20.2.8  Restricted Interest

Manual Transmittal

April 28, 2014

Purpose

(1) This transmits revised IRM 20.2.8, Interest, Restricted Interest.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Forms, letters, and IRM references were reviewed and updated as necessary. Significant changes to this IRM are reflected in the table below:

Reference Description of Change
IRM 20.2.8.1 (1) Added this paragraph to clarify the purpose of this IRM with respect to restricted interest.
IRM 20.2.8.1 (3) and (4) Moved to IRM 20.2.8.3 (1) and (2).
IRM 20.2.8.3 (2) Added freeze code -Y and Transaction Codes (TC) 400, 604, 605, 608, and 609 to the list of conditions that prevent a module from systemically computing interest. Deleted the -O freeze code for disaster since it does not prevent the systemic computation of interest.
IRM 20.2.8.3 (3) Added this paragraph to address two areas:
  1. Second review of interest computations involving manual debit credit interest adjustment.

  2. Validation by another employee with expertise in computing interest exceeding $50,000.

IRM 20.2.8.3 (4) Added this paragraph to address managerial and quality review requirements.
IRM 20.2.8.3 (5)(c) Corrected IRM reference per IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590 dated 11-09-2010) and added a reference to Transaction Codes 19X.
IRM 20.2.8.3 (6) IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590) to delete the "reminder" at the end of IRM 20.2.8.3 (1) and incorporated it in paragraph 6.
IRM 20.2.8.3 (7) Expanded the explanation regarding the date to use in the debit interest to date (DB-INT-TO-DT) field when manually computing interest.
IRM 20.2.8.3 (9) Moved the content in this section from IRM 20.2.8.3 (1)(g) to a separate paragraph. Incorporated IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590 that removed the word "non-restricting" from the text). This section now explains the use of TC 190 when the tax module is not restricted but requires a quick or prompt assessment.
IRM 20.2.8.3 (10) Incorporated IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590 dated 11-09-2010) to clarify when debit interest is manually computed and a recomputation of the entire tax module is necessary. Also, added the procedures to follow when an examiner is unable to secure the prior interest computations and cannot back into the prior calculations.
IRM 20.2.8.3 (12) Added this paragraph to address procedures that must be followed to compute the correct amount of credit interest when using TC 772 on a module with a credit balance.
IRM 20.2.8.3 (13)(c) Added instructions on how to handle the use of TC 342 when manually abating a failure to pay penalty.
IRM 20.2.8.3 (13)(d) Revised the "note" section to include additional reasons for using a TC 340 with a "zero" amount.
IRM 20.2.8.3 (14) Clarified the notice requirements for an interest computation per IRC 6631 and the appropriate letters to mail to the taxpayer.
IRM 20.2.8.4 Clarified when credits and payments are available.
IRM 20.2.8.5 Clarified the requirements regarding IRS approved interest computation software and how to obtain it.
IRM 20.2.8.6 Added additional reasons to restrict interest.
IRM 20.2.8.7 Changed the title from "870 Waiver Interest Suspension Periods" to "IRC 6601(c) Waiver Interest Suspension Periods." Moved paragraph (1) text to paragraph (6), which changes the numbering of the subsequent paragraphs.
IRM 20.2.8.7 (1) The "note" explains that waivers received for certain types of tax credit reversals may require a restricted interest computation. Rebate credit reversals should post on the same date as the allowance. These dates should be verified when importing transactions using the Decision Modeling Inc./Automated Computation Tool (DMI/ACT).
IRM 20.2.8.7 (8) Expanded the list of forms a taxpayer can use to sign a waiver. This text was previously located in paragraph (1).
IRM 20.2.8.8 (2)(c) Added instructions that transcripts are an exception when attaching source documents.
IRM 20.2.8.10 Revised instructions to correspond with IRM 3.17.46.5.1, Assessments Under IRC Section 7804(c).
IRM 20.2.8.11 (2)(a) Incorporated IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590) that changed the word "23C" in IRM 20.2.8.11 (2)(a) table to "cycle" for clarity and added the word "posting" to explain the meaning of "23C date."
IRM 20.2.8.11 (2)(b) Clarified the date to use in the "DB-INT-TO-DT" field when using a non-restricting TC 340.
IRM 20.2.8.11.1 Clarified, in the "caution" statement, when the -I freeze will not be present on the module.
IRM 20.2.8.12 (3) Clarified when an accepted OIC conclusively settles a liability.
Exhibit 20.2.8-1 Revised to show the subject in the first column. IRM and IRC citations have been corrected, additional references added, and repealed statutes removed. Also, added a table of interest references for employment taxes.
Exhibit 20.2.8-2 Added "IRC 6404(g) Suspension Periods" to the title.

Effect on Other Documents

This material supersedes IRM 20.2.8, dated 12-04-2009 and incorporates changes from IPU 13U1753 issued 12-20-2013 (which reissued IPU 101590).

Audience

This IRM is intended for Servicewide use by all employees who handle tax adjustments involving the computation of interest.

Effective Date

(04-28-2014)

Brad J. Bouton
Director, Exam Policy
Small Business/Self Employed

20.2.8.1  (04-28-2014)
Restricted Interest Overview

  1. The purpose of this IRM is to provide guidance with respect to restricted interest application and computation. It provides guidance to employees who handle tax adjustments involving restricted interest.

  2. Interest may be limited to specific time periods or rates, or it may be statutorily prohibited, which gives rise to the term "restricted interest." Restricted interest is subject to the same variables (time, rate, amount) as "normal" interest calculated by the IRS. The primary difference between normal and restricted interest is that the IRS computer may not be able to identify all the conditions involved in a restricted interest situation.

