Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 20. Penalty and Interest

Chapter 2. Interest

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

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

20.2.10.1  (11-18-2008)
Interest on Estate Tax Returns

  1. Estate tax may be extended or deferred and paid in installments as provided in IRC section 6166 with interest assessed at a reduced rate. These tax modules are identified by a Taxpayer Identification Number (TIN) ending in "V" (valid TIN) or "W" (invalid TIN) and MFT 52 TXPD 000000 with a Notice Status of 14. Instructions for determining the portion of estate tax that may be subject to the reduced rate are found in IRM 4.25.2.1.5, Campus Procedures for Estate Tax (rev. 05/01/2007).

  2. Interest on a portion of the Estate tax is charged at 2% for decedents whose date of death is after December 31, 1997.

  3. Interest on the amount that exceeds the 2% portion (as outlined in IRC section 6601(i)(2)) shall be paid at 45% of the normal interest rate as found in IRC section 6621.

20.2.10.1.1  (11-18-2008)
Installment Payments on Form 706 Estate Tax Return

  1. If all or a portion of an assessment (deferred amount) is paid in installments, compute and assess interest as shown below.

    1. Interest on the deferred amount that is not past due is computed from the return due date (excluding extensions of time to file) to the last prior installment due date.

    2. Interest on the deferred amount that is past due is computed from the return due date (excluding extensions of time to file) to the date of payment using the normal interest rate as provided by IRC section 6621.

    3. Interest on the non-deferred amount is computed from the return due date (excluding extensions of time to file) to the date of payment using the normal interest rate.

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

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

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

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

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

    2. Compute interest for the period of the extension of time to pay an installment under IRC section 6161(a)(2) at the rate of 2%, on the 2% portion and the remainder at 45% of the normal interest rate, from the due date of the installment to the date of payment.

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

    • The 2% rate as per IRC section 6601(j) is used to determine the amount of interest that should have been paid in each annual interest payment.

    • Interest on any underpayment of interest accrues at the prevailing rate under IRC section 6601(a) from the date the interest should have been paid under IRC section 6166(f)(1) if the return had shown the correct tax liability. See Rev. Rul. 89-32.

    Note:

    The 2% rate was previously 4% for the estates of decedents who died before January 1, 1998. In addition, executors of estates of decedents who died before January 1, 1998, could have elected to use the new 2% rate for installments due after the date of the election. The election had to be made prior to January 1, 1999. See Rev. Proc. 98-15.

  5. Refer to IRM 4.25.2, Campus Procedures for Estate Tax, for more information.

20.2.10.1.2  (11-18-2008)
Credits Against Estate Tax

  1. Death taxes paid to any state, the District of Columbia, or a foreign country, are allowed as a credit against Federal Estate Tax owed. See IRC section 2011 and 2014.

  2. Income taxes paid to a foreign country are allowed as a credit against Federal Income Tax owed.

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

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

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

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

  5. IRC section 2011(f) provides that IRC section 2011 shall not apply to the estates of decedents dying after December 31, 2004. See IRC section 2058 which allows for a deduction for state death taxes for estates of decedents dying after December 31, 2004.

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

  7. Interest is computed based on the tax adjustment information shown on Form 1366, Tax Analysis Worksheet for Overassessment of Estate Tax Involving Restricted Interest.

20.2.10.1.3  (11-18-2008)
Time Frame for Claims

  1. The credit allowed under IRC section 2011 must be claimed within 4 years after the filing of the Estate Tax Return, except if:

    1. A timely petition to Tax Court was filed, then within the 4-year period, or before the expiration of 60 days after the date the decision of the Tax Court becomes final, or

    2. Under IRC section 6161 or 6166, an extension of time has been granted for payment of the tax shown on the return, or of a deficiency, then within 4 years of the period of extension, or

    3. A claim for refund or credit of an overpayment has been filed within the time prescribed in IRC section 6511, then the 4-year period or before the expiration of 60 days from the date of mailing of a certified/registered notice of disallowance of the claim, or before the expiration of 60 days after a decision by any court of competent jurisdiction becomes final with respect to a timely suit instituted upon such claim, whichever is later.

  2. The credit allowed under IRC section 2014 must be claimed within 4 years after the filing of the Estate Tax Return, except if:

    1. A timely petition to Tax Court was filed, then within the 4-year period or before the expiration of 60 days after the decision of the Tax Court becomes final, or

    2. Under IRC section 6161, an extension of time has been granted for payment of the tax shown on the return, or of a deficiency, then within 4 years of the period of the extension.

