20.2.6  Methods of Computing Interest

Manual Transmittal

October 07, 2011

Purpose

(1) This transmits revised IRM 20.2.6, Interest, Methods of Computing Interest.

Material Changes

(1) Servicewide Interest Program is now called the Office of Servicewide Interest. All references have been updated.

(2) Minor editorial changes have been made throughout this IRM. Also, website addresses, legal references, and IRM references were reviewed and updated as necessary. Other significant changes to this IRM include the following:

  1. IRM 20.2.6.5 - Added official use only (OUO) content and modified paragraph 3 to advise why the claim date is needed.

  2. IRM 20.2.6.6 - Modified the title to remove the word "manual."

  3. IRM 20.2.6.7 - Added new section "Types of Interest Suspensions."

  4. IRM 20.2.6.8 - Moved old IRM 20.2.6.5.1, Payment Allocation to this location and changed title to Payment Allocation and Reallocation.

  5. IRM 20.2.6.8.1 - Moved old IRM 20.2.6.5.2, Payment Allocations-Affect on Underpayment Interest Suspension Periods, to this location and changed title to Calculating the Underpayment Interest Suspension Amount.

  6. IRM 20.2.6.9 - Moved old IRM 20.2.6.7, Summary, to this location, changed title to Helpful Interest Facts, and added paragraph 6.

Effect on Other Documents

This material supersedes IRM 20.2.6, dated June 18, 2010.

Audience

This IRM is intended for employees of all operating divisions who work with interest.

Effective Date

(10-15-2011)

Duane M. Gillen
Director, Exam Policy
Small Business/Self-Employed

20.2.6.1  (06-18-2010)
Method and Rates Used

  1. The methods and rates for computing interest are:

    • Prior to February 1, 1980, simple annual interest was computed on a Year, Year, Month, Month, Day, Day (YYMMDD) basis.

    • Beginning February 1, 1980, the method changed to calculate total days times the daily factor.

    • On January 1, 1983, the method changed to daily compounding of interest (i.e., interest computed on interest).

20.2.6.2  (10-15-2011)
Compound Interest

  1. The Service is required to compound interest on a daily basis per IRC 6622(a). This results in a daily recalculation of the principal amount plus accrued interest.

    • Principal amount (P)

    • Daily interest rate (R)

    • Number of days (T)

    • Interest (I)

  2. The principal amount on which interest is compounded includes tax, penalties (at the point they become subject to interest per IRM 20.2.5.3, Interest on Penalties and Additions to Tax), additions to tax and all accrued interest.

  3. The formula to compute interest is as follows:

    • Interest (I) equals principal (P) times the daily interest rate (R) or I = P x R.

    • New principal (New P) equals interest plus principal or New P= I + P and continues over the number of days (T) until the principal/new principal amounts are paid.

20.2.6.3  (10-15-2011)
Assessment of Interest Accruals

  1. Interest will accrue on a liability (tax, penalties, additions to tax and/or interest) until it is fully paid. Interest accruals are not assessed (recorded) on the transcript [Command Code (CC) TXMOD/IMFOL/BMFOL] until one of the following conditions occurs:

    • Input of an adjustment (e.g., TC 29X or TC 30X), or

    • Posted payment is in excess of tax and/or penalties, or

    • Input of a TC 290 for zero ($.00) with Priority Code 5.

    Note:

    Input of a TC 342 for zero ($.00) without Priority Code 5 will not update interest accruals.

  2. The input of TC 290 for zero and Priority Code 5, with the appropriate hold code on an unrestricted tax module, will post any accrual of interest. When adjusting with Doc Code 54, use Hold Code 0, so that notices will go out. Refer to Section 8.16 of Document 6209, IRS Processing Codes and Information, for information on hold codes. An on-line version can be found on SERP.

    Caution:

    Only use this procedure to update interest when necessary. This procedure is useful when working with taxpayers on payoffs and offsets. For instance,
    •If a module is being moved to Non-Master File or MFT 31, or
    •If a module balance shows zero, but interest is accruing and unpaid and significant enough to warrant the posting of interest and penalties.

  3. The input of TC 300 for zero, with Priority Code 5, will also update accruals. This is usually done at final closing (case goes to Status 90), when there is no additional tax to assess, but there are pending accruals to post. With Document Code 47 (AMCLS), a hold code is not required.