20.2.8.2  (04-28-2014)
Provisions Restricting and Prohibiting Interest

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

20.2.8.3  (04-28-2014)
Manual Computations

  1. The posting of certain freeze codes and transaction codes prevent IRS computers from calculating normal interest when restricted interest might be applicable. As a result, interest must be manually computed and updated.

  2. Below is a list of freeze codes and transaction codes that restrict interest from being systemically computed. Document 6209, IRS Processing Codes and Information, Section 8A, Master File Codes, provides additional information on the following freeze codes and transaction codes:

    Freeze Codes:

    1. -I freeze—Debit interest restriction.

    2. I- freeze—Credit interest restriction.

    3. -C freeze—Combat zone indicator for individual Master File (IMF) [Master File can compute interest provided the entry and exit dates do not overlap. Check CC IMFOLE before restricting an account].

    4. -Y freeze—Offer in Compromise (OIC) freeze.


    Transaction Codes:

    1. TC 340, TC 341

    2. TC 400

    3. TC 500, TC 534

    4. TC 604, TC 605

    5. TC 608, TC 609

    6. TC 770, TC 772

    7. TC 780

  3. When a manual debit or credit interest adjustment is required, all personnel should double-check their interest computation for accuracy. When interest computed exceeds $50,000 (per tax module), another technician with expertise in calculating interest must verify the accuracy of the interest computation.

  4. All manual interest computations are also subject to random quality reviews, regardless of the adjustment amount. Managers (or their delegates) are required to randomly review manual computations to verify that interest is restricted and computed correctly.

  5. When manually computing interest address the following:

    1. Always attach the computation and the reason for the action taken to the adjustment source document.

    2. Provide the reason on the adjustment source document when interest is abated.

    3. Provide the reason on the adjustment source document when a TC 340 for zero amount is input.

      Note:

      Do not unnecessarily restrict tax modules. Use TC 19X or non-restricting TC 340 whenever possible. See IRM 20.2.8.11, Non-Restricting TC 340. Ensure that TC 190/191, TC 340/341, and TC 770/772 are used appropriately.

  6. It is not necessary when inputting manual debit interest restriction transaction codes (TC34X) in ADJ54 or AMCLS to use a blocking series that will create a refile DLN if sufficient documentation is attached to the adjustment source document.

    Reminder:

    Electronically document the reason for the action taken when Accounts Management Services (AMS) is available to the function inputting the adjustment.

    Example:

    If the case is located on AMS, notate the following in the case history:
    • Reason interest has been restricted.
    • Relevant interest computation dates and amounts for the adjustment.
    • Any specific information that would be helpful to someone in reconstructing the posted restricted interest adjustment.

  7. All manual debit interest transactions input through ADJ54 or AMCLS must have an interest-to-date in the "DB-INT-TO-DT" field (MMDDYYYY format). Interest is generally computed to the full paid date, 30 days from the agreement date, or the 23C date of the assessment, whichever is the earliest. The "DB-INT-TO-DT" field posts to the module and identifies to which date the manual debit interest was computed. Accurate entry of this field assists employees who are responsible for performing subsequent interest computations, account updates, and account inquiries.

    Exception:

    The following are exceptions to using a date other than the date interest was computed to in the "DB-INT-TO-DT" field:
    (1) If a TC 340 for zero is input to stop erroneous accruals, then the 23C date of the assessment can be used.
    (2) If no interest is due on the module, then use the return due date (RDD).
    (3) When non-restricting TC 340 is used, enter the 23C date of the non-restricting TC 340 adjustment. See IRM 20.2.8.11 (2)(b), Non-Restricting TC 340.

  8. Manual credit interest transactions input through ADJ54 or AMCLS, using TC 770 with a dollar amount, must have an interest-to-date in the "CR-INT-TO-DT" field (MMDDYYYY format). Manually compute credit interest if there is a prior TC 770 on the module, when applicable.

  9. Use TC 190 to post manually computed debit interest on quick and prompt assessment documents when the tax module is not restricted. Do not post a TC 190 for zero unless no interest is due. When possible, input a non-restricting TC 340 after a quick or prompt assessment has posted with a restricting TC 340 to allow Master File to update interest. See IRM 20.2.8.11, Non-Restricting TC 340, for input details.

  10. Anytime debit interest is manually computed, it is necessary to recompute the entire tax module to ensure an accurate computation is made. When a tax module is recomputed, all prior manually computed interest transactions (e.g., TC 19X, TC 34X, TC 770, TC 772) must be verified. If you are unable to match the manually computed interest transaction amount(s), secure the appropriate document(s) or the case file. If unable to secure the documents after several attempts, then try to contact the employee or area that computed the restricted interest. Also, the taxpayer or POA may have a copy of the interest computation. When all attempts to verify the prior computations have been exhausted, then use the interest to date of the last manually computed interest as the starting point, unless there is an interest-free suspension period, then use the 23C date as the interest start date. Compute interest to the appropriate "DB-INT-TO-DT" considering any payments, credits, waivers, or notices posted after the last interest transaction. Ensure that your interest computation and notes related to searches for the prior interest computation are associated with the adjustment document.

  11. A reversal of some tax credits (e.g., fuel tax), will require a manual computation and restriction of debit interest if the taxpayer signed an agreement form with a waiver of restrictions under IRC 6213(d), such as, Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. Tax credit reversals are entitled to the same waiver suspension period as tax, but Master File currently does not recognize all of them. Also, additional credits, payments, or both should be included in this suspension amount. See IRM 20.2.6, Methods of Computing Interest.

  12. Master File does not recognize TC 772 as a total consideration of all credit interest (e.g., a credit interest combination adjustment which may include netted or additional credit interest, etc.). As a result, if the tax period has an overpayment at the time of posting, it will recalculate credit interest, post an erroneous TC 776 amount, and issue a refund with excessive credit interest. To avoid this, it is necessary to cycle the adjustment by performing the following processing steps.