  3. If the claim is timely filed, allow any refund of overpaid Estate Tax based on the credit for taxes actually paid within the 4-year period, but do NOT allow interest on the refund.

20.2.10.1.4  (11-18-2008)
Recovery of Taxes Claimed as a Credit

  1. If the executor or other person representing an estate recovers any state or foreign death tax claimed as a credit, they must notify the Service within 30 days of the receipt of a refund, pursuant to Treasury Regulation 20.2016–1. The Federal Estate Tax will be redetermined; and (without regard to the statute of limitations provided in IRC section 6501) the amount of the redetermined Federal Estate Tax is due upon notice and demand.

    If Then
    The redetermined deficiency is the result of recovery of any part of a state (or District of Columbia) death tax claimed as a credit. Compute debit interest under the regular rules of IRC section 6601.
    The redetermined deficiency is the result of recovery of any foreign death tax claimed as a credit. Compute debit interest
    FROM:
    The date the executor of the estate (or another person) received the refund from the foreign government. See IRC section 2016.
    TO:
    The date of payment of the tax, or if the deficiency is satisfied by credit, to the date the overpayment is applied against the liability.
    THEN:
    To the interest so computed is added an amount equal to any interest paid on the refund by the foreign government. The sum of the two amounts will be the interest assessment. See Rev. Proc. 60-17 Sect. 12.05.

    Note:

    Internal Revenue Code section 2016 applies only to IRC section 2014 for decedents dying and generation-skipping transfers after December 31, 2004.

20.2.10.1.5  (11-18-2008)
Combination Adjustments

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

  2. Using Columns C and D, if Form 1366 shows a deficiency in one column and an overassessment in the other, deduct the lesser amount from the greater to determine the net result.

    If the net result is Then
    A deficiency in Column C Compute debit interest under the regular rules of IRC section 6601.
    A deficiency in Column D that results from a recovery of an amount claimed and paid as foreign death taxes Compute debit interest
    FROM:
    The date the executor of the estate (or another person) received the refund from the foreign government. See IRC section 2016.
    TO:
    The date of payment of the tax, or if the deficiency is satisfied by a credit, to the date the overpayment is applied against the liability.
    THEN:
    To the interest so computed is added an amount equal to any interest paid on the refund by the foreign government. The sum of the two amounts will be the interest assessment. See Rev. Proc. 60-17 Sect. 12.06.
    A deficiency in Column D that results from the recovery of an amount claimed and paid as state (or District of Columbia) death taxes Compute debit interest under the regular rules of IRC section 6601. (interest is NOT restricted on this deficiency).
    An overpayment in Column C Compute credit interest under the regular rules of IRC section 6611(b).
    An overpayment in Column D Do not allow credit interest. See Rev. Proc. 60-17 Sect. 12.03.

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

    • If the amount of the credit changes, prepare another Form 1366 showing the adjustments in each column, as corrected. The amount in Column A. should be identical to the amount on the original Form 1366.

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

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

20.2.10.2  (11-18-2008)
Foreign Tax Credit

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

  2. FTC is claimed by the taxpayer on:

    • Form 1116, Foreign Tax Credit for Individual, Estate, or Trust.

    • Form 1118, Foreign Tax Credit — Corporations.

20.2.10.2.1  (11-18-2008)
Adjustments to FTC

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

    If Then
    the taxes paid differ from the amounts claimed as FTC on the taxpayer’s return the taxpayer must report the adjustment. Re-determine the tax liability for the year in which the accrued FTC was claimed.
    any part of the tax actually paid is refunded to the taxpayer by the foreign country the taxpayer must report the refund. Re-determine the tax liability for the year in which the FTC was claimed.
    the accrued taxes are not paid before the date that is 2 years after the close of the year for which the FTC was claimed the taxpayer must reverse out the FTC for the accrued but unpaid tax. Re-determine the tax liability for the year the FTC was claimed. If the foreign tax is actually paid in a later year, re-determine the tax liability again for the year to which the foreign tax relates.

