  5. If the time for payment of estate tax is extended under IRC section 6166 and a deficiency is assessed after the estate has made one or more timely interest payments

    • the 4% rate as per IRC section 6601(j) is applied to determine the amount of interest that should have been paid in each annual interest payment.

    • interest on any underpayment of interest accrues at the prevailing rate under IRC section. 6601(a) from the date the interest should have been paid under IRC section. 6166(f)(1) if the return had shown the correct tax liability. Revenue Ruling 89-32, 1989-1 C.B. 307

    Note:

    The 4% rate was replaced by a 2% rate for the estates of decedents who died after December 31, 1997. In addition, executors of estates of decedents who died before January 1, 1998, may elect to use the new 2% rate for installments due after the date of the election. See Rev. Proc. 98-15, 1998-4 I.R.B. 25.

  6. Refer to IRM, Miscellaneous Accounting, for more information.

20.2.10.1.2  (07-31-2001)
Deductible Credits

  1. "Death" taxes paid to any state, the District of Columbia, or a foreign country, are allowed as a credit against Federal Estate Tax owed. See 11.2.

  2. Income taxes paid to a foreign country are allowed as a credit against Federal Income Tax owed. See 10.6 of this Chapter.

  3. This chapter explains the effect of these credits on interest computations.

  4. IRC section. 2011(a) and 2014 provide for a credit against Federal Estate Tax (for citizens or residents of the United States) for estate, inheritance, legacy, or succession tax paid to:

    • any state (or the District of Columbia) IRC section. 2011(a)), or

    • any foreign country or possession of the United States. IRC section. 2014)

  5. The tax must actually be paid to be taken as a credit.

  6. Interest is determined on Form 1366, Tax Analysis Worksheet for Overassessment of Estate Tax Involving Restricted Interest.

20.2.10.1.3  (07-31-2001)
Time Frames for Claims

  1. Claims for refund of Estate Tax must be filed within 4 years after the date that the Estate Tax Return was filed IRC section. 2014 (e) except if:

    1. a timely petition to tax court was filed, then within the 4–year period, or

    2. [see IRC section 2011(c)(2)] 60 days after the date the decision of the tax court becomes final, or

    3. within the 4–year period or 60 days after the mailing of a certified/registered notice of disallowance of a claim, or

    4. 60 days after a decision of a court of competent jurisdiction becomes final.

  2. If the claim is timely filed, allow any refund of overpaid Estate Tax based on the credit, but do NOT allow interest on the refund.

20.2.10.1.4  (07-31-2001)
Recovery of Taxes Claimed as a Credit

  1. If the executor or other person representing an estate recovers any state or foreign death tax claimed as a credit, they must notify the Service pursuant to IRC section. 2016. The Federal Estate Tax will be redetermined; and (without regard to the statute of limitations provided in IRC section. 6501), the amount of the redetermined Federal Estate Tax is due upon notice and demand.

    If Then
    The redetermined deficiency is the result of recovery of any part of a state (or D.C.) death tax claimed as a credit Compute deficiency interest under the regular rules of IRC section. 6601.
    The redetermined deficiency is the result of recovery of any foreign death tax claimed as a credit Compute deficiency interest from the date the refund from the foreign country was received by the executor of the estate.

    Note:

    An amount equal to any interest paid on the refund by the foreign government is added to the amount of deficiency interest determined.

20.2.10.1.5  (07-31-2001)
Combination Adjustments

  1. If an Examination determination involves a combination of general adjustments and an adjustment of the credit claimed on the return for state death taxes under IRC section. 2011, or the foreign death taxes under IRC section. 2014, the Examination Division will flag the case file for the restricted interest clerk. The file will contain Form 1366, Tax Analysis Worksheet for Overassessment of Estate Tax Involving Restricted Interest.

  2. If Form 1366 shows a deficiency in either column (d) or (d), and an overassessment in the other, deduct the lesser amount from the greater to determine the net result.

    If the net result is Then
    A deficiency in column (c) Compute deficiency interest under the regular rules of IRC section. 6601
    A deficiency in column (d) that results from a recovery of an amount claimed and paid as foreign death taxes Compute deficiency interest
    FROM: the date the executor (or another person) received the refund from the foreign government
    TO: the date of payment of the tax (or if the deficiency is satisfied by a credit, to the date the overpayment is applied). Add an amount equal to any interest received on the refund from the foreign country and assess the total of the two amounts.
    A deficiency in column (d) that results from the recovery of an amount claimed and paid as state (or D.C.) death taxes Compute deficiency interest under the regular rules of IRC section. 6601. (Interest is NOT restricted on this deficiency)
    An overpayment in Column (c) Compute credit interest under the regular rules of IRC section. 6611.
    An overpayment in Column (d) Do not allow credit interest.

  3. In some instances a re-determination is made after adjustments have been made to the amounts claimed as state or foreign death tax credits and the resulting deficiencies or overassessments have been assessed or scheduled.