    1. Calculate interest to the 23C date of the following cycle.

    2. Post the necessary adjustments, including the TC 772 to the current cycle, using a hold code to prevent Master File from posting a TC 776, and releasing the credit.

    3. Input a TC 340 for zero and TC 770 for zero to release the credit for refund with a one week cycle delay (to match the interest to date).

    4. Post a hold code that only holds the notice.

    Note:

    Unlike a TC 772, Master File recognizes a TC 770 as the current total computation of credit interest and generally will not post (generate) a TC 776.

  13. TC 342 removes the interest restriction previously set by either a TC 340 or TC 341. Input TC 342 with a Priority Code (PC) 5 to allow Master File to post accrued interest when applicable. Master File considers all posted TC 19X, TC 34X, and TC 33X amounts when assessing or abating additional interest as a result of a recomputation.

    Note:

    Master File will not post accrued interest unless PC 5 is posted with the input of a TC 342. See IRM 20.2.6.3, Assessment of Interest Accruals, for additional information.

    1. TC 342 may NOT be input without first securing the source document for the TC 340/341 that created the interest freeze.

    2. The TC 342 may be input if the TC 340/341 restriction was unnecessary or if a TC 340 for zero was systemically generated on an original filed return because of the combat zone indicator.

    3. If manually abating the failure to pay penalty (TC 271), a TC 342 might not compute the interest correctly, based on the way Master File has been programmed. Either continue to manually update the interest or monitor to make sure Master File is computing it correctly.

    4. A TC 340 for zero may indicate a net rate interest netting adjustment. DO NOT INPUT TC 342 in this instance. See IRM 20.2.14, Netting of Overpayment and Underpayment Interest.

      Note:

      Listed below are additional reasons why a TC 340 for zero may be input. The adjustments listed below should not be released by the input of TC 342. This list is not all inclusive.
      • Combat zone indicator
      • Prevent the posting of diminimus interest accruals
      • Innocent spouse adjustments
      • Erroneous refund due to IRS error
      • Systemic interest problems causing erroneous notices to be sent out
      • Interest abatement under IRC 6404(e)

    5. When inputting TC 342, it is not necessary to use a blocking series that will create a refile DLN if sufficient documentation is attached to the adjustment source document.

    6. Attach a copy of the source document for the TC 340/341 to the TC 342 adjustment document. If the source document is not available, notate on the TC 342 adjustment document why a TC 340 for zero was originally input (if known).

      Example:

      Combat zone indicator

      TC 150 - $1,000.00
      TC 806 - $500.00
      TC 270 - $0.00
      TC 340 - $0.00



      A source document would not be available for the TC 340 for zero adjustment. Notate on the TC 342 adjustment document "Source document not available—combat zone indicator—TC 340 for zero systemically generated on original filed return."

    Reminder:

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

  14. When a notice is issued to an individual taxpayer that includes interest to be paid, the notice must include a computation of the interest. See IRC 6631. Because a sole proprietor is an individual taxpayer, the requirements of IRC 6631 also apply to employment and excise tax liabilities of a sole proprietor. Master File programming will systemically include an explanation of the interest calculation with notices sent to taxpayers when interest has been systemically generated.

    1. If interest is manually computed or restricted, send a copy of the interest computation report. Users of command code (CC) COMPA may only send COMPAD prints to taxpayers as an explanation of the manual interest computation.

    2. Use Letter 3447, Cover Letter for Manual Interest Computations With COMPAD, or Letter 3535, Interest Computation Cover Letter, as a cover letter when providing an interest computation report to the taxpayer as required by IRC 6631. Use Letter 3447 as a cover letter for CC COMPAD printouts, and Letter 3535 to accompany interest computations generated by the ACT/DMI interest software.

      Reminder:

      In accordance with the purpose of the Office of Management and Budget (OMB) Memorandum M-07-16, Safeguarding Against and Responding to the Breach of Personally Identifiable Information, use only the last four digits of a taxpayer's SSN on the documents mailed to the taxpayer.

    3. The requirements of IRC 6631only apply to notices which "include an amount of interest required to be paid" by the taxpayer.

      Note:

      While there is no requirement under IRC 6631 to provide an explanation on business Master File (BMF) modules, it is recommended that an explanation be provided to the taxpayer when interest on a BMF module is manually computed.

20.2.8.4  (04-28-2014)
Credit Availability Date for Debit Interest Computation

  1. To determine the credit "interest start date" on an overpayment, consider the credit availability date.

  2. As applied to debit interest computations, a credit is generally available as follows:

    1. Prepaid credits (e.g., withholding) are available on the due date of the return (determined without regard to any extension of time for filing the return).

    2. Subsequent payments made on or after the return due date (determined without regard to any extension of time for filing the return) are available on the received date or transaction date shown on the transcript.

    3. Credits transferred from another module are available as of the applicable credit availability date.

  3. Refer to IRM 20.2.4, Overpayment Interest, for additional information regarding credit availability dates.

20.2.8.5  (04-28-2014)
Interest Computation Software

  1. The IRS currently approves and supports the use of IDRS (e.g., COMPA) and a commercial off-the-shelf (COTS) software program, InterestNet by Decision Modeling, Inc. (commonly referred to as ACT/DMI or InterestNet), to perform manual interest computations.

    Note:

    ACT/DMI is the preferred interest computation tool. There are few instances when COMPA should be solely used. TaxInterest and Report Generation Software (RGS) are examples of non-approved interest programs.

  2. InterestNet (ACT/DMI) software is available, through MITS, to all employees who manually compute interest. The auto update process of this program will allow InterestNet to self-update when it identifies the availability of a system or an interest rate table update.