  4. The input of TC 290 or TC 300 with a zero amount and Priority Code of 5 will post unrestricted Failure to Pay (FTP) penalty accruals.

  5. To stop the accrual of penalty and/or interest (e.g., balance due notice erroneously generated for a tax module that is fully paid), input a TC 290 for zero, accompanied with (as appropriate) TC 340 and/or TC 270 for zero. See IRM 21.5.2.4.8.3, Clearance Tolerances, for further discussion of accounts in Master File Status Code 12.

    Reminder:

    If a module is restricted from computing interest, Master File will not systemically assess accrued interest. Refer to Section 8 of Document 6209, IRS Processing Codes and Information, or IRM 20.2.8, Restricted Interest, for an explanation of conditions that restrict systemic interest computations.

    Caution:

    Do not input a TC 340 for a zero amount either to bypass unpostable conditions (the unpostable would be erroneously addressed but the cause of the unpostable would not be corrected) or to bypass a module restriction, when an actual restricted interest computation needs to be made. For manual interest computations, use the appropriate Field Office Resource Team (FORT) unit found on the Examination Centralized Case Processing (CCP) website under the heading "Restricted Interest" . See CCP Website.

20.2.6.4  (10-15-2011)
Interest Computation Tools

  1. IDRS Command Code (CC) COMPA is used for non-complex interest computations. C C INTST is used if the module is not restricted (-I Freeze Code is one indicator of module restriction). In addition to these command codes, the IRS supports the use of a Commercial Off The Shelf (COTS) software program called InterestNet, commonly referred to as the Automated Computational Tool (DMI/ACT), which can be used for most interest computations, and is recommended for more complex interest computations. This software program is available to all employees, particularly those involved with the calculation of restricted interest. IRM 20.2.8.6, Reasons for Restriction, lists some of the reasons interest may need to be restricted on a tax module.

  2. See IRM 2.3.39, Command Code FTPIN, for an explanation of CC FTPIN. See IRM 2.3.40, Command Code PICRD, for an explanation of CC PICRD. See IRM 2.3.29, IDRS Terminal Input, Command Codes INTST, ICOMP, and COMPA, for definers and examples using CC COMPA.

  3. Occasionally, CC INTST does not match the Master File (i.e., CFOL) interest and/or penalty computation. Therefore, before CC INTST results are used, compare total penalty and interest with CFOL command codes BMFOLT or IMFOLT (as appropriate) with total penalty and interest on INTST, computed to the interest date reflected on IMFOLT or BMFOLT. If unable to reconcile computational differences between CFOL and CC INTST, a manual computation must be made to determine which one is correct. If there is a systemic interest problem, send the results to the appropriate person per local procedures (consult your manager or lead), so that either programming can be corrected or an advisory can be issued. If there are no local referral procedures, then send to the Office of Servicewide Interest analyst responsible for programming problems. For contact information see http://sbseservicewide.web.irs.gov/interest/contacts/213.aspx.

    Caution:

    C C INTST does not update or cause an accurate interest computation on a tax module to be performed when interest is restricted. If the tax module is restricted, a manual interest computation must be done. Whenever possible, use a non-restricting TC 340. See IRM 20.2.8.11, Non-Restricting TC 340.

20.2.6.5  (10-15-2011)
Computer Generated Interest Computations

  1. Master File calculates interest by sorting all money amount transactions in effective date order and computing interest on balances from transaction to transaction (running module balance).

    1. When all transactions are sorted and a liability is established, interest is computed on that liability to the date of the next transaction.

    2. That transaction amount is added to the unpaid liability plus interest, and interest on this new balance is computed to the next transaction date and so on, through all transactions posted, to the current posting (23C) date.

    3. Master File compares the total interest accrued to the net amount of all posted interest transactions in the module and assesses or abates the difference with TC 19X or 33X as appropriate.

    4. No additional penalty or interest accrues on amounts paid within 21 calendar days of notice and demand (10 business days if the amount in the notice is $100,000 or more). See IRM 20.2.5.4, Notice and Demand and Debit Interest.

