20.2.5  Interest on Underpayments

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20.2.5.1  (03-12-2010)
Underpayment Interest Overview

  1. Debit interest, at the underpayment rate established under IRC 6621, is charged on an outstanding liability from the due date of the UNPAID liability to the date fully paid.

    1. The rate is determined quarterly.

    2. Special rules apply for large corporate underpayments and tax motivated transactions (TMT). See IRM 20.2.5.8 and IRM 20.2.5.9.

    3. Per IRC 7502, returns and payments timely mailed are considered timely received.

      Note:

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      Note:

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      Exception:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      See IRM 20.2.5.4 regarding notice and demand dates for payments.

20.2.5.2  (03-12-2010)
Statutory Period for Assessment and Collection of Interest

  1. Interest may be assessed and collected at any time during which the tax to which it relates may be collected. See IRC 6601(g) .

  2. Generally, taxes assessed after November 5, 1990, must be collected within 10 years after the assessment of the tax [Collection Statute Expiration Date (CSED), IRC 6502(a)(1)]. See IRM 25.6.1.12, Collection Statute Expiration Date (CSED), for additional information on CSED.

  3. Prior to November 5, 1990, the statutory period for collection was six years.

  4. The statutory period of limitations for filing a claim for credit or refund of overpaid debit interest is generally the later of: two years from the date of the payment or three years from the time the return was filed. If no return has been filed or the return is filed late, then the statutory period is two years from the date of payment. Credits (TC 700/706/730/736) applied via offset have a statute of two years from the cycle date the credit was applied. However, misapplied payments transferred from another module are considered effective on the date of payment and not when transferred. See IRM 25.6.1, Statute of Limitations Processes and Procedures, for additional information on the Refund Statute Expiration Date (RSED).

    Exception:

    If a consent ( Form 872, Consent to Extend the Time to Assess Tax) to extend the Assessment Statute Expiration Date (ASED) is secured, the period for filing a claim for refund of overpaid interest is also extended six months from the new ASED.

  5. When debit interest is erroneously abated and refunded, (e.g., from an interest abatement claim), debit interest may be reassessed within ten years from the original tax assessment to which the interest relates. However, for an erroneous refund of credit interest (an excessive payment of interest on an overpayment), erroneous refund procedures must be followed. See IRM 20.2.4.11.2, Excessive Interest Paid, 21.4.5, Erroneous Refunds, 3.17.80, Working and Monitoring Category D, Erroneous Refund Cases in Accounting Operations , and 25.6.1.10.2.4.4, Remedies for Recovering an Erroneous Refund. Generally, IRS has two years from the refund date to file a suit to recover the refund, unless there is fraud or a " misrepresentation of material facts." In those cases, IRS has five years from the refund date to recover the refund. Local Counsel advice is needed prior to pursuing an erroneous refund after two years. If the erroneous refund is an IRS error, see IRM 20.2.7.5, Erroneous Refunds, IRC Section 6404(e)(2) for the rules regarding debit interest for erroneous refunds due to IRS error.

20.2.5.3  (03-12-2010)
Interest on Penalties and Additions to Tax

  1. With the exceptions of (2) and (3) below, penalties (including penalties referred to as "additions to tax" ) are due on the date of notice and demand [ IRC 6601(e)(2)(A) ], which is the assessment date or "23C" Date. Therefore, interest on these penalties is computed from their assessment date.

  2. Interest on the following penalties starts from the return due date (RDD) of the related return, the extended return due date, or July 18, 1984, whichever is later. Use the appropriate date as the start date on CC COMPA or ACT/DMI computations. This change is effective for interest accruing after July 18, 1984, with respect to certain penalties assessed on or after July 18, 1984 [ IRC 6601(e)(2)(B)]. If assessed before July 18, 1984, use the 23C Date of the assessment as the interest start date.

    1. For returns due after December 31, 1989, the following penalties have interest starting from the return due date or the extended return due date (whichever is later):

      • IRC 6651(a)(1), Failure to File Penalty (TC 16X).

      Exception:

      IRC 6698 and IRC 6699 are Failure to File Penalties for Form 1065, U.S. Return of Partnership Income, and Form 1120 , U.S. Corporation Income Tax Return respectively, but interest does not start until the 23C Date, even though the penalty posts with a TC 16X.


      • IRC 6662, Accuracy Related Penalty, (TC 240, Reference Number 680).
      • IRC 6663, Fraud Penalty (TC 320)
      • IRC 6651(f), Fraudulent Failure to File (Ref No. 686)

      Note:

      If an extension is later reversed, as shown by TC 462 (Correction of a TC 460 Transaction Processed in Error), compute interest on the penalty from the original return due date.


    2. For returns with due dates prior to January 1, 1990, the following penalties have interest accruing from the return due date, the extended return due date or July 18, 1984, whichever is later:

      • IRC 6651(a)(1), Failure to File Penalty (TC 16X)
      • IRC 6659, Gross Valuation Overstatement Penalty (TC 240, Reference Number 680)
      • IRC 6660, Valuation Understatement Penalty for purposes of estate or gift taxes (TC 240, Reference Number 682)
      • IRC 6661, Substantial Understatement Penalty (TC 240, Reference Number 681)

      Note:

      IRC 6659, IRC 6660, and IRC 6661, were repealed in 1989.


      • IRC 6653(a), Negligence Penalty (TC 350) and IRC 6653(b), Fraud Penalty (TC 320) were also subject to an additional 50% of the interest due on the portion of tax determined to be due to negligence or fraud. The additional 50% component was repealed for returns due after December 31, 1988. Effective January 1, 1990, IRC 6653 is a penalty for failure to pay stamp tax.

  3. If the return due date is prior to January 1, 1990, TC 240 penalties assessed on the civil penalty module (MFT 13 and 55) with Reference Numbers 510–518, 601–603, 606 and 611 are due and payable on April 1 of the year following the calendar year for which the return or statement was made. Interest is charged from April 1 to the date the penalty is paid. See IRC 6676(d)(1)(B) and IRC 6724(c)(3)(B).

    Note:

    IRC 6676 was repealed and IRC 6724 was amended to start interest on the assessment date for returns and statements with due dates after December 31, 1989.

  4. Interest is computer generated on penalty assessments according to the above rules. Do NOT manually compute and assess interest on the above penalties unless interest must otherwise be restricted.

    Note:

    With the exception of the late payment penalty, when a penalty has been asserted due to the recapture of a carryback allowance, interest on the penalty accrues from the due date of the loss year return, the extended due date of the loss year return, or July 18, 1984, whichever is later. With these penalty adjustments, interest must be manually computed and restricted by input of TC 340.

  5. See Exhibit 20.2.5-1, Interest on Penalties, which shows how the interest rules described above are applied. In the exhibit, since the late filing penalty (TC 166) is one of the penalties assessed as of the return due date, it posts with that date as its 23C Date. It is placed in the CC DINCOMP screen just under the TC 150 and is assigned the date of January 31, 2000, as the interest start date.