    Note:

    To ensure the auto update feature functions properly, it is imperative that the "Remind me about future updates" checkbox is not deactivated or manually unchecked by the user.

    Caution:

    Use only IRS approved software to calculate interest.

20.2.8.6  (04-28-2014)
Reasons for Restriction

  1. Some of the reasons for restricting interest on a tax module are listed in the table below (the list is not all inclusive):

    Description Reference
    Carryback and general adjustments using Form 2285, Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments (Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal Revenue Code IRM 20.2.9, Interest on Carryback of Net Operating Loss.
    Tax motivated transactions IRM 20.2.5.9, Tax Motivated Transaction (TMT) Interest.
    Net rate interest netting IRM 20.2.14, Netting of Overpayment and Underpayment Interest.
    Rev. Rul. 99-40 IRM 20.2.5.7, Revenue Ruling 99–40 (Modifies and Supersedes Revenue-Ruling 88–98) Use of Money.
    Multiple waiver dates IRM 20.2.8.7, IRC 6601(c) Waiver—Interest Suspension Periods.
    Error or delay in ministerial or managerial acts IRM 20.2.7.4, Unreasonable Error or Delay in Performing a Ministerial or Managerial Act, IRC 6404(e)(1).
    Ascertained date under IRC 6502 IRM 20.2.12, Employment Taxes.
    Non-Master File assessments IRM 21.7.12, Business Tax Returns and Non-Master File Accounts, Non-Master File (NMF) Adjustments.
    Estate tax returns IRM 20.2.10.1, Interest on Estate Tax Returns.
    Combat zone with multiple in/out tours within a 6-month period IRM 20.2.7.8, Combat Zone, IRC 7508.
    Offers in compromise (OIC) IRM 20.2.8.12, Offers in Compromise (OIC).
    Large corporate underpayment (LCU) IRM 20.2.5.8, Large Corporate Underpayment (LCU) Introduction.
    Certain disaster areas IRM 20.2.7.10, Federally Declared Disaster, IRC 7508A.
    Tax module reinstated from retention IRM 20.2.8.11 (3), Non-restricting TC 340.
    Reversals of tax credits, such as fuel credits, withholding credits, education credits, or credits from Form 8839, Qualified Adoption Expenses, Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts, Form 8885, Health Coverage Tax Credit, Form 8827, Credit for Prior Year Minimum Tax—Corporations, Form 3800, General Business Credit, etc., with interest suspension periods IRM 20.2.8.7 (1), IRC 6601(c) Waiver—Interest Suspension Periods, note regarding the reversal of credits.
    Carryback adjustments that include tax credits (Master File will use the return due date as the effective date for the credit, instead of the carryback date) IRM 21.5.9.5.15, Carryback Net Operating Loss (NOL) Effect on Refundable Credits.
    "Multiple" IRC 6404(g) notice dates IRM 20.2.7.7.5.1, Multiple IRC 6404(g) Notices.
    Previously posted TC 29X/30X adjustments including TC 29X/30X for zero when TC 971 AC 064 is pending or posted and the input adjustment results in an increase in liability (tax, penalties, or decrease in refundable credits). IRM 20.2.7.6.6, IRC 6404(g) Interest Computation.
    Section 3082(a), Public Law 110-289 of the Housing and Economic Recovery Act of 2008 IRM 21.6.6.3.49, Section 3082(a) of the Housing and Economic Recovery Act of 2008—Disaster Primary Housing Grant Relief.
    Personal holding company tax IRM 20.2.11.2.4, Decreases in PHC Tax, and IRM 20.2.11.2.5, Debit Interest on PHC Tax Adjustments.

    Note:

    See IRM 4.10.8.13.3.4, Restricted Interest, for routing/notation procedures for examination cases requiring restricted interest.

20.2.8.7  (04-28-2014)
IRC 6601(c) Waiver—Interest Suspension Periods

  1. Pursuant to IRC 6601(c), if an assessment is not made and a bill (notice and demand for payment) is not issued within 30 days after a waiver is received or executed, interest will not be computed on the deficiency (or on the interest on the deficiency) for the period beginning on the 31st day after the waiver date and ending on the assessment date (23C date). Because Master File programming will suspend underpayment interest during this period, it is not necessary to restrict the tax module for this reason alone. However, Master File programming cannot accurately compute interest involving more than one IRC 6601(c) suspension period. Therefore, interest on those tax modules must be manually computed and interest assessed with TC 340.

    Reminder:

    IMF/BMF Automated Underreporter Program(s) (AUR) agreed assessments are also entitled to the interest suspension provision under IRC 6601(c). A "Credit Interest Date" posting with an AUR adjustment is considered the agreement date. Refer to IRM 4.19.3.20.10.1 (8), The Assessment Window, and IRM 4.119.4.18.10.1 (7), The Assessment Window, for additional information.

  2. Reversals of certain tax credits included on either the revenue agent report (RAR) or on the IRC 6601(c) waiver form, e.g., Form 870 will also require a manual computation and restriction of interest with TC 340. A restriction is required because there are no systemic means for Master File or IDRS to distinguish one type of tax credit reversal (TC 767) from another. For example, Master File and IDRS do not distinguish fuel tax credits previously allowed from the additional child tax credit.

    Note:

    Earned income credit (EIC) reversals do not need to be restricted.

  3. Rebate credits (e.g., economic stimulus, recovery rebate) are an exception because they are reversed out using the same transaction date as originally allowed. Thus, they do not receive a waiver suspension period. Rebate credits are imported using the return due date instead of the transaction date; therefore, when using DMI/ACT interest software, be sure to verify the correct availability date after importing a tax module.

  4. The suspended interest period applies only to the tax, credit reversals, penalties, and interest related to the TC 300 assessment. The example below shows the effect of a suspension period on a debit interest computation.