20.2.10.2.2  (11-18-2008)
Interest on Adjustments to FTC

  1. For interest on adjustments to FTC:

    If Then
    the adjustment results in a reduction of the FTC previously allowed for the year in which the foreign tax accrued and a corresponding increase in the tax liability compute debit interest on the increase
    FROM:
    The date the taxpayer received the refund of foreign taxes paid.
    TO:
    The date of payment of the increase in U.S. tax, or if the deficiency is satisfied by credit, to the date the overpayment is applied.
    THEN:
    To the interest so computed is added an amount equal to any interest paid on the refund by the foreign government. The sum of the two amounts will be the interest assessment. However, the above amount is not to exceed the amount that would have been assessed under normal interest procedures found in IRC section 6601. See Treas. Reg. 1.905-4T(e).
    the FTC claimed on the return was for accrued but unpaid taxes which were abated by the foreign country or possession of the U.S. compute debit interest on the corresponding increase in tax
    From:
    The due date of the return.
    To:
    The date of payment of the tax.
    the adjustment results in an increase in the FTC previously allowed and a corresponding decrease in the tax liability. compute credit interest under the regular rules of IRC section 6611(b) and 6611(f)(2).

20.2.10.2.3  (11-18-2008)
Time Frame for Filing Claims

  1. A claim for credit or refund attributable to foreign taxes paid or accrued must be filed within 10 years from the due date of the return for the year in which the foreign taxes were actually paid or accrued.

20.2.10.2.4  (11-18-2008)
Carrybacks and Carryovers of Excess Foreign Taxes Paid

  1. Taxpayers can carry back or carry over credit for excess foreign taxes paid. If a carryback of foreign taxes paid or accrued to foreign countries or possessions of the United States results in an overpayment of tax, that overpayment is deemed not to have been made before the filing date for the taxable year in which such taxes were actually paid or accrued. See IRC section 6611(f)(2).

  2. No interest will be paid on post-OBRA (after December 31, 1993) carryback and carryover refunds if issued within 45 days of the date the claim is received by the Service. See IRC section 6611(f)(4)(b).

  3. If the erroneous application of a carryback under IRC section 904(c) or 907(f) results in a deficiency, that deficiency must be assessed at any time within one year after the expiration of the period within which a deficiency may be assessed for the year of the excess taxes described in IRC section 904(c) and 907(f). See IRC section 6501(i).
    Example:

    If Then
    Excess foreign taxes are erroneously carried back from 2007 and claimed in 2006, resulting in a deficiency for 2006 assess the deficiency within one year of the assessment statute expiration date of the 2007 tax year.

20.2.10.2.5  (11-18-2008)
Computing Interest on Excess Foreign Taxes Carried Back

  1. Manually compute overpayment interest on refunds attributable to the carryback of excess foreign taxes.

    1. The interest start date is the due date of the return for the year in which the foreign taxes were paid or accrued if the return was filed on or prior to the due date or extended due date. Interest ends on the date the carryback is refunded, minus all applicable back-off periods, (see IRM 20.2.4.7) or the date it is applied to another deficiency.

    2. No interest is allowed on carryback and carryover refunds if issued within 45 days of the date the claim is received by the Service. See IRC section 6611(f)(4)(B).

  2. The interest start date is never earlier than the due date of the return for the year in which the excess foreign taxes were generated. See IRC section 6611(f)(2).

20.2.10.3  (11-18-2008)
Excise Taxes

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

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

20.2.10.3.1  (11-18-2008)
Interest Generally Allowable

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

  2. Overpayment interest accrues from:

    • the due date of the return

    • the date the return is filed, or

    • the date the tax is paid

    whichever is later, to the date of refund or offset of the credit.

  3. Many excise tax adjustments are statutorily made without interest.

20.2.10.3.2  (11-18-2008)
Special Interest Rules

  1. Ultimate Vendor Claims. Claims by registered ultimate vendors of undyed diesel fuel and undyed kerosene (Form 720, Schedule C; Form 8849, Schedule 3) are paid with interest if the refund is not issued within 45 days of receipt (20 days for electronic claims). Interest accrues from the claim received date to the refund schedule date. See IRC section 6427(i)(4)(A).

  2. Alcohol Fuel and Biodiesel Mixture Claims. Claims for alcohol fuel and biodiesel mixture credits (Form 720, Schedule C; Form 8849, Schedule 3) follow the same rules as claims by registered ultimate vendors described in (1) above. See IRC section 6427(i)(3)(B).

  3. In the case of registered ultimate vendor claims and alcohol fuel and biodiesel mixture claims:

    If the claim is: Then:
    allowed issue a manual refund without interest no later than the 42nd day (15th day for electronic claims) after the claim received date.
    allowed but not timely processed within 45 days (20 days for electronic claims) interest must be paid from the claim received date to the refund schedule date.