  4. If the amount of the credit changes, prepare another Form 1366 showing the adjustments in each column, as corrected. The amount in column (a) should be identical to the amount on the original Form 1366.

  5. Redetermine the interest on the basis of the corrected Form 1366 and adjust the interest assessed or allowed.

    If the re-determination results in Then
    A deficiency in Column (d) resulting from a correction in the amount of an overassessment previously allowed on the basis of a state or foreign death tax claim Compute deficiency interest
    FROM: the refund schedule date (since interest was not allowed on the previous overpayment)
    TO: the date of repayment (or, if satisfied by a credit, to the date the overpayment is applied).
    An overassessment in Column (d) Do not allow credit interest
    An overassessment in both Columns (c) and (d) Apportion the overpayment of interest between the general and restricted overassessment.
      a Do not allow interest on the credit or refund of the part apportioned to the restricted interest overassessment.
      b Allow interest under the regular rules of IRC section. 6611 on the part apportioned to the general adjustment overassessment

20.2.10.2  (07-31-2001)
Foreign Tax Credit

  1. Foreign Tax Credit (FTC) relieves U.S. taxpayers of the double tax burden imposed when their foreign source income is taxed by both this country and the foreign country from which it is derived.

  2. FTC is claimed by the taxpayer on:

    • Form 1116, Foreign Tax Credit for Individual, Fiduciary, or Nonresident Alien Individual.

    • Form 1118, Computation of Foreign Tax Credit for Corporations.

20.2.10.2.1  (07-31-2001)
Adjustments to FTC

  1. When accrued taxes are paid to the foreign country, or possession of the United States:

    If Then
    they differ from the amounts claimed as FTC on the taxpayer’s return the taxpayer must report the adjustment. Re-determine the tax liability for the year adjusted.
    any part of the tax actually paid is refunded to the taxpayer by the foreign country the taxpayer must report the refund. Re-determine the tax liability for the year for which the taxpayer received the refund.

20.2.10.2.2  (07-31-2001)
Interest on Adjustments to FTC

  1. For interest on adjustments to FTC:

    If Then
    the adjustment results in a reduction of the credit previously allowed and a corresponding increase in the tax liability compute deficiency interest on the increase
    FROM: the date the taxpayer received the refund of foreign taxes paid
    TO: the date of payment of the increase in tax. If interest was paid on the refund, the interest paid is added to the increase in tax and deficiency interest.
    the FTC claimed on the return was for accrued taxes which were abated by the foreign country or possession on the U.S. compute deficiency interest on the corresponding increase in tax
    From: the due date of the return
    To: the date of payment of the tax
    the adjustment results in an increase in the FTC previously allowed and a corresponding decrease in the tax liability compute credit interest under the regular rules of IRC section. 6611.

20.2.10.2.3  (07-31-2001)
Time Frame for Filing Claims

  1. A claim for credit or refund of foreign taxes paid or accrued must be filed within 10 years from the due date of the return on which the Foreign Tax Credit is claimed.

20.2.10.2.4  (07-31-2001)
Carrybacks and Carry overs of Excess Foreign Taxes Paid

  1. Taxpayers can carry back or carry over credit for excess foreign taxes paid. If a carryback of foreign taxes paid or accrued to foreign countries or possessions of the United States results in an overpayment of tax, that overpayment is deemed not to have been paid or accrued before the filing date for the taxable year in which such taxes were actually paid or accrued.—IRC section. 6611(g).

    1. Prior to implementation of OBRA 1993, interest was paid from the return due date.

    2. If the application of a carryback, {under IRC section. 904(c) or 907(f)}, results in a deficiency, that deficiency may be assessed at any time within one year after the expiration of the period within which a deficiency may be assessed for the year of the excess taxes described in IRC section. 904(c) and 907(f).

  2. Example:

    If Then
    Excess foreign taxes credit is carried back from 1992 to 1991, resulting in a deficiency in 1991 assess the deficiency within one year of the assessment statute expiration date of the 1992 tax year

    Note:

    The carryback or carry over is subject to the same limitation under IRC section. 904(a) as in the year the tax was paid or accrued.

20.2.10.2.5  (07-31-2001)
Computing Interest on Carrybacks of Excess FTC

  1. Manually compute interest on excess foreign tax credit carrybacks.

  2. The interest start date is never earlier than the due date of the loss year return.

20.2.10.3  (07-31-2001)
Excise Taxes

  1. Excise tax liabilities are reported on Form 720 (Quarterly Federal Excise Tax Return), Form 730 (Tax on Wagering), Form 11–C (Occupational Tax and Registration Return for Wagering), and Form 2290 (Highway Vehicle Use Tax Return).

  2. Excise tax credits and refunds are claimed on Schedule C of Form 720, Form 8849 (Claim for Refund of Excise Tax), Line 5 of Form 730, Line 4 of Form 2290, and Form 4136 (Credit for Federal Tax Paid on Fuels) that is attached to an individual's or business' income tax return.