    Example:

    An examination resulted in a tax increase of $5,875.00 for a 200512 tax period. The IRS received a signed agreement to the tax increase on July 28, 2008. Interest on the tax accrued from the return due date to 30 days past the waiver date (August 27, 2008) is $800.52. The 23C assessment date occurs on September 8, 2008. Interest is then suspended on the additional tax ($5,875.00) and related interest ($800.52) from the 31st day after the waiver date until the 23C date; September 8, 2008.

    See Exhibit 20.2.8-2, Interest Free Period-IRC 6601(c) and IRC 6404(g) Suspension Periods.

  5. To allow the suspension period, CC FTPIN will post a TC 9990 with a credit amount equal to the amount on which interest must stop. Continuing with the example in paragraph (2) above, tax and interest total $6,675.52. The TC 9990 date is August 27, 2008. To resume computing interest, CC FTPIN will post a debit TC 3330 with the same amount, using the 23C date of the assessment, September 8, 2008. Interest accruals continue on all other liabilities to which the interest suspension period does not apply. See Exhibit 20.2.8-2, for the 2nd page of CC FTPIN (DINCOMP).

  6. While Master File programming can accurately compute interest if there is one waiver date (870-DT) or AUR credit interest date on the tax module, it cannot if there are multiple adjustments with different 870-Dates or AUR credit interest dates. Interest on these modules must be manually computed and restricted. See IRM 20.2.6.8.1, Calculating the Underpayment Interest Suspension Amount, for instructions to manually compute the interest suspension amount.

    Reminder:

    Do not unnecessarily restrict tax modules. Use a non-restricting TC 340 whenever possible. See IRM 20.2.8.11, Non-Restricting TC 340.

  7. To update interest on a module with a waiver date, use a current TXMOD or Master File information and take the following actions:

    1. Compute interest on the accompanying TC 30X, 29X (including additions to tax, penalties, recaptured or allowed credits impacting the TC 29X/30X) to the 870-DT or AUR credit interest date + 30 days.

    2. Suspend interest on the tax, penalties, interest, and credit transactions (e.g., earned income credit (EIC), additional child tax credit (ACTC)) for that TC 30X, 29X from the 31st day until the 23C date of the assessment.

    3. Resume normal interest computations as of the assessment date.

    Reminder:

    When more than one IRC 6601(c) suspension date is present on a tax module (due to multiple assessments), multiple interest suspension computations will be required.

  8. There are multiple forms used by the IRS for the purpose of applying IRC 6601(c). Form 870 is the most common form used by the IRS for taxpayers to sign waiving their right to a statutory notice of deficiency. Hence, the underpayment interest suspension period allowed under IRC 6601(c) is often referred to as an "870 waiver." Other forms used by the IRS for applying IRC 6601(c) include but is not limited to the following:

    1. Form 4549, Income Tax Examination Changes.

    2. Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment.

    See IRM 20.2.6.7, Types of Interest Suspensions, for additional waiver information.

20.2.8.8  (04-28-2014)
Documentation

  1. It is imperative that all manual adjustment source documents include sufficient information and documentation to determine how and why interest was manually computed and restricted. This not only applies to the original manual restricting document but also to any adjustment document(s) for any subsequent interest updates. Since it is no longer necessary to use a blocking series that will generate a refile DLN, attaching documentation to every interest adjustment is essential.

  2. At a minimum, adjustment source documents should contain the following:

    1. A print of the interest computation (e.g., ACT/DMI, CC COMPAD).

    2. Relevant forms (e.g., Form 2285 or Form 2322, Statement of Interest or Estimated Tax Penalty Charges).

    3. Any other relevant information (e.g., combat zone dates, disaster dates, multiple IRC 6404(g) notice dates and amounts, large corporate underpayment (LCU) start date).

      Exception:

      It is not necessary to attach Master File or IDRS transcripts to adjustment source documents.

  3. All manual interest computations must include documentation supporting the interest computations. Documentation is required even if a copy of such documentation is retained in the area. See IRM 20.2.8.3, Manual Computations.

20.2.8.9  (12-04-2009)
Overpayment of Original Tax When Liability Exists for Interest

  1. Sometimes additional tax and interest are assessed for a taxable year and later an overpayment is determined for the same year. In such a case, the interest assessed on the underpayment is not always refunded in full. For example, when an overpayment attributable to a net operating loss carryback is less than the underlying underpayment. See IRM 20.2.9, Interest on Carryback of Net Operating Loss.

  2. When determining the dates of the overpayment, consider whether the payment was designated. If the payment was specifically designated to pay interest (TC 680), the interest liability on the module is considered paid on the actual date of the payment. The same is true with a designated penalty payment (TC 690) because the penalty liability is considered paid on the actual date of the payment.

  3. Always consider the impact of a carryback allowance on previously assessed interest. Using a current TXMOD or Master File transcript, compute a running module balance on the entire tax module to determine if the underpayment interest needs to be adjusted based on the carryback.

20.2.8.10  (04-28-2014)
Assessments Against Treasury Department Embezzlers (NMF)

  1. IRC 7804(c) provides for assessments to be made against officers and employees of the Treasury Department who either embezzle or fail to properly handle and account for money received in connection with internal revenue laws. These assessments are handled under NMF procedures. See IRM 3.17.46.5.1, Assessments Under IRC Section 7804(c), for procedures.

    1. A notice and demand must first be issued for the amount owed before the assessment can be made.

    2. If payment is not made within 30 days from issuance of notice and demand, an assessment can be processed.

  2. Interest is charged at the underpayment rate from the date of embezzlement to the date of full payment.

    • The first notice includes interest computed from the date of embezzlement to the 23C date of the notice.