      Note:

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  2. The computation of debit interest is figured on the balances from the earliest to the latest effective dates and by applying decimal equivalent interest rates based on the months and days elapsed in the interest computation time period.

    1. Interest transactions are ignored in this process.

    2. Each successive interest amount added to the accumulation is computed and rounded to the penny.

    3. The ending date is either the date the module balance goes to a zero or credit balance, or the current posting (23C) date of an assessment.

  3. In order to properly compute debit/credit interest, the program uses the necessary information from Master File, as well as information that is manually input, such as:

    • Transaction codes and dates.

    • Amended Claims Date - Used to determine if a credit interest suspension period is applicable on taxpayer initiated claims for refund. Specifically, the Amended Claims Date field (AMD-CLMS-DT) will be used to determine if the OBRA 45-day rule applies. See IRM 20.2.4.7.5, 45-Day Rule. The Amended Claims Date field is also used for debit interest suspension periods applicable to IRC 6404(g) on amended returns. See IRM 20.2.7.9.2 (2), Amended Returns for Hurricane Related Casualty Losses with Subsequent Grant Reimbursement, Reason Code 176 and 177.

    • Reference Numbers - Used by the computer to identify the type of adjustment to be assessed or abated. The reference numbers enable the program to start interest on the appropriate date.

    • Penalty Reference Numbers (PRN) - Used specifically for certain types of penalties for the same reasons as stated for Reference Numbers above. If a TC 240 without a PRN is input, then interest accrues from the assessment date.

    • Waiver/870 Date - Used on agreed Examination and Appeals cases. It directs the computer to suspend interest from the 31st day after the waiver agreement date (date waiver received or acknowledged by the Service) until the date of assessment of the deficiency amount.

    • Transaction Code (TC) 971 Action Code 064 - Used by the computer to suspend interest after 18/36 months from the timely filed individual return (including extensions) due date or return received date (if prior to the extended due date), to 21 days from the TC 971/064 transaction date (unless the interest requires restriction). The 18-month notification period changed to 36 months for notices issued after November 25, 2007. See IRM 20.2.7.6, IRC 6404(g) Interest Suspension, and IRM 4.31.6.2.5.4, IRC Section 6404(g), Suspension of Interest and Certain Penalties, for clarification of notification dates and other IRC 6404(g) rules.

      Note:

      Restriction of interest may be required if posting a 10/04/2004 notice date. This date is used because it is the date the law was enacted to no longer allow listed transactions the benefit of IRC 6404(g) suspensions.

    • Claim Received Date - Date claim received by the Service. This date is used to determine if the 45-day rule of IRC 6611(e)(2) applies. See also Amended Claims Date above.

    • Interest Computation Date - Used for carrybacks and certain employment tax adjustments to provide the interest start date on subsequent tax adjustments, such as, TC 298/299, TC 308/309.

    • Payments Made by the Taxpayer - Generally are effective on the date that the payment was received by the Service or bank (lockbox). Payments received within a notice grace period are applied as of the notice date for debit interest purposes only to eliminate additional debit interest accruals. After 1997, this notice grace period is 10 business days or 21 calendar days. See IRM 20.2.5.4, Notice and Demand and Debit Interest, for additional information. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. If a taxpayer makes a full undesignated payment of a proposed liability under Rev. Proc. 2005-18 (section 4.03), the undesignated remittance will be treated as a payment of tax; a notice of deficiency will not be mailed, and the tax is assessed. If a taxpayer makes a partial payment of tax indicating agreement to part of a proposed liability, the Service may assess that tax up to the amount paid without following deficiency procedures (see IRM 4.4.24, Payments and Remittances.

  5. The request to designate all or part of the payment to interest is honored if one of the following conditions is met:

    1. The taxpayer agrees to assessment and collection of the liability by executing a waiver of restrictions; or

    2. The taxpayer pays the underlying tax with respect to the amount to be designated as interest and the amount designated does not exceed the amount of interest that has accrued on the tax being paid.

  6. After an interest computation is completed, conditions in the module may change, causing/requiring a recalculation of interest on the module. The purpose of the interest adjustment is to ensure that the proper amount is posted to the module after taking into consideration all outstanding balances, late posting credits, and subsequent assessments.