    1. For the Failure to Pay Penalty (FTP) (TC 276), interest begins on the assessment date (the 23C Date) of the posting cycle. The CC DINCOMP display shows how the FTP penalty was inserted into the computation according to the May 14, 2001, assessment date.

    2. See Exhibit 20.2.2-1, Return Due Date Chart.

20.2.5.4  (03-12-2010)
Notice and Demand and Debit Interest

  1. Once notice and demand is issued, the taxpayer has a limited time period to pay the amount shown as due before additional interest on that amount is charged.

    1. For notice and demand issued before January 1, 1997, if the amount shown on the notice is paid within 10 calendar days, additional debit interest is not computed.

    2. For notice and demand issued after December 31, 1996:

    If the amount shown on the notice And Then
    is less than $100,000 is paid within 21 calendar days, additional interest is not computed
    equals or exceeds $100,000 is paid within 10 business days, additional interest is not computed.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. Compute debit interest only when a liability is both due and unpaid.

  3. Taxpayers are required to pay the tax due on or before the due date of the return. See Document 6209, IRS Processing Codes and Information, Section 2, for the due dates for filing various returns.

  4. Issuance of notice and demand are identified on Master File or IDRS by Notice Status Codes 19, 20, 21, 54, 56, and 58. See Exhibit 20.2.5-2, Payment Effective Date Decision Chart.

  5. A Collection due process notice allows 30 days to pay. This condition is identified by Transaction Code (TC) 971, Action Code (AC) 069.

    Note:

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20.2.5.5  (03-12-2010)
Application of IRC 7503 for Interest Computations

  1. A liability must be paid on or before the due date to avoid debit interest charges.

    Exception:

    IRC 7503 provides that if the last day prescribed for the performance of any act falls on a Saturday, Sunday or legal holiday, the performance of the act on the next succeeding workday is deemed timely.

    Caution:

    IRC 7503 does NOT prescribe a new due date. However, the application of IRC 7503 may relieve the taxpayer of the liability for the failure to file, failure to pay penalties and interest.

  2. Any authorized extension of time shall be included in determining the last day for performance of any act under IRC 7503.

    If the liability is Then
    Paid in full by the following FIRST WORKDAY NO interest is charged
    NOT paid in full by the following FIRST WORKDAY Charge interest:
    FROM: actual due date
    TO: date of full payment

  3. See IRM 20.2.2.2, Tax Return Due Dates, for the list of legal holidays.

20.2.5.6  (03-12-2010)
Suspension of Interest on Deficiencies

  1. Cases closed by Examination or Appeals often contain waivers of the restrictions of assessment and collection of deficiencies that are signed by taxpayers ( Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment, and Form 890, Waiver of Restriction on Assessment and Collection of Deficiency and Acceptance of Overassessment - Estate, Gift, and Generation-Skipping Transfer Tax). See IRM 20.2.8.7, 870 Waiver Interest Suspension Periods, for instructions for computing interest on tax modules with 870 waiver periods.

    Exception:

    Signing Form 870, 870-AD, 890, Form 4549, Income Tax Examination Changes , or filing a return after a Substitute for Return (SFR) has posted, does not entitle a taxpayer to an interest-free period under IRC 6601(c). See IRM 4.4.9, Delinquent and Substitute for Return Processing, for details on closing adjustments through AIMS. If not on AIMS, assess without the Tentative Carryback Date (TCB DT). The Tentative Carryback Date posts as the Correspondence Received Date (CR-INT-DT) and doubles as an agreement date, thus giving the taxpayer an erroneous suspension period.

  2. See IRM 20.2.7, Abatement and Suspension of Interest, for other types of underpayment interest suspension conditions.

20.2.5.7  (03-12-2010)
Revenue Ruling 99–40 (Modifies and Supersedes Revenue–Ruling 88–98) Use of Money

  1. In Avon Products Inc. v. United States: 588 F.2d 342 (2d Cir. 1978), the court interpreted IRC 6601(a) to mean that interest on an underpayment can only be charged when the tax is both due and unpaid. This impacts interest computations when a subsequent underpayment is determined after either:

    1. A refund without credit interest is issued; and/or

    2. An overpayment is applied to a succeeding tax period as a credit elect.

20.2.5.7.1  (03-12-2010)
Rev. Rul. 99–40 and Refunds

  1. If a refund was issued without interest, compute interest on a subsequent underpayment using a current TXMOD or Master File transcript as follows:

    1. Compute a running module balance, which includes the subsequent underpayment, from the return due date to the date the overpayment was refunded. This date is usually the assessment date or 23C Date on the transcript. For manual refunds (TC 840), it is the date the check is mailed or wire transferred, not the date the taxpayer received the check. Look at the Julian Date of the DLN to verify the date. The Julian Date will be the sixth, seventh, and eighth digits. (If the adjustment was closed through Exam, 400 may need to be subtracted from the total of those digits to obtain the correct Julian Date, e.g., if 645 is shown, subtract 400 to get 245).

    2. Suspend debit interest on the amount of the refund or the module balance, whichever is less, from the interest start date to the date of the refund.

      Note:

      ACT/DMI does this automatically

      .

    3. Resume debit interest from the refund date on the full module balance including the amount suspended for the refund.

    Note:

    Refunds or offsets given WITH credit interest are covered in IRM 20.2.14, Netting of Overpayment and Underpayment Interest.

  2. Before refunding or crediting an overpayment, be sure that the applicable statute to do so is open. If a credit or refund cannot be allowed in full or in part, see IRM 25.6.1, Statute of Limitations, Statute of Limitations Processes and Procedures, for claim disallowance procedures.

20.2.5.7.2  (03-12-2010)
Rev. Rul. 99–40 and Credit Elects (May/Sequa)

  1. When a taxpayer elects to apply an overpayment to the succeeding year's estimated taxes (credit elect), the credit elect is applied to unpaid estimated tax payments in order to avoid the failure to pay estimated income tax penalty under IRC 6654 or IRC 6655 for that year.

    Note:

    Transaction Codes 830/836 identify the credit elect amount on the overpaid module and Transaction Codes 710/716 identify the credit elect amount on the tax module for the immediately succeeding taxable year

    .

  2. If a subsequent underpayment is assessed on a tax module containing a credit elect to a succeeding tax period, the taxpayer may request that interest be computed according to Rev. Rul. 99-40. Employees may receive such requests informally, on Form 843, Claim for Refund and Request for Abatement , or by annotation on Form 3198, Special Handling Notice, for Examination Case Processing. These claims/requests impact both IMF and BMF returns for which estimated tax payments are required to be made. There is no requirement that such requests be filed by the taxpayer on Form 843. If Rev. Rul. 99-40 applies, interest should be computed under its provision. Thus, a determination should be made to apply Rev. Rul. 99-40 as it relates to unpaid installments of estimated tax. If an employee sees a TC 830 or 836 on the module, a determination should be made whether Rev. Rul. 99-40 would apply, especially on BMF and high dollar income returns for IMF. Caution: If the taxpayer used the annualized installment method, Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, or Form 2220, Underpayment of Estimated Tax by Corporations , for the subsequent year must be secured before an adjustment can be made. Computer Condition Code (CCC) 8 is an indicator that the annualized installment method was used.