    • If the date of embezzlement is unknown, interest accrues from the date of the first notice.

20.2.8.11  (04-28-2014)
Non-Restricting Transaction Code (TC) 340

  1. The non-restricting TC 340 is an enhancement to Master File programming to allow a systemic interest update on a tax module after it has been restricted, and it should be used whenever possible. This is especially useful for, but not limited to, the following situations:

    1. Multiple waiver dates

    2. Combination adjustments involving carrybacks (Form 2285)

    3. Disaster area adjustments

    4. Abatements due to a delay or error in a ministerial or managerial act

    5. Combat zone participants

    6. Multiple IRC 6404(g) notice dates

  2. Entering the module balance in the "COMP-INT-AMT" field causes Master File to resume normal interest computation on that amount from the date entered in the "DB-INT-TO-DT" field. See Exhibit 20.2.8-3, Input Screen of Non-Restricting TC 340.

    1. The module balance includes any tax, penalty, and interest unpaid as of the "DB-INT-TO-DT," except accrued failure to pay penalty (TC 270). Refer to the If/Then Table below that provides the rules for handling TC 270 when determining the "COMP-INT-AMT" for the non-restricting TC 340.

      If the 23C (posting) date of the TC 270 Then the TC 270 amount
      is the same as the "INT-TO-DATE" should be included in the "COMP-INT-AMT."
      is after the "INT-TO-DATE" should not be included in the "COMP-INT-AMT."

    2. When the non-restricting TC 340 is used, the interest accruals are updated systemically. The system uses the "DB-INT-TO-DT" as the start date for subsequent computations. Therefore, compute interest to the posting date (23C date) and input this date in the "DB-INT-TO-DT" field. See IRM 20.2.8.3 (1)(d) above for the date to use in this field when computing a manual TC 340.

      Example:

      For Exam and Appeals tax assessments with a signed IRC 6601(c) waiver, the "DB-INT-TO-DT" is the 23C date of the assessment, not 30 days past the agreement date.

      Reminder:


      Use a non-restricting TC 340 whenever possible.
      When feasible, input a non-restricting TC 340 after a prompt or quick assessment has posted with a restricting TC 340 to allow Master File to update interest.

  3. The non-restricting TC 340 should not be used in situations where normal programming cannot correctly update the interest. Some examples are as follows:

    1. Tax motivated transaction interest (TMT) (120% interest)

    2. Large corporate underpayment (LCU) interest (2% interest)

    3. Modules reactivated from retention (TC 370 with Doc Code 52 sets a permanent debit interest restriction, unless the TC 370 contains a Julian date of "999," in which case the module is not restricted)

    4. Net rate interest netting cases

20.2.8.11.1  (04-28-2014)
Subsequent Manual Interest Accrual Processing

  1. After the posting of a non-restricting TC 340, certain conditions on a module will prevent Master File from correctly updating subsequent interest accruals. These conditions include the following:

    1. Any subsequent adjustment to tax.

    2. Any other subsequent adjustment with a transaction date prior to the "DB-INT-TO-DT."

    3. A subsequent credit transfer with an availability date that is earlier than the last posted "DB-INT-TO-DT."

  2. The -I freeze will not be present on the module after the non-restricting TC 340 posts. Any adjustment transaction as described above will unpost unless the TC 340 is identified and addressed with the manual interest update.

  3. If any of the described adjustment transactions occurs, calculate a new non-restricting TC 340.

20.2.8.12  (04-28-2014)
Offers in Compromise (OIC)

  1. An offer in compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability (tax, penalties, and interest) for payment of less than the full amount owed.

  2. An OIC is identified by the following module conditions:

    1. TC 480 (pending) or TC 780 (accepted) in the module

    2. -Y freeze on the module

    3. Status Code 71

      Note:

      While both TC 480 and TC 780 freeze the module from offsetting or refunding and suspends the assessment and collection statute of limitations, only the TC 780 restricts computer generation of interest and penalties.

  3. Per Treas. Reg. 301.7122-1, an accepted OIC conclusively settles the liability. Therefore, interest and penalties are suspended on the date the OIC is accepted (TC 780 posting date) provided the taxpayer follows the agreement made with the IRS.

  4. Instructions for processing and monitoring OIC cases are found in IRM 5.19.7.3, Monitoring Offers in Compromise (MOIC).

Exhibit 20.2.8-1 
Provisions Restricting and Prohibiting Interest

Subject IRC and IRM References Interest Restricted on Underpayments Interest Restricted on Overpayments
Net Operating Loss Carryback IRC 172(b) and IRM 20.2.9 IRC 6601(d) IRC 6611(f)
Capital Loss Carrybacks for Corporations IRC 1212(a) and IRM 20.2.9 IRC 6601(d) IRC 6611(f)
Unused Credit Carryback IRC 39 and IRM 20.2.9 IRC 6601(d) IRC 6611(f)
Tentative Carryback Allowance IRC 6411(b) and IRM 20.2.9 IRC 6601(d) IRC 6611(f)
Carryback of Foreign Tax Credit IRC 904(c) and IRM 20.2.10 IRC 6601(d) IRC 6611(f)(2)
Foreign Tax Credit IRC 901 and IRM 20.2.10 IRC 905(c) Not restricted
Deficiency Dividend Deduction—Personal Holding Company Tax IRC 547(a) and IRM 20.2.11 IRC 547(f)(2) IRC 547(b)(2)
Erroneous Refunds IRC 7405 and IRM 20.2.7   IRC 6404(e)(2)
Renegotiation of Certain Subcontracts IRC 1341(b)(2) and IRM 20.2.11   IRC 1341
Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right IRC 1341(a) and IRM 20.2.11   IRC 1341(b)
Large Corporate Underpayments (Post 1990) IRC 6621(c) and IRM 20.2.5 IRC 6621(c)  
Income From Non-qualified Deferred Compensation Plans IRC 409A IRC 409A(a)  
Tax Treatment of Cooperatives and Patrons IRC 1383(a) and IRM 20.2.11   IRC 1383(b)
Receipt of Disaster Grant After Reporting Casualty Loss for Hurricane Katrina, Rita, or Wilma Per Housing and Economic Recovery Act of 2008 IRM 21.6.6.3.49 Section 3082(a)(3) of Public Law 110-289  
Time for Performing Certain Acts Postponed by Reason of War IRC 7508 and IRM 20.2.7 IRC 7508(a) IRC 7508(a) and IRC 7508(b)
Presidentially Declared Disaster Area IRC 7508A and IRM 20.2.7 IRC 7508A(a)  
Penalties and Interest Not Asserted Against Federal Agencies (Employment Code A or F) IRM 1.2.20.1.2 Policy Statement 20-2  