    Example:

    A payment posts with an earlier effective date than the date to which interest was previously computed.

20.2.6.6  (10-15-2011)
Steps to Compute Interest

  1. To compute interest to a specific date after a tax underpayment and penalties have posted:

    If Then
    The module is not restricted from computing interest. Use CC INTST or CC FTPIN.
    The module is restricted from computing interest, or module conditions exist that prevent systemic calculations. Manually Compute Interest.

  2. Use the following process to determine the net amount of interest to be assessed or abated. This process allows for consideration of any interest-free periods and allows comparison of the adjusted amount to interest already assessed. Use either CC COMPA or the ACT/DMI program.

    1. Using a current TXMOD or Master File transcript, compute a running module balance on the entire tax module.

    2. Enter debits and credits on the appropriate dates.

    3. Suspend and resume interest (on a specific amount if necessary) for waiver/suspension periods. See IRM 20.2.6.8.1, Calculating the Underpayment Interest Suspension Amount, for how to compute a suspension amount.

    4. Compare the amount of interest assessed on the module to your interest computation to determine the interest assessment (TC 340) or abatement (TC 341). For a quick or prompt assessment, use TC 190/340 as appropriate. Compare the module balance plus/minus your adjustment with the balance of interest and principal on your computation. If the balances are not the same, go through the computation to determine if there is an error in the entries.

      Note:

      Always balance your computation with the tax module balance plus/minus your adjustment.

      Reminder:

      Previous restricted interest transactions must be verified before recomputing a module. If you are unable to verify the TC 34X/77X amount, secure the adjustment document or case file.

20.2.6.7  (10-15-2011)
Types of Interest Suspensions

  1. In accordance with IRC 6601(a) and IRC 6601(b), the payment of interest is required unless specific provisions apply that allow the IRS to limit interest. Some established interest suspension provisions require all interest on any balance due to be suspended during a certain period of time, while others may apply to only part of the balance due. This is a brief overview of the most common types of interest suspension provisions, the applicable code sections, and other IRM references where further information might be available.

  2. Interest suspension provisions affecting the entire balance due include:

    1. Combat Zone per IRC 7508 - A taxpayer is allowed an underpayment interest suspension from the entry date to the exit date plus up to 180 days or 285 days, depending on the circumstances. See IRM 20.2.7.7, Combat Zone – IRC 7508.

    2. Disaster Area per IRC 7508A - Affected taxpayers in a presidentially declared disaster area are allowed an underpayment interest suspension for a period of time determined by the Secretary. See IRM 20.2.7.9, Presidentially Declared Disaster – IRC 7508A.

  3. Interest suspension provisions that may affect either all or only part of the balance due include:

    1. Non-Compute Returns per IRC 6014 - A taxpayer is allowed an underpayment interest-free period from the original due date until 30 days after the IRS sends the first notice and demand. This suspension applies only to the amount on the notice and demand. See IRC 6151(b).

    2. Employment Tax Returns per IRC 6205 - A taxpayer is allowed an underpayment interest-free period from the original due date until the received date of the adjusted return or agreement. See IRM 20.2.12.2, Underpayment Adjustments.

    3. Errors on IRS Prepared Returns per IRC 6404(d) - A taxpayer is allowed an interest suspension on the underpayment caused by the IRS from the normal due date until 30 days after the first notice has been issued on the underpayment. See IRM 20.2.7, Abatement and Suspension of Interest.

    4. Ministerial and Managerial Acts per IRC 6404(e)(1) - A taxpayer is allowed an abatement of interest for an underpayment caused by an IRS error or delay in performing a ministerial or managerial act. See IRM 20.2.7.4, Errors or Delays in Performance of a Ministerial or Managerial Act – IRC 6404(e)(1).

    5. Erroneous Refunds per IRC 6404(e)(2) - A taxpayer may be allowed an interest-free period on the repayment of an erroneous refund if a taxpayer/POA did not in any way contribute to the erroneous refund. See IRM 20.2.7.5, Erroneous Refunds – IRC 6404(e)(2).