    1. If the claim also requests an adjustment to tax, existing claim procedures will be followed.

    2. If the taxpayer already has an open/active account on AIMS or IDRS, the claim will be routed for association.

    3. Claims/requests involving restricted interest are only sent to Appeals when:
      1) The claim/request year is open in Appeals.
      2) The claim/request has been disallowed and the taxpayer requests the case be sent for Appeals consideration.

  3. Once it is determined that there is an underpayment of tax in a year for which the taxpayer made a credit elect, determine whether the credit elect was needed to avoid the failure to pay estimated tax penalty for the immediately succeeding tax period. The following information is needed to make this determination:

    1. When the tax became overpaid.

    2. What, if any, payments of estimated tax were made for the succeeding tax period.

    3. Any refundable credits, like fuel tax credit or telephone excise tax credit, shown on the succeeding tax year.

    4. Estimated tax liability for each installment period based on the taxpayer's required installments of estimated tax for purposes of IRC 6654 or IRC 6655.

      Note:

      The Rev. Rul. 99-40 benefit is allowed even if there is a penalty for failure to make timely estimated tax payments on the succeeding tax period.

      Example:

      There is a $10,000 estimated tax payment due for the first installment and the taxpayer paid $2,000 and had a credit elect for $5,000. The estimated tax penalty would be based on a shortfall for the first installment of $3,000, but the taxpayer would still receive, under Rev. Rul. 99-40, benefit of $5,000 as an interest-free period for the calculation of debit interest.

  4. This information can be found on the TXMOD or Master File transcript of the taxpayer's module for the underpayment tax period and the succeeding tax period, and the taxpayer's return for the succeeding period, including Form 2220, Underpayment of Estimated Tax by Corporations; Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts , or Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman.

  5. Using the information described in 3 and 4 above, determine the amount of each of the taxpayer's required installments of estimated tax for the succeeding year. Refundable credits are subtracted from the tax owed prior to computing the required installments. See IRC 6654(d), IRC 6655(d) or IRC 6655(e).

    If Then
    The required installment is equal to or less than the amount of timely estimated tax payments made on or before the due date of that installment period, The credit elect amount is not needed and the taxpayer is not liable for underpayment interest on the credit elect amount to the due date of the installment.
    The required installment exceeds the amount of all timely estimated tax payments made on or before the due date for that installment, The credit elect (or a portion thereof) is needed and underpayment interest begins on the due date of the installment on the lesser of the underpayment, the installment amount, or portion of the installment.
    The required estimated tax is equal to or less than the amount of timely estimated tax payments made on or before the return due date, The credit elect amount is not needed and the taxpayer is not liable for underpayment interest on the credit elect amount prior to the return due date of the succeeding tax period.
    The taxpayer receives a refund of some or all of the estimated tax payments prior to the unextended return due date, The refunded amount is considered as one of the required installments on the date of the refund.
  6. Compute interest on the subsequent underpayment as follows:

    1. Using current TXMOD or Master File information, compute a running module balance.

    2. Suspend debit interest on the lesser of the credit elect or underpayment amount from the return due date to the date of the estimated tax payment to which it is applied.

    3. Resume interest on the module balance plus the underpayment that is less than or equal to the estimated tax payment.

    4. Make sure that erroneous "within module netting" does not occur. Although IRS procedures are to apply Rev. Rul. 99-40 before within module (annual) netting, the ACT/DMI software may do the opposite. In certain circumstances, ACT/DMI must be manipulated to avoid the application of annual netting when the use of money principle under Rev. Rul. 99-40 would apply instead. This problem surfaces when a refund or offset is allowed credit interest, but an interest-free period for an overpayment (a refund, offset or credit elect) runs during this same time period.

      Example:

      John Smith files Form 1040 for the 200612 tax year reflecting an overpayment of $65,000. The taxpayer requests that $45,000 of the overpayment be applied as a credit elect to the 200712 tax period. The remaining overpayment of $20,000 is refunded with interest. Credit interest on the refund is allowed from the return due date of April 15, 2007, to the refund schedule date of July 22, 2007. Later, the taxpayer files an amended return reporting a tax assessment of $30,000, and requests application of Rev. Rul. 99-40. The amended return was processed and the credit elect was applied to the fourth quarter estimated tax installment due January 15, 2008. Thus, debit interest on the $30,000 tax assessment will begin from January 15, 2008. To prevent the ACT/DMI program from applying within module netting during the period of time interest was allowed on the original $20,000 refund, the tax assessment of $30,000 is assigned an effective date on ACT/DMI of January 15, 2008. This prevents the program from computing interest (annual netting) during the interest-free period allowed by Rev. Rul. 99-40.

    5. See Exhibit 20.2.5-3 for a Rev. Rul. 99-40 example.

    There are Tax Comp. Specialist spreadsheets for Form 2210 and Form 2220 available on the Appeals website for this purpose. See http://appeals.web.irs.gov/taxcomput/sscat.htm .

20.2.5.7.3  (03-12-2010)
Credit Elects and Employment Tax

  1. Rev. Rul. 99–40, as it relates to unpaid installments of estimated tax, does not apply to Employment Tax returns (e.g., Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return) or Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, because filers of such returns are not required to make estimated tax payments. Federal Tax Deposits are not considered estimated tax payments.

20.2.5.7.4  (03-12-2010)
Rev. Rul. 99–40 and Carrybacks

  1. When a subsequent assessment (general adjustment), including penalties, is made and a carryback has previously been allowed and refunded for the same year without interest, debit interest on the subsequent assessment for that year (up to the amount of the carryback) is not computed for the period between the carryback availability date and the carryback refund date.

  2. Compute underpayment interest on the subsequent assessment as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on the subsequent assessment from the due date of the tax to the date the carryback is available.

      Note:

      For interest accruing for periods prior to October 4, 1982, the date the carryback is available is the first day after the end of the loss year or the date the tax was paid, whichever is later.

    2. Suspend interest on the lesser of the module balance or the carryback amount on the carryback availability date.

    3. Resume debit interest on the suspended amount from the carryback refund date to the applicable ending date; waiver date plus 30 days (if applicable), payment date or 23C Date, whichever is earlier.

    4. When importing data from TXMOD using ACT/DMI, the software will automatically suspend interest on the carryback for any refunds issued later than the loss year due date. Therefore, use the loss year due date as the interest computation date when the carryback recapture is input. However, always ensure the original dates on TXMOD are correct.

    5. Make sure that erroneous within module netting does not occur. This can happen if you recapture credit interest that is unrelated to the current assessment.

      Example:

      A claim is filed for a refund and is not processed in 45 days, so the taxpayer receives credit interest. Then, a carryback without interest is refunded and later recaptured. The recaptured carryback should not reduce the interest from the claim that had nothing to do with a carryback.