Provisions Restricting and Prohibiting Interest on Estate Taxes

Subject IRC and IRM References Interest Restricted on Underpayments Interest Restricted on Overpayments
Credit for State Death Taxes IRC 2011(a) and IRM 20.2.10   IRC 2011(c)
Credit for Foreign Death Taxes IRC 2014(a) and IRM 20.2.10   IRC 2014(e)
Recovery of Taxes Claimed as Credit IRC 2016 and IRM 20.2.10 IRC 2016  
Interest Restricted for 180 Days on a Credit or Refund for Certain Deductions on Estate Tax Returns IRC 2055(e)   IRC 2055(e)
Erroneous Refunds IRC 7405 and IRM 20.2.7   IRC 6404(e)(2)

Provisions Restricting and Prohibiting Interest on Excise Taxes

Subject IRC and IRM References Interest Restricted on Underpayments Interest Restricted on Overpayments
Certain Taxes on Sales and Services IRC 6416(a) and IRM 20.2.10   IRC 6416(b)
Floor Stocks Refunds—Tires and Taxable Fuel IRC 6412(a) and IRM 20.2.10   IRC 6412(a)
Gasoline Used on Farms or for Non-Highway Purposes, or by Local Transit Systems IRC 6420(a), IRC 6421, and IRM 20.2.10   IRC 6420(a), IRC 6421(a), and IRC 6421(b)
Excise Tax on Wagers Laid-Off by Taxpayer IRC 6419(a) and IRM 20.2.10   IRC 6419(b) Rebate
Erroneous Refunds IRC 7405 and IRM 20.2.7   IRC 6404(e)(2)

Provisions Restricting and Prohibiting Interest on Employment Taxes

Subject IRC and IRM References Interest Restricted on Underpayments Interest Restricted on Overpayments
Federal Insurance Contribution Act (FICA) IRC 3101, IRC 3111, and IRM 20.2.12 IRC 6205(b) IRC 6413(b)
Railroad Retirement Tax Act (RRTA) IRC 3201, IRC 3221, and IRM 20.2.12 IRC 6205(b) IRC 6413(b)
Income Tax Collected at Source IRC 3402 and IRM 20.2.12 IRC 6205(b) IRC 6413(b)
Foreign Subsidiaries of Domestic Corporations IRC 3121(l) and IRM 20.2.12 IRC 3121(l)(5)(A) IRC 3121(l)(5)(A)
Federal Unemployment Tax Credit Against Tax Imposed by IRC 3301 IRC 3302 and IRM 20.2.12   IRC 6413(d)
Erroneous Refunds IRC 7405 and IRM 20.2.7   IRC 6404(e)(2)

Exhibit 20.2.8-2 
Interest Free Period-IRC 6601(c) and IRC 6404(g) Suspension Periods

Identification of IRC 6601(c) and IRC 6404(g) Suspension Periods on CC TXMODA Transcript

TXMODA 123-45-6789----MFT>30----TX-PRD>200512---------NM-CTRL>JONE
16000-000-00000-6<DLN       BOD-CD>WI
SC-STS>48 MOD-BAL> 6,675.52      
MF-STS>12 MOD-BAL> 6,675.52 CYC>200835-------- TODAYS-DT>10-24-2008
ASED>04152009 FRZ> N-   AGREE-IND>2    
CSED>04152016 INTL>        
RSED>04152009   NAICS-CD>999999
-----------------------------POSTED RETURN INFORMATION----------------------------------
RET-RCVD-DT>04152006      
FS>4--- NUM-EXEMPT>02      
AGI> 18,930.00      
TXI> 10,730.00        
-------------------------------------RETURN TRANSACTION---------------------------------------
TC POSTED TRANS-AMOUNT CYC T DLN
150 02062006 0.00 200604 D 16000–000–00000–6
806 04152006 1,573.90 200604   WTHLDNG TAX CR POSTED W/RETURN
Employee # 0000000000--- Page 001 of 004----- Page 002  
   
TXMODA 123-45-6789---- MFT>30---- TX-PRD>200512--------- NM-CTRL>JONE  
----------------------------POSTED TRANSACTION SECTION----------  
TC POSTED TRANS-AMOUNT CYC T DLN
766 04152006 1,190.00 200604   16000-000-00000-6
768 04152006 3,441.00 200604   16000-000-00000-6
846 02132006 6,204.90 200605   16000-000-00000-6
424R 05162008 0.00 200821   19000-000-00000-8
420 05222008 0.00 200822   19000-000-00000-8
971 07292008 0.00 200833   28000-000-00000-8----971-CD>043
971 05292008 0.00 200834 -------------MEMO-MONEY-AMT> 5,875.00 86000-000-00000-8----971-CD>064

Note:

IRC 6404(g) suspension identifier

767 04152006 1,190.00 200835   49000-000-00000-8----CR-ID-NUM>336
765 04152006 3,441.00 200835   49000-000-00000-8
Employee # 0000000000---Page 002 of 004-----Page 003  
   
TXMODA 123-45-6789----MFT>30----TX-PRD>200512--------- NM-CTRL>JONE  
300 09082008 1,244.00 200835   49000-000-00000-8
      870–DT>07282008 DISP-CD>03   CSED>20180908
421 09082008 0.00 200835   49000-000-00000-8
336 09082008 800.52 200835   49000-000-00000-8
-------------------------------------NOTICE HISTORY SECTION-----------------------------------  
NOTICE   AMOUNT CYC S DO
CP022   6,675.52 200835 M SUPPRESS-CD>0
DAS   6,675.52 200835 M  
   
Employee # 0000000000---Page 003 of 004-----Page 004  

CC TXMODA will show the waiver date as 870-DT with respect to the tax adjustment when applicable.

Effect of Waiver Plus 30 to 23C Date Interest Free Period on Underpayment Interest Computation as Shown on CC FTPIN Transcript—2nd Page DINCOMP

DINCOMP -------------------------------------123–45–6789---30-----200512----200829
TOTAL LIABILITY AT RDD     5,875.00   COMPUTE TO DATE 10242008
CODE TRANS-AMOUNT FROM DT TO DT PRINCIPAL INT FACTOR INTEREST
7% 0.00 03312006   0.00   0.00
1500 0.00 04152006   0.00   0.00
3000 1,244.00 04152006   1,244.00   0.00
766B 1,190.00- 04152006   54.00   0.00
7670 1,190.00 04152006   1,244.00   0.00
7680 0.00 04152006   1,244.00   0.00
806B 1,573.90 04152006   329.90-   0.00
9460 6,204.90 04152006 06302006 5,875.00 .01468 86.25
8% 0.00 06302006 09302006 5,961.25 .02036 121.41
8% 0.00 09302006 12312006 6,082.66 .02036 123.88
8% 0.00 12312006 03312007 6,206.54 .01991 123.63
8% 0.00 03312007 06302007 6,330.17 .02014 127.51
8% 0.00 06302007 09302007 6,457.68 .02036 131.52
8% 0.00 09302007 10152007 6,589.20 .00329 21.70
971S 6,610.90- 10152007   0.00   0.00
7% 0.00 12312007   0.00   0.00
6% 0.00 03312008   0.00   0.00
972S 6,610.90 06192008 06302008 6,610.90 .00180 11.93
5% 0.00 06302008 08272008
6,622.83 .00795 52.69
9990 6,675.52- 08272008   0.00   0.00
3330 6,675.52 09082008   0.00   0.00
             
----------------------------------------------------------TOTAL INTEREST-----------------800.52

Note:

TC 971S and TC 972S on this module are indicators that interest is suspended then resumed for a period of time when interest is systemically computed. In the above instance, interest is suspended for purposes of IRC 6404(g).


As of 08272008—(Waiver Plus 30 Days)—Debit Interest does not accrue on the TC 300 amount plus accruals (9990 – $6,675.52-).


As of 09082008—(23C date)—Debit Interest resumes (3330 - $6,675.52).

Exhibit 20.2.8-3 
Input Screen of Non-Restricting TC 340

-------------------------------------------------------------------------------Input Screen of Non-Restricting TC 340-------------------------------------------------------------------------------

ADJ54 xxx-xx-xxxxMFT>30PLAN>000TX-PRD>xxxx12NM-CTRL>NCNC
SEQ-NUM>001---------------------------BLK>15--------CORRESP-DT>--------------------------- INT-CMPTN-DT>
CASE-STS-CD>C-------IRS-RCVD-DT>----------------------CTRL-CAT>-------------2%-INT-DT>
ACTIVITY>COMBATZONE-------5330-PYE-DT>--------------------TCB-DT>----------------CR-INT-TO-DT
RET-PROC-DT>---------------------5330-RVRSN-DT>-----------------------OVERRIDE-CD>--------RFSCDT>
DB-INT-TO-DT>03182012-----------------------------COMP-INT-AMT>23,456.89------------------------------------------OTN>
DATA-REF-1>------------REF-CHG-1>----------------------------DATA-REF-2>----------------REF-CHG-2>
N-PER>----------------N-AMT>-----------------------------------N-BEG>-----------------------N-END>---------------------------N-MFT>
***********************************************TRANSACTION CODES********************************************************
TC>-------AMT>---------------------------------TC>---------AMT>----------------------------------TC>-------AMT>
TC>------AMT>----------------------------------TC>---------AMT>
************************************************************************************************************************************
SRCE-CD>1---RSN-CDS>-----------------------------------------RCA-IND>--------MTH-ERR-CDS>---------------------FLC>
HOLD-CD>0---PRT-CD>-------PSTNG-DLAY-CD>----------CP-NTC-SUPP-IND>---------AMD-CLMS-DT>
ACK-LTR?>N----TRANS-REG-IND>--------DMF-AG>-----------SUB-AG>------XREF-TIN>
******************* ITEM-REF-CDS/ABST-CDS/CR-REF-CDS/FUTA-STATE-CD/DRI-CD *****************************
CD>-------AMT>------------------------------CD>------AMT>-----------------------------CD>-------AMT>
CD>-------AMT>------------------------------CD>------AMT>-----------------------------CD>-------AMT>
CD>-------AMT>------------------------------
***********************************************************************************************************************************
CIS-IND>---------SOURCE-DOC-ATTACHED?>Y REMARKS>SD ADJUST INT & PNLT>

Note:

Entering an amount in the "COMP-INT-AMT" field will allow interest to be systemically updated from the date entered in the "DB-INT-TO-DT" field.


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