    6. Failure to Timely Contact Taxpayer per IRC 6404(g) - An individual taxpayer is allowed a suspension of interest on an underpayment shown on a notice or report if it is not issued within 18 or 36 months (RAR issued to taxpayer after November 25, 2007) from the later of the return due date or return filed date of a timely filed individual return, including extensions. See IRM 20.2.7.6, IRC 6404(g) Interest Suspension.

    7. Waiver on Agreed Assessment per IRC 6601(c) - A taxpayer is allowed a suspension of underpayment interest from 30 days after an agreement is received by the Service (sometimes called an 870 Waiver referring to Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment) until the first date of notice and demand, usually the 23C Date of the assessment. See IRM 20.2.8.7, 870 Waiver Interest Suspension Periods, and IRM 20.2.5.6, Suspension of Interest on Deficiencies.

    8. Notice grace period interest suspension on payments per IRC 6601(e)(3) - Payments made within 21 calendar days or 10 business days ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of a notice and demand for payment are entitled to an underpayment interest-free period up to the amount of the payment. See IRM 20.2.5.4, Notice and Demand and Debit Interest.

    9. Bankruptcies - See IRM 20.2.11.6, Bankruptcy Code Cases.

20.2.6.8  (10-15-2011)
Payment Allocation and Reallocation

  1. Payment allocation is a term used to describe the assigning or earmarking of a payment to a specific liability or set of liabilities; while payment reallocation describes the application of a previously applied payment to a different liability or set of liabilities.

  2. Payments are generally allocated to the earliest unpaid and collectible liability owed and due as of the payment availability date, i.e., oldest open Collection Statute Expiration Date (CSED) applied in the following order (see IRM 20.2.6.8 (3) below for a detailed description of how Master File is programmed):

    1. Tax

    2. Tax Motivated Transaction (TMT) tax

    3. Penalties and fees

    4. Non-TMT interest

    5. TMT interest

    Exception:

    If a taxpayer specifically requests allocation of a payment to tax, penalties, or interest, it remains allocated as requested unless the liability for which it was designated is overpaid. Designated payments are identified by their transaction codes: TC 640 for tax, TC 680 for interest, and TC 690 for penalty. However, a remittance is only designated when a written designation accompanies the remittance in compliance with the procedures for making a designated deposit or payment.

    Note:

    Pursuant to IRC 6601(e), interest is owed and due as it accrues, and is assessed, collected and paid in the same manner as tax.

  3. As stated in IRM 20.2.6.5, Computer Generated Interest Computations, Master File computes interest by sorting all money amount transactions in effective date order and calculates interest on those balances from transaction to transaction (running module balance). This method of computing interest remains constant, even when conditions in the tax module change. For example, a transaction posts with an effective date that is earlier than existing payments and credits on the module or the last “compute to date.” The interest calculation outcome remains constant as long as all available payments and credits are applied as of their given availability date against any unpaid liability that is owed and due as of that given date.

    Example:

    A taxpayer timely files a Form 1120, U.S. Corporation Income Tax Return, for the calendar year ending December 31, 2007, reporting tax of $80,000, due March 15, 2008. The tax, along with interest charges of $258.32, and a late payment penalty of $400, is satisfied with a payment of $80,658.32 dated April 1, 2008. Under daily compounding of interest, the effective date of the interest charge is the liability date of the assessment to which it relates (March 15, 2008); the effective date of the penalty charge is April 1, 2008, its assessment date. Later, the Service conducts an audit of the same tax year and assesses additional tax of $15,000, also due March 15, 2008. Following the running module balance routine, the payment of $80,658.32, dated April 1, 2008, is now being distributed to an increased liability that is now owed and due as of April 1, 2008, for $95,706.75, which includes the additional $15,000 tax assessment and its related interest charge of $48.43.

    Caution:

    Payments with effective dates before December 31, 1982 must have interest manually computed. They cannot be reallocated to subsequent assessments when computing interest.

20.2.6.8.1  (10-15-2011)
Calculating the Underpayment Interest Suspension Amount

  1. The reallocation of payments and credits for purposes of computing an underpayment interest suspension is a methodology no longer supported by the Service. Below are some scenarios of how to handle a payment allocation when an interest suspension period applies to an underpayment/debit interest adjustment.

  2. When computing an underpayment/debit interest suspension, e.g., for IRC 6404(g) or IRC 6601(c) (also known as 870 Waiver), do not reallocate payments that have been previously used to pay assessed penalty and/or interest for another assessment.