  3. See IRM 20.2.9, Interest on Carryback of Net Operating Loss, for rules concerning carrybacks.

  4. Effective for adjustments posting in Cycle 198909 and later, debit interest is systemically computed in refund situations under the above rules if the module is not restricted. Do not unnecessarily restrict a tax module.

20.2.5.8  (03-12-2010)
Large Corporate Underpayment (LCU)

  1. Effective January 1, 1991, IRC 6621(c) increased the debit interest rate by two percentage points above the prevailing underpayment rate for "C" Corporations (includes corporate income, employment and excise tax returns). This increased interest rate is referred to as "Large Corporate Underpayment (LCU) interest" or "2% interest" . LCU interest is applicable when:

    1. A notice of underpayment or proposed deficiency (or the assessment of the proposed underpayment/deficiency) is greater than $100,000 (determined without regard to interest, penalties, or additions to the tax), AND

    2. The amount shown on a proposed deficiency of tax by either a 30/90 Day Letter is not paid within 30 days from the notice date OR

    3. The amount shown in a notice and demand (if deficiency procedures do not apply) is not paid within 30 days of the date of notice and demand (whichever is earlier).

      Exception:

      See IRM 20.2.5.8.5 for LCU rules for dates prior to December 31, 1997.

    Note:

    "C" Corporation is any BMF taxable entity with a significant Form 1120 , U.S. Corporation Income Tax Return, filing requirement (including Form 1120S, U.S. Income Tax Return for an S Corporation), and any BMF taxable entity without a significant Form 1120 filing requirement, but having an Exempt Organization Section present with a Corporate Indicator.

20.2.5.8.1  (03-12-2010)
Threshold for LCU

  1. The 2% Interest "threshold" amount is $100,000. Once $100,000 is exceeded and the criteria mentioned above are met, the additional 2% interest applies to the entire liability until it is paid in full. Once the additional 2% interest rate becomes applicable, it remains in effect even after the balance is reduced below the $100,000 threshold. See IRM 20.2.5.8.1(4) for an exception.

  2. The "threshold" refers to the aggregate of unpaid tax (TC 150, TC 29X and/or TC 30X) for a single tax period.

    Caution:

    DO NOT INCLUDE interest, penalties, or additions to tax to determine the threshold.

  3. If the $100,000 threshold is exceeded, compute the additional 2% interest on the total liability (including interest, penalties and additions to tax) from the "applicable" date for beginning 2% interest.

  4. Per Med James, Inc. v. Commissioner, 121 TC 147, 151 (2003), if a net operating loss carryback reduces tax to $100,000 or less at the time of assessment, the LCU rate will not apply to that assessment.

  5. Payments cannot be reallocated to reduce the threshold.

20.2.5.8.1.1  (03-12-2010)
Consideration of Payments for LCU

  1. Do NOT apply the additional 2% interest if the liability is paid within 30 days of the notice and demand date or the 30/90 Day Letter date.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. Cash bonds and deposits made under the provision of IRC 6603 are not considered for purposes of determining whether the underpayment (amount shown in the notice or letter) is paid within 30 days.

    Example:

    The taxpayer has a threshold underpayment that exceeds $100,000 and submits a "6603 deposit" or a deposit in the nature of a cash bond that reduces the underpayment to below $100,000. The taxpayer is subject to the additional 2% interest, because the "6603 deposit" or cash bond is not considered as payment of the liability.

  3. To avoid the additional 2% interest, all of the tax, penalty, interest and additions to tax must be paid within 30 days of the notice and demand for payment or 30/90 Day Letter.

    If the threshold is met Then
    and the total liability, including interest, penalty and additions to tax, is paid within 30 days of the notice or 30/90-Day Letter The additional 2% interest does NOT apply.
    and the total liability, including interest, penalty and additions to tax, is not paid within 30 days of the notice or 30/90-Day Letter Assess additional 2% interest on the total liability from the applicable date provided the TAX is over $100,000.

    Example:

    A math error was made on an original 200512 Form 1120 which resulted in a bill for $50, that was not paid. One year later, an agreed audit assessment resulted in a deficiency of $99,951. The additional 2% interest rate would not apply at the time of assessment, since the additional tax is not over $100,000, nor has a 30/90-Day Letter for over $100,000 been issued. If the taxpayer does not pay the total balance due within 30 days after a notice and demand for payment has been issued, then 2% would apply since the total tax now owed would be over $100,000 ($50 + $99,951 = $100,001).

  4. Once the additional 2% interest is "applicable" , it remains applicable on any unpaid balances until full paid.

20.2.5.8.2  (03-12-2010)
Start Date for Additional 2% Interest (LCU)

  1. The date of the 30-Day Letter, Notice of Deficiency (90-Day Letter) or the date of notice and demand (when the bill was sent) is known as the "notice" date.

  2. The earliest notice date is used for purposes of determining when the additional 2% interest starts. The notice date plus 30 days is referred to as the "applicable" or "trigger" date.

    Example:

    The "applicable" date in the example shown above ( IRM 20.2.5.8.1.1) would be the 30th day after the notice and demand for payment was issued to the taxpayer. This was the first notice for over $100,000 in tax. This module would need to be restricted, since Master File would use the first notice date for the $50 as the "applicable " date.

  3. When a copy of the 30-Day Letter, Notice of Deficiency, or notice and demand is not available, use the date AIMS went into Status 13/24, or the date on the earliest RAR issued to the taxpayer that meets the threshold criteria as the "notice" date. If the taxpayer agreed to the underpayment before a 30-Day Letter was issued, then the notice and demand date can be found on TXMOD under Master File Status 58 or above. After 2008, a TC 971 AC 257 indicates a Statutory Notice of Deficiency (90-Day Letter) was issued by Exam.

  4. If the start date cannot be determined, contact the examining officer to request research to find the date the taxpayer received the first notification of liability meeting the LCU criteria.

  5. If it is determined that the taxpayer either never received the proper notification of liability or agreed to the assessment prior to issuance of a 30-Day Letter, post the assessment without calculating LCU interest and monitor until 30 days after notice and demand is sent. A computer generated interest computation will automatically charge the extra 2%, if the taxpayer has not paid. Make sure there is no prior "applicable/trigger " date on the module.

20.2.5.8.3  (03-12-2010)
Master File and Additional 2% Interest (LCU)

  1. Generally, modules with the additional 2% interest must have interest manually computed and updated, especially, if there is more than one "applicable" date. However, if Master File has the correct 2% applicable date, it can systemically compute the additional 2% interest, provided there are no other issues that require the module to be restricted. Always monitor if not restricting by checking TXMOD/BMFOL one to two cycles later for the correct posting of interest. Once a LCU applicable date is entered on IDRS, it cannot be changed or removed. Do not rely on the LCU date from TXMOD/BMFOL. Always verify the "applicable date" for LCU interest through careful analysis of the case.

20.2.5.8.4  (03-12-2010)
Application of Additional 2% Interest (LCU)

  1. Once it is determined that the LCU interest rate is to be charged:

    1. Using a current TXMOD or Master File transcript, compute a running module balance from the return due date to the day after the notice date plus thirty days (applicable date).