20.2.10.3.1  (07-31-2001)
Interest Generally Allowable

  1. Underpayment interest accrues on unpaid excise taxes, unless otherwise provided, from due date of the return to date paid.

  2. Overpayment interest accrues, unless otherwise provided, from the due date of the return to date paid.

20.2.10.3.2  (07-31-2001)
Special Interest Rules

  1. Airline Ticket Tax Refunds. Passengers are eligible for a refund of the tax related to tickets purchased for travel during certain periods when the tax expired (Form 8849 accompanied by an original passenger receipt for airline tickets). Interest is allowable under IRC section 6402.

    1. If the passenger meets either of the criteria below, they are eligible for a refund:

      • They paid tax prior to August 27, 1996, for travel January 1, 1996, and subsequent.

      • They paid tax on or after August 27, 1996, through March 6, 1997.

        Note:

        Tickets purchased on or after March 7, 1997, are not eligible for a refund of excise tax.

    2. Interest is computed on allowed claims:

    If the refund is issued Then compute interest
    within 45 days of the receipt of the claim from the date the ticket was purchased to the claim received date
    after 45 days of the receipt of the claim from the date the ticket was purchased to the refund schedule date

  2. IRC section 6427(i) provides that claims by registered ultimate vendors of undyed diesel fuel and undyed kerosene (Form 720, Schedule C; Form 8849, Schedule 3) are paid with interest if the refund is not issued within 20 days of receipt. Interest is accrued from the claim received date to the refund schedule date.

  3. IRC section 6427(i) provides that claims for gasohol blending (Form 720, Schedule C; Form 8849, Schedule 3) follow the same rules as claims by registered ultimate vendors in (2) above.

  4. In the case of registered ultimate vendor claims and gasohol blending claims:

    If the claim is: Then:
    accepted issue manual refund without interest no later than the 15th day after claim received date.
    accepted but not timely processed interest must be paid from the claim received date to the refund schedule date

20.2.10.3.3  (07-31-2001)
Interest Not Allowable

  1. There are additional rules that treat certain events as overpayments but restrict the interest on the payments. These rules are provided in the remainder of this chapter.

20.2.10.3.4  (07-31-2001)
Events Related to Certain Retailers and Manufacturers Excise Taxes

  1. IRC section 6416(b) treats certain events as overpayments (Form 720, Schedule C; Form 8849, Schedules 4 or 6): price adjustments; specified uses and resales; tax-paid articles for further manufacture; tires; return of certain installment accounts; and truck chassis, bodies, semitrailers used for further manufacturing.

20.2.10.3.5  (07-31-2001)
Gasoline Used in Farming by Government and Educational Organizations

  1. IRC section 6420 treats as overpayments the tax imposed on gasoline used on a farm for farming purposes by governmental entities and nonprofit educational organizations (annual claim on Form 8849, Schedule 6).

20.2.10.3.6  (07-31-2001)
Fuels Not Used for Taxable Purposes

  1. IRC sections 6427 and 6421, in general, treat as an overpayment the tax imposed on fuels used for nontaxable purposes (Form 720, Schedule C; Form 8849, Schedule 1).

20.2.10.3.7  (07-31-2001)
Laid-off Wagers

  1. IRC section 6419(b) treats as an overpayment the tax on a wager that is laid off by the taxpayer (Form 8849, Schedule 6; Form 730, Line 5).

20.2.10.3.8  (07-31-2001)
Vaccines

  1. IRC section 4132 treats as an overpayment any tax on a vaccine that is returned to the manufacturer or destroyed (Form 720, Schedule C; Form 8849, Schedule 6).

20.2.10.3.9  (07-31-2001)
Heavy Highway Vehicles

  1. IRC section 4483 treats as an overpayment tax paid on the use of heavy highway vehicles when the vehicle is used for 5,000 miles or less (7,500 for agricultural vehicles) (Form 720, Schedule C; Form 2290, Line 4).

20.2.10.3.10  (07-31-2001)
Chemicals

  1. IRC section 4662 treats as an overpayment any tax paid on a taxable chemical that is exported, used as feedstock, and, in some cases, used as fertilizer or animal feed.

  2. IRC section 4682 treats as an overpayment any tax paid on an ozone-depleting chemical that is used as a feedstock, exported, or used as a propellant in a metered-dose inhaler (Form 720, Schedule C; Form 8849, Schedule 6).

20.2.10.3.11  (07-31-2001)
Underpayment of "Collected" Excise Taxes

  1. Chapter 33 of the Internal Revenue Code imposes an excise tax on certain facilities and services. Compute interest on any underpayment of excise tax from the date the taxpayer makes the payment for the facility or service to the date the tax is paid.

    • The person paying for the facility or service is liable for the tax and is the "taxpayer" .

    • The person receiving payment for the facility or service is the "collecting agency" .

  2. Compute debit interest to the date paid regardless of whether the taxpayer makes a delinquent payment of the tax to the collecting agency or whether a direct assessment of the tax is made against the taxpayer by the Service.


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