    Example:

    A taxpayer sends a payment of $6,000 which is used to pay tax of $5,000, penalties of $800 and interest of $200. Later, there is an audit and the taxpayer agrees to $2,000 in additional tax. The $1,000 previously applied to penalties and interest should not be reallocated for purposes of computing an underpayment interest suspension. The liability amount subject to suspension period will be based on the $2,000 additional tax.

  3. When computing suspension amounts, only consider the pertinent tax liability (including adjustments to refundable credits), any related penalties, payments, and/or credits associated with that tax liability. The calculation of the suspension amount should take into consideration all module conditions at the time of determination, and the proper application of all interest related code sections, revenue rulings, revenue procedures, etc. This includes all currently available credits that will be used to offset into the module to help pay this assessment.

    Example:

    Using the same scenario as in the above example, but in addition to the $2,000 in tax, there is also an accuracy related penalty of $400, a withholding credit of $72 and an EIC recapture of $84. The suspension amount will be based on the adjustment items directly attributable to the audit assessment, of $2,000 additional tax, related penalty of $400, withholding credit of $72 and EIC recapture of $84, plus accrued interest to the beginning of the suspension period. Ensure that offsets into the underpayment module are applied and processed at the same time as the underpayment adjustment.

    Example:

    After the audit of a taxpayer's 200812 and 200912 returns, he has an overpayment of $4,500 in 200912 that he wants applied to his underpayment for 200812 of $8,000. For the 200812 year, he only pays the tax difference of $3,500 and wants to be billed for any interest. The $4,500 must be considered as a payment as of the availability date when computing the suspension amount. Ensure that offsets into the underpayment module are applied and processed at the same time as the underpayment adjustment, so that Master File can consider it during the systemic interest computation.

  4. Check CC SUMRY or CC IMFOLI/BMFOLI to make sure there are no pending credits that will be offset into the module. Also, a taxpayer's payment that is meant for tax liabilities for different tax years may post to only one module. Carefully analyze the case file to determine the taxpayer's intent as it relates to payments on the module when computing interest involving an 870 suspension period.

    Example:

    The taxpayer has agreed to $14,000 in taxes for 200612, 200712, and 200812. The Revenue Agent Report (RAR) shows he owes $3,000; $5,000; and $6,000 respectively. He writes a check for $14,000 which is posted to the 200612 module instead of being divided as per the taxpayer's request. Even though the payment only posted to 200612, the taxpayer's intent should be considered when computing the suspension amount for 200712 and 200812. The payments should be moved to the modules they were intended and the suspension amount computed with them.

  5. After the suspension amount is determined, it is then used in the running module balance suspending interest on that amount during the suspension period to the date full paid or the 23C Date, whichever is earlier. It is important to remember to stop the suspension on the date the liability becomes full paid, especially when there are later adjustments. Also, if there is a debit event that occurs in the middle of the suspension period, the suspension will stop and start again with the increased balance.

  6. Another way to compute the suspension amount is to perform two separate interest computations with and without the adjustment and related transactions that are entitled to the suspension period. Then, take the interest difference between the two computations and add all the waiver related adjustments to arrive at the actual suspension amount. This second method is how Master File determines the suspension amount.

  7. If a taxpayer specifically requests allocation of a payment to tax, penalties, or interest, it remains allocated as requested (i.e., TC 640, 680, 690). The designation by the taxpayer can be written or oral. There should be an annotation found in the workpapers. Designated payments should be processed as TC 640 for tax, TC 690 for penalty, and TC 680 for interest. All the tax has to be paid before any amounts can be designated to penalties or interest. See IRM 20.2.6.5 (5), Computer Generated Interest Computations. If a payment is not specifically designated, the payment will be applied to the oldest unpaid liability first, provided the CSED is still open. Even if allocated, but later the module becomes overpaid, the overpayment amount is then considered undesignated.

  8. When computing the suspension amount, prior credit interest-free suspension periods should be considered. For example, refunds received without interest. See IRM 20.2.5.7, Revenue Ruling 99–40 (Modifies and Supersedes Revenue–Ruling 88–98) Use of Money, for Rev. Rul. 99–40 adjustments. If there is a credit sitting on the module due to an overpayment or abatement of tax, then this should also be used in the interest suspension computation amount for a subsequent assessment.