    2. Compute debit interest on the balance, including the additional 2% interest, starting from the applicable date to the payment date, Waiver + 30 date (if applicable), or 23C Date, whichever is earlier.

      Note:

      When using ACT/DMI, the LCU start date should be entered in the" Edit Existing Module " screen

      .

20.2.5.8.5  (03-12-2010)
Special Application of 2% Interest for Periods Before and After December 31, 1997

  1. Prior to December 31, 1997, an unpaid notice for any amount could activate the additional 2% for large corporate underpayments if the other criteria were met. After December 31, 1997, the notice must show an amount of greater than $100,000. Because of this, special consideration must be made.

  2. If the notice activating the increased rate prior to December 31, 1997, was for less than $100,000, the increased rate is not assessed after December 31, 1997.

  3. It is possible to have a second notice for $100,000 or more activate the additional 2% rate after December 31, 1997, after a first notice of less than $100,000 activated the increased rate before December 31, 1997. In this case, there would be two "applicable" dates for the start of the increased rate. One prior to December 31, 1997, with the increased rate ending on that date and the other after December 31, 1997, with the increased rate resuming on the new "applicable " date.

  4. In the example above [ See IRM 20.2.5.8.1.1 ], the applicable date for LCU would be 30 days from the $50 notice date, assuming a 199512 return (due March 15, 1996) and assessments were prior to December 31, 1997 because:

    • The Form 1120 is a "C" Corp.;

    • The threshold underpayment amount was exceeded, $100,001 ($99,951 + $50);

    • The first underpayment of tax ($50) was not paid within 30 days of notice and demand; AND,

    • The interest period ends on or before December 31, 1997.

20.2.5.9  (03-12-2010)
Tax Motivated Transaction (TMT) Interest

  1. IRC 6621(c), as it pertained to TMT, was repealed for returns with due dates (without regard to extensions) after December 31, 1989. On January 1, 1991, IRC 6621(c) refers to Large Corporate Underpayment (LCU) interest. See IRM 20.2.5.8 above. Prior to its repeal, IRC 6621(c) imposed an interest rate of 120% of the underpayment rate determined in IRC 6621, for interest accruing after December 31, 1984, on substantial underpayments attributable to Tax Motivated Transactions (TMT).

  2. Many TMT cases are still active and/or are still in collection status, with TMT rates continuing to apply to these balances.

20.2.5.9.1  (03-12-2010)
Processing TMT Interest

  1. For returns with due dates before January 1, 1990, without regard to extensions, IRC 6621(c) requires that tax assessments based on TMT are subject to an interest rate of 120% of the rate determined in IRC 6621(a). Generally, 120% interest is computed on the underpayment from the later of the return due date (RDD) or December 31, 1984.

    If the date of the assessment is: Then
    Prior to January 1, 1985 1. Compute interest at the applicable underpayment rate, on the tax motivated principal amount to December 31, 1984.

    2. Compute 120% interest on the tax motivated principal PLUS the total compounded interest from Step 1, from December 31, 1984 to the applicable interest ending date.
    After December 31, 1984 Compute 120% interest on the tax motivated principal amount from the RDD to the applicable interest ending date.

20.2.5.9.2  (03-12-2010)
Special Processing Conditions for TMT Interest

  1. Special conditions which apply to the processing of 120% interest cases:

    • Assessments are generally made only by Examination, Criminal Investigation, and Appeals.

    • The 120% interest rate ONLY applies to a TMT assessment over $1,000.

      Note:

      Once assessed, interest continues to accrue at the 120% rate even though the unpaid TMT tax liability drops below $1,000.

    • The 120% interest rate MUST be manually computed and input with TC 340 due to Master File limitations.

      Caution:

      DO NOT use the non-restricting TC 340 on a tax module that includes TMT interest.

20.2.5.9.2.1  (03-12-2010)
Reference Numbers for TMT Interest

  1. Reference Numbers (Ref. No.) are used to identify the portion of the total tax assessment and associated interest accruals related to TMT. Ref. No. 221 (TMT tax) and 222 (TMT interest) post to Master File and are displayed on IDRS and transcripts.

  2. Amounts for Ref. No. 221 and 222 must be manually computed, appropriately adjusted (positive or negative) and input whenever there is an assessment or abatement of either the TMT tax amount or TMT interest amount.

  3. Input Ref. No. 221 with TC 29X/30X for a significant tax amount to identify the portion of the total tax assessment related to TMT.

    • Ref. No. 221 should reflect the TMT tax for the specific tax adjustment it accompanies.

    • The total amount of TMT tax can be determined by totalling all of the Ref. No. 221 amounts on the module.

    • Interest on the Ref. No. 221 amount is computed at 120% of the applicable underpayment interest rate.

    • Ref. No. 221 posts to Master File and displays the literal " TX–MOTV–TRANS" .

    Note:

    As procedures have varied in the use of these reference numbers, it may be necessary to request previous adjustment documents from the Files function to review and analyze the correct amount of TMT interest.

  4. Input Ref. No. 222 with TC 340 to identify the portion of the total interest assessment related to TMT.

    • Interest accruals on the Ref. No. 222 amount must be manually computed.

    • Additional Ref. No. 222 amounts must be input to identify additional accruals of tax motivated interest until fully paid.

    • Include in the Ref. No. 222 the TMT interest associated with that adjustment up to the current adjustment date.

    • The Ref. No. 222 amount does not have to match the TC 340 amount being input.

    • The total TMT interest on the module will be the sum of all Ref. Nos. 222.

  5. If Ref. No. 221 and 222 were previously omitted or incorrect, update the module by entering the reference number and appropriate amounts. Input these reference numbers with TC 290/300 for .00 and Hold Code 2. Include an explanation with the source document.

20.2.5.9.3  (03-12-2010)
Negligence and/or Fraud Penalty in Conjunction with TMT Interest

  1. The 120% rate is used to compute interest on a tax motivated underpayment of tax due to negligence or fraud and is also used to compute the 50% interest portion of the negligence or fraud penalty. See IRC 6653(a)(1)(B) and IRC 653(b)(1)(B).

    1. Use the TMT interest rate to compute the 50% interest portion of the fraud and negligence penalties associated with a TMT underpayment.

    2. After the penalties are assessed, normal interest rates apply to the interest accruals on the penalty amounts.

      Note:

      Interest on the tax motivated underpayment continues to accrue at 120%.

20.2.5.9.4  (03-12-2010)
870 Waiver Date Processing regarding TMT Interest and TEFRA

  1. TMT interest is computed on all TMT tax assessments as of December 31, 1984. However, not all TMT tax assessments are subject to deficiency procedures per IRC 6211.

  2. Per PL 97–248, of the "Tax Equity and Fiscal Responsibility Act of 1982" (TEFRA), TMT assessments made under the provisions of IRC 6222 are not subject to deficiency procedures. A Form 870 agreement is not obtained for these tax assessments (known as "TEFRA" assessments).