    Example:

    An examination of the Form 1120, U.S. Corporation Income Tax Return, of Santolina and Sons, Inc. for the tax period ending December 31, 2007, is assessed a tax increase of $8,200. A debit interest suspension is computed on the $8,200 using Rev. Rul. 99-40, with interest beginning at 4-15-2008, not 3-15-2008. Later, the IRS accepts and processes a Form 843, Claim for Refund and Request for Abatement, requesting an additional Rev. Rul. 99-40 benefit. Based on a Form 2220, Underpayment of Estimated Tax by Corporations, for the subsequent tax year, and using the equal installment method, the assessment is divided evenly among the four installments with deficiency interest beginning on April 15, 2008, June 15, 2008, September 15, 2008, and December 15, 2008. The suspension amount will be changed to include the greater benefit of Rev. Rul. 99-40 because, pursuant to IRM 20.2.5.7.2, Rev. Rul. 99-40 and Credit Elects (May/Sequa), it should have been considered at the time the initial suspension amount was determined.

  9. If the original suspension amount was properly determined at the initial calculation, subsequent module activity will not alter the suspension amount. Once a suspension amount has been determined, it should not be changed unless an error has been identified.

    Example:

    A wrong TC 870 date was previously used.

    Example:

    An examination of a Form 1120, of Dalea Corp. for the tax period ending December 31, 2007 results in a tax increase of $2,000,000. Prior to assessment, the taxpayer sends an electronic funds payment of $2,000,000, which the IRS posts as an estimated tax payment (TC 660) to tax period 2009. The 870 waiver interest suspension does not include the payment. The taxpayer notifies IRS that the payment was designated to be an advanced payment on the 2007 deficiency. The interest suspension amount must be recalculated.

  10. For consistency purposes, if there is a subsequent TC 291/301 to reduce the tax, this adjustment does not change the underpayment suspension amount previously computed.

    Example:

    An examination of the Form 1120 of Gaura Corp. for the tax period ending December 31, 2009 results in a tax increase of $9,000. The underpayment interest suspension is computed on the $9,000 tax increase. Later, the IRS reduces the 200912 tax by $500. The $9,000 underpayment interest suspension previously computed is not affected by the subsequent $500 tax abatement.

  11. When an interest suspension period(s) applies and there are multiple assessments and payments on a module, it may be necessary to restrict interest. See IRM 20.2.7.6, IRC 6404(g) Interest Suspension, and IRM 20.2.8.7, 870 Waiver Interest Suspension Periods, for additional information.

  12. Since payments are applied to liabilities in effective date order, undesignated payments may be applied to certain penalties before tax.

    Example:

    Penalty assessments that accrue interest from the due date of the return would be paid before a tax liability from a math error on a return prepared by an IRS employee. Interest accrues on a math error adjustment starting from 30 days past the notice date.

    Note:

    This IRM cannot address every possibility that may arise regarding payment allocation. If needed, please contact your designated technical lead or manager for assistance.

  13. A copy of how the suspension amounts were determined should be included with the interest computation that is attached to the input document and case file, especially when there are multiple suspension periods.

20.2.6.9  (10-15-2011)
Helpful Interest Facts

  1. PL 97–248 provided that interest will be compounded daily, effective 1–1–1983. It also provided for semi-annual redetermination of the interest rate, with any new rates effective January 1 or July 1.

  2. Effective 1–1–1987, the interest rate is redetermined quarterly. The rate of interest allowable (credit interest) is 1% lower than the rate of interest assessed (debit interest).

  3. Effective 1–1–1999, the interest rates for non-corporate and individual taxpayers were equalized for both debit and credit interest.

  4. For current interest rates, check the Office of Servicewide Interest website.

  5. The reallocation of payments and credits for purposes of computing an underpayment interest suspension is a methodology no longer supported by the IRS. See IRM 20.2.6.8.1, Calculating the Underpayment Interest Suspension Amount.

  6. Whenever possible, use a non-restricting TC 340. See IRM 20.2.8.11, Non-Restricting TC 340.


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