    Note:

    A Form 870 agreement may be obtained separately from the TEFRA tax assessment. The 870-Waiver suspension period applies to the penalties (see IRM 20.2.8, 870 Waiver Interest Suspension Periods).

    Note:

    For tax years beginning after August 5, 1997, the 870 Waiver suspension period is applicable to TEFRA.

  3. The total assessment may include TMT items that are not TEFRA related, TEFRA related items, and/or penalties. TEFRA related items can be identified in the administrative file or, after assessment, by the DLN associated with the Doc Code 47 adjustment. The following blocking series, located in the ninth, tenth, and eleventh digits of the DLN, identifies TEFRA assessments prior to January 1, 2007:

    • 080–099

    • 180–199

    • 200–299

    • 680–699

    • 750–769

    • 780–789

    • 980–999

    1. See Document 6209, Section 12 or IRM 4.4.1, AIMS/Processing Handbook, Introduction, for the types of returns these blocking numbers are referencing.

  4. Use the following chart to determine if the 870 Waiver period may be applicable (This chart can also be used for non-TMT cases for tax years ending on or before August 5, 1997):

    If assessment is: Then 870-Waiver may apply:
    TEFRA tax only NO
    Non-TEFRA tax only YES
    Penalties only YES
    TEFRA tax &
    Non-TEFRA tax
    NO
    YES
    TEFRA tax &
    penalty
    NO
    YES
    Non-TEFRA tax &
    penalties
    YES
    YES
    TEFRA tax,
    Non-TEFRA tax &
    penalty
    NO
    YES
    YES

20.2.5.9.5  (03-12-2010)
Partial Payment Allocation

  1. Partial payments must first be applied against any underpayments that are NOT TMT on cases involving TMT underpayments. Treasury Regulation 301.6621–2T provides that a taxpayer cannot make a partial payment that applies only to the TMT underpayment. Apply undesignated payments in the following order:

    1. non-TMT tax;

    2. TMT tax;

    3. any penalties or fees;

    4. non-TMT interest; then,

    5. TMT interest.

    Note:

    Because TMT is often assessed years later due to Tax Court decisions, or there may have been prior audit assessments paid prior to the TMT assessment, it may be necessary to recompute the module if there are open periods of collection on the prior assessments. The module should be recomputed to apply the payments in the order listed above. This is because payments previously used to pay interest or penalties may need to go towards non-TMT tax, TMT tax, etc., as in the order shown above. For interest computation purposes only, amounts previously used to pay assessed interest or penalties may, at a later date, be used to pay an additional tax assessment. This has the effect of reducing the amount of interest charged on subsequent adjustment(s) in most instances. However, when a normal assessment follows a TMT assessment, the interest charges will increase after reallocation.

    Exception:

    Payments are not reallocated from interest to tax for interest prior to January 1, 1983, or if the CSED has expired on the prior assessment(s). Also, payments are not reallocated to reduce suspensions, such as for the 870 Waiver period.

20.2.5.9.5.1  (03-12-2010)
Computing Interest on non-TMT Tax Underpayment and Penalty

  1. Interest is computed at the normal underpayment rate on the non-TMT tax and penalty assessment from the RDD (or extended due date for certain penalties) until 30 days after the 870 date. See IRM 20.2.5.3 for interest on penalties.

  2. Interest is suspended from 30 days after the 870 date until the 23C Date of the TC 300 assessment.

  3. Interest continues to accrue on the principal plus interest accruals (compounded to 30 days after the 870 date) from the 23C Date of the TC 300 assessment until paid.

    Figure 20.2.5-1

    1. Using CC COMPA, compute interest at the normal underpayment rate on the non-TMT tax underpayment plus the substantial understatement penalty, from the RDD to 30 days after the 870 date.
    COMPA
    04151983 01121990 3,278.00 (1,826.00 plus 1,452.00)
    Total Interest $3,105.37
    2. Compute interest on the principle plus the accrued interest (STEP 1) from May 28, 1990 to the date of payment. Note: The 870 Waiver period is applicable. Interest is suspended from the 30th day after the 870 date to the 23C Date of the assessment.
    COMPA
    05281990 07021990 6,383.37 (3,278.00 plus 3,105.37)
    Total Interest $67.67
    3. The payment of $21,277.84 is allocated per IRM 20.2.6.5.1. Tax, penalty and normal interest are fully paid as of July 2, 1990. Add together the "total interest" amounts from Step 1 and Step 2 to arrive at the total interest associated with the non-TMT tax underpayment and the penalty.
    $3,105.37 plus $67.67 equals $3,173.04

20.2.5.9.5.2  (03-12-2010)
TMT Interest Calculation

  1. The following figure illustrates an example of TMT interest computation using CC COMPA and CC COMPAP.

    Figure 20.2.5-2

    1. Use CC COMPA to compute interest at the normal underpayment rate on the TMT assessment from the RDD to December 31, 1984 (the effective date for TMT interest).
    COMPA
    04151983 12311984 7,260.00
    Total Interest $1,596.17
    2. Use CC COMPAP to compute TMT interest on the total principle plus accrued interest as of December 31, 1984 to 30 days after the 870 date.
    COMPAP
    12311984 01121990 8,856.17
    Total Interest $7,891.05
    3. Compute interest from the 23C Date of the assessment to the payment date on the TMT underpayment principle plus the accruals of TMT Interest as of 30 days past the 870 date.
    COMPAP
    05281990 07021990 16,747.22
    Total Interest $213.29
    4. The payment of $21,277.84 is allocated per IRM 20.2.6.5.1. Non-TMT tax, penalty and interest (including the normal interest computed on the tax motivated assessment as of December 31, 1984) are fully paid as of July 2, 1990. Add together the "total interest" amounts from Step 2 and Step 3 to arrive at the total TMT interest associated with motivated tax as of July 2, 1990.
    $7,891.05 plus $213.29 equals $8,104.34

  2. If using ACT/DMI to compute interest, then highlight the amounts that are subject to TMT including any prior refunds and change the transaction type under "Adv" to "Motivated " . This may also be accomplished by changing the transaction subject to TMT interest to "code" 1001.

20.2.5.9.5.3  (03-12-2010)
Computing Accruals of TMT

  1. Determine the remaining balance as of the payment date. Subtract from the payment, the tax, penalty, and interest liabilities. The total underpayment as of July 2, 2000, is $2,133.71.

    ($21,277.84) Payment
    1,826.00 non-TMT tax
    7,260.00 TMT tax
    1,452.00 Substantial understatement penalty
    3,173.04 Normal interest non-TMT tax & penalty
    1,596.17 Normal interest/TMT tax
    8,104.34 TMT interest
    $2,133.71 Module Balance as of July 2, 2000

  2. Because all of the non-TMT liabilities have been paid, the remaining balance is unpaid TMT interest. Using CC COMPAP, compute TMT interest on the remaining balance from July 2, 2000, to the date requested by the taxpayer. If using ACT/DMI, recompute the entire module making sure to mark the TMT tax.

    Reminder:

    Interest on the substantial understatement penalty would start on the return due date, extended due date or July 18, 1984, whichever is later. Any prior refunds would need to be annotated as TMT if recomputing the module in order to accurately compute the interest.

    .

20.2.5.10  (03-12-2010)
Corporate Installment Payments - Form 7004 (1982 and Prior)

  1. Prior to January 1, 1983, the taxpayer was considered to have elected to pay tax in installments if Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, was timely filed and at least one-half of the tax shown on Form 7004 was paid.

  2. When the tax was allowed to be paid in installments, the due date of the tax was the same as the date of the installment and interest is not charged if the tax was timely paid.

    1. If the additional tax paid with the return was not less than one-half the estimated tax on Form 7004, no interest is due on the installment.

    2. If the actual tax is less than the estimated tax shown on Form 7004 and a subsequent assessment is made, the taxpayer may be able to claim the unused installment privilege on all or part of the additional tax.

  3. For tax years beginning after 1982, the privilege of paying corporate income tax in installments was repealed.

20.2.5.10.1  (03-12-2010)
Form 7004 (1982 and Prior) Installment Computations

  1. If an installment was not timely paid, interest is charged from the installment due date until the tax is paid.

  2. Interest is charged on amounts due that are not included on the return or Form 7004, from the due date of the return until the date of payment.

  3. If the installment privilege was taken and a deficiency is assessed, the deficiency amount is prorated to the installments. Interest is charged from the due date of the first installment to the date of payment [ IRC 6152(c)]. See Figure 20.2.5-3 for computing the allowable installment privilege on deficiencies.

  4. If the tax module indicates that the taxpayer defaulted but a timely installment payment is found and applied, Master File will re-analyze the module. If the payment satisfies an earlier installment and the module is still in default for later installments, Master File will compute penalties and interest for the later installment.

    Figure 20.2.5-3

    Installment Privilege for Corporations 1982 and Prior
    1. Enter TC 620 Memo amount from transcript.
    ___________
    2. Enter prepaid credits prior to filing of Form 7004.

    ___________
    3. Line 1 minus Line 2.

    Note:

    If less than zero, no privilege is extended.





    ___________
    4. Due with Form 7004 (1/2 of Line 3).
    ___________
    5. Paid with Form 7004 (TC 620 with credit amount from transcript should equal Line 4; may not be less than Line 4).



    ___________
    6. Second Installment (Line 3 minus Line 5. If Line 5 is greater, no privilege remains).


    ___________
    7. Tax per transcript, including original tax and subsequent assessments. Do not include carryback amounts.



    ___________
    8. Tax remaining. (Line 1 minus Line 7. If Line 7 is greater, no privilege remains).



    ___________
    9. Installment privilege available for this assessment (lesser of Line 6 and Line 8).


    ___________

20.2.5.11  (03-12-2010)
Special Rules for Determining Due Date of Payments

  1. Consider the following special rules for the due date of payments for Form 2290, Heavy Highway Vehicle Use Tax Return, Jeopardy Assessments, Accumulated Earnings Tax, and Penalties.

    1. See IRM 21.7.8.4.2, Form 2290, Heavy Highway Vehicle Use Tax Return, for instructions for Form 2290. Beginning July 1, 2005, the installment privilege was eliminated. The installment payment line on Form 2290 was deleted. Tax must be paid in full with the filing of Form 2290. Otherwise, penalties and interest will accrue on the unpaid balance ( IRM 21.7.8.4.2.11 , Form 2290, Paying Tax On Installment Basis).

    2. In the case of a jeopardy assessment, notice and demand for payment is issued immediately [ IRC 6861(a)]. The due date for payment of the assessment is the date of the notice and demand.

      Caution:

      Taxpayers normally have 21 calendar days from the notice date, or 10 business days if the amount due is over $100,000, to pay the amount shown on a notice.

    3. The due date of Accumulated Earnings Tax ( IRC 531 ) is the due date of the income tax return, determined without regard to extensions. For returns due before January 1, 1986, the Accumulated Earnings Tax was due on notice and demand.

    4. Debit interest is computed on penalties from the due dates set forth in IRM 20.2.5.3.

  2. Disregard any extension of time for filing the return or any installment agreement entered under IRC 6159 when determining the due date for payment of the liability.

  3. Procedures for interest on Form 8752, Required Payment or Refund Under IRC 7519, can be found in IRM 20.2.11, Miscellaneous Interest Provisions.

  4. Procedures for interest on the Trust Fund penalty can be found in IRM 20.2.12, Employment Taxes.

  5. IRC 1363(d)(2) provides that the payment of tax related to the Last-In First-Out (LIFO) recapture is due in 4 equal installments. The first installment shall be paid by the due date of the return for the last year as a C corporation and the 3 succeeding installments shall be paid by the due date for the S corporation return for the 3 succeeding taxable years. There is no interest charge for the period of extension. There is no interest charge provided payments are made by the installment due date.

20.2.5.12  (03-12-2010)
Unidentified Remittance Account Payments

  1. When a payment is refunded from the Unidentified Remittance Account, no interest is allowed.

  2. When a payment from the Unidentified Account is correctly identified and applied to a tax module, it is treated the same as any other payment on the module. Normal debit and credit interest rules apply.

  3. To ensure correct interest computations, always apply a payment from the Unidentified Remittance Account using the payment received date.

    Note:

    If an amount from the unidentified payments account is returned to the taxpayer because the taxpayer establishes that it was sent to the Service in error, no interest is allowed.

20.2.5.13  (03-12-2010)
Debit Interest on Liabilities Paid by Offset

  1. IRC 6402(a) permits the Service to credit a taxpayer’s overpayment to his/her outstanding liability.

    Note:

    In order to be "outstanding" , the liability must be unpaid.

  2. If an overpayment is applied to an outstanding tax liability, compute debit interest from the due date of the liability to the availability date of the overpayment. Debit interest stops on any portion of a liability satisfied by credit of an overpayment, as of the credit availability date.

  3. Compute debit interest on a liability satisfied by an offset of a credit with an availability date that is later than the liability due date as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on the liability from the due date of the tax to the date the credit is available.

    2. Apply the offset as a payment on the credit availability date. The offset credit is to be treated the same as a payment in regards to notice grace periods. See IRM 20.2.5.4 above. The earliest available credit is always offset first, regardless of the year (prior or later) it is offset to.

    3. Continue debit interest to the applicable ending date; waiver date plus 30 days (if applicable), payment date or 23C Date, whichever is appropriate.

  4. If possible, offset overpayments in a manner that will not create overlapping debit and credit interest periods thereby creating a net rate interest netting situation.

  5. No debit interest is charged on a liability (up to the amount of the credit) satisfied by a credit that has an availability date that is earlier than a tax, penalty or interest liability.

20.2.5.13.1  (03-12-2010)
Debit Interest on Liabilities Paid by Offset from a Different Taxpayer

  1. A liability of one taxpayer may be paid by the overpayment of another taxpayer at the overpaid taxpayer’s request.

  2. Compute debit interest on the liability satisfied by the offset of the credit as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on the liability from the due date of the tax to the date the offset is applied.

    2. Apply the offset as a payment on the current date.

    3. Continue debit interest to the applicable ending date; waiver date plus 30 days (if applicable), payment date or 23C Date.

    Example:

    ABC Corporation was purchased by XYZ Corporation on March 31, 2007. On June 15, 2007, ABC Corporation filed a short period return showing an overpayment. The taxpayer requested the overpayment be applied to XYZ's liability for the full year return due and filed on March 15, 2008. The technician is performing the credit transfer on July 16, 2009. Interest is computed to the current 23C Date.

    • Debit interest is computed on XYZ’s liability from March 15, 2008, to July 23, 2009 (the current 23C Date), when ABC’s overpayment (with interest) is applied.

    • Credit interest is computed on ABC Corp.'s overpayment from June 15, 2007, to July 23, 2009, and may be transferred to XYZ's liability with the July 23, 2009 date.

    • If XYZ’s liability is not totally satisfied, debit interest will continue to accrue on the balance until it is satisfied.

20.2.5.14  (03-12-2010)
Insolvent Taxpayers, Seized Property, and Collection Costs

  1. See IRM 20.2.11.6, Bankruptcy Code Cases, for information on computing interest for taxpayers in bankruptcy or receivership.

    1. If unable to determine computation dates for interest, contact the Insolvency Field Office or Centralized Insolvency Operation where the bankruptcy was filed. For the Insolvency (Bankruptcy) National Field/Centralized Site Directory, see: http://serp.enterprise.irs.gov/databases/who-where.dr/inslvncy-bnkrptcy/national_insolvency_field.htm .

  2. When levy proceeds are returned, the delinquent tax is not forgiven. The taxpayer is still obligated to pay the amount owed, and the Service is obligated to collect it. However, the taxpayer will not be charged the failure to pay penalty and interest during the period that the Service held the money.

    Example:

    The taxpayer owed $10,000. On April 10, 2007, $2,500 was collected as levy proceeds. On May 4, 2009, the $2,500 was returned.

    1. Compute a running module balance on $10,000 through April 10, 2007.

    2. Suspend interest on $2,500 for the period April 11, 2007, though May 4, 2009.

    3. Resume interest on the running module balance plus the $2,500 on May 4, 2009. Input a TC 340 with the COMP-INT-AMT and INT-TO-DT fields complete. This will allow IDRS and Master File to systemically update interest after input of the non-restricting TC 340.

  3. If property of an individual other than the taxpayer is wrongfully levied upon and the property or proceeds from the sale of the property is applied to satisfy a liability of the taxpayer, and later is returned to that individual, underpayment interest should be charged on the taxpayer's liability during the period that the amount was applied.

  4. Collection procedures stipulate that monies derived from a sale or auction are to be applied against lien fees and collection costs first, and the balance of monies, if any, applied against the past due tax liability.

    If lien fees and collection costs Then interest is computed
    Are not fully satisfied and become part of the unpaid balance FROM: due date of the return
    TO: date of full payment

20.2.5.15  (03-12-2010)
Claims for Refund of Overpaid Debit Interest

  1. The statutory period of limitations for filing a claim for refund of overpaid debit interest is two years from the date of the payment or three years from the time the return was filed, whichever is later. See IRM 25.6.1.10.2.7(2),Claims for Credit or Refund-General Time Period for Submitting a Claim. The amount of credit or refund may not exceed the portion of the tax paid within the period immediately preceding the filing of the claim equal to 3 years plus the period of any extension of time for filing the return. Prepaid credits are considered paid on the return due date for this purpose. See IRC 6511.

    Exception:

    If a consent ( Form 872) to extend the Assessment Statute Expiration Date (ASED) is secured, the period for filing a claim for refund of overpaid interest is also extended six months from the new ASED. The amount of credit or refund may not exceed the portion of the tax paid after the execution of the agreement and before the filing of the claim, as well as the portion of the tax that would have been open under the two or three year statute periods, if a claim had been filed on the date the agreement was executed.

    Example:

    The normal ASED is April 15, 2008. A consent Form 872 was secured extending the ASED to December 31, 2008. The taxpayer has until June 30, 2009, to file a claim for overpaid debit interest.

  2. For rules concerning the statute of limitations, see IRM 25.6.1, Statute of Limitations, Statute of Limitations Processes and Procedures.

20.2.5.16  (03-12-2010)
Types of Deficiencies that do not Receive an IRC 6601(c) Suspension of Interest

  1. Agreed cases closed by Exam with only a Form 906, Closing Agreement on Final Determination Covering Specific Matters, and no Form 870 or Form 870-AD, do not receive an IRC 6601(c) suspension. These situations are usually settlement initiative cases. Even though such cases are not entitled to an underpayment interest suspension under IRC 6601(c), (also known as 870 Waiver Plus 30 Days), the taxpayer may be entitled to an underpayment interest suspension under IRC 6404(g). See IRM 20.2.7.6, Section 6404(g) Interest Suspension-Background .

  2. The initial return or agreement after a Substitute for Return (SFR) has posted. Subsequent agreements follow normal procedures. See IRM 20.2.5.6.

  3. For TEFRA adjustments with return due dates ending on or before August 5, 1997, See IRM 20.2.5.9.4.

Exhibit 20.2.5-1  (03-12-2010)
Interest on Penalties

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Interest on Penalties

Exhibit 20.2.5-2  (03-12-2010)
Payment Effective Date Decision Chart

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Payment Effective Date Decision Chart

Exhibit 20.2.5-3  (03-12-2010)
Revenue Ruling 99–40 Example

Taxpayer Book, Inc., 33-1111111, timely filed and paid Form 1120 for tax periods ending December 31, 1998, and December 31, 1999. Each period had overpaid estimated tax payments, which the taxpayer elected to have credited to their respective succeeding tax periods.

Subsequently, on June 23, 2000, the taxpayer submitted an amended tax return, which resulted in a tax assessment of $521,886. The amended return included a payment of $600,000.

After receiving a refund of $24,419.17, the taxpayer requested that Rev. Rul. 99-40 be applied.

Using TXMOD information, Form 2220, and the chart shown on the following page, we determined that the taxpayer can apply Rev. Rul. 99-40 as follows:

Tax Assessment 521,886.00
Credit elect used on 9/15/1999 -246,913.50
Credit elect not used -214,472.50
Balance of deficiency 60,500.00

Debit interest starts as follows

3/15/1999 60,500.00
9/15/1999 +246,913.50
3/15/2000 +214,472.50
  521,886.00

Debit interest starts on the deficiency in excess of the credit elect on the return due date.

The application of Rev. Rul. 99-40 may not extend the debit interest start date past the return due date of the succeeding tax period.

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TXMOD of Assessed Tax Period for Rev. Rul. 99-40

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TXMOD of Subsequent Tax Period for Rev. Rul. 99-40

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Revenue Ruling 99-40 Worksheet

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Rev. Rul. 99-40 Example (Continued)

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Rev. Rul. 99-40 Example (Continued)


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