  4. Telephone Excise Tax Refund (TETR) Claims. The telephone excise tax refund is a one-time payment designed to refund previously collected federal excise taxes on long-distance or bundled service. Taxpayers may claim the refund by using the standard amount based on the number of exemptions claimed or file Form 8913, Credit for Federal Telephone Excise Tax Paid to request a refund of the actual amount of federal excise taxes paid. TETR claims are only valid for tax years 200612 through 200711. Special interest rules apply and can be found in IRM 21.6.3.5.13 for IMF and in IRM 21.7.4.4.23.4 for BMF.

20.2.10.3.3  (11-18-2008)
Underpayment of "Collected" Excise Taxes

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

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

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

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

20.2.10.3.4  (11-18-2008)
Payments Related to Certain Retailers and Manufacturers Excise Taxes

  1. IRC section 6416(b) identifies certain payments as overpayments subject to credit or refund without interest (Form 720, Schedule C; Form 8849, Schedule 6): price adjustments; specified uses and resales; tax-paid articles for further manufacture; tires; return of certain installment accounts; and truck chassis, bodies, and semitrailers used for further manufacturing. These overpayments are refunded without interest.

20.2.10.3.5  (11-18-2008)
Gasoline Used in Farming by Government and Educational Organizations

  1. IRC section 6420 provides for a payment (without interest) to the ultimate purchaser of gasoline, if the gasoline is used on a farm for farming purposes and the ultimate purchaser is a governmental entity or an organization described in IRC section 501(a). Annual claims are made on Form 8849, Schedule 6. The overpayment may be refunded or taken as an income tax credit as provided for in IRC section 6420(g). Overpayment interest is not allowed on either type of credit.

20.2.10.3.6  (11-18-2008)
Fuels Not Used for Taxable Purposes

  1. IRC section 6421 provides for a payment (without interest) if gasoline is used in an off highway business use, in inter-city, local or school buses, or sold to any person for an exempt purpose. IRC section 6427 provides for a payment (without interest) if a tax has been imposed on the sale of fuel and the purchaser uses the fuel for a nontaxable purpose or resells the fuel. Claims are made on Form 720, Schedule C; Form 8849, Schedule 1. The overpayment may be refunded or taken as an income tax credit as provided for in IRC section 6420(g). Overpayment interest is not allowed on either type of credit.

20.2.10.3.7  (11-18-2008)
Laid-off Wagers

  1. IRC section 6419(b) identifies as an overpayment the tax on a wager that is laid off by the taxpayer (Form 8849, Schedule 6; Form 730, Line 5). These overpayments are refunded without interest.

20.2.10.3.8  (11-18-2008)
Vaccines

  1. IRC section 4132(b) identifies as an overpayment any tax on a vaccine that is returned to the manufacturer or destroyed (Form 720, Schedule C; Form 8849, Schedule 6). The tax shall be abated, credited or refunded without interest.

20.2.10.3.9  (11-18-2008)
Heavy Highway Vehicles

  1. IRC section 4483(d) identifies as an overpayment tax paid on the use of heavy highway vehicles when the vehicle is used for 5,000 miles or less (7,500 for agricultural vehicles) (Form 720; Form 2290, Line 5). The credit or refund of the tax is made without interest.

20.2.10.3.10  (11-18-2008)
Chemicals

  1. IRC section 4662(d) identifies as an overpayment any tax paid on a taxable chemical that is exported, used as feedstock, and, in some cases, used as fertilizer or animal feed. The credit or refund of the tax is made without interest.

  2. IRC section 4682 identifies as an overpayment any tax paid on an ozone-depleting chemical that is used as a feedstock, exported, or used as a propellant in a metered-dose inhaler (Form 720, Schedule C; Form 8849, Schedule 6). The credit or refund of the tax is made without interest.

20.2.10.3.11  (11-18-2008)
Tax on Removal of a Taxable Fuel

  1. IRC section 4081 imposes a tax on removal, entry or sale of certain types of fuel. Underpayment interest is computed from the return due date (RDD) on any second tax assessed to the account.

  2. IRC section 4081(e)provides for a refund of those taxes in certain cases. Claims for refund made under this Code section must be filed on Form 8849, Schedule 5. See IRM 21.7.8.4.5.6 for processing procedures.

    1. The credit availability date for credits allowed under IRC section 4081(e) is the due date of the return. These credits are posted to Master File as a transaction code (TC) 766 (input with the appropriate credit reference number) using the return due date and are refunded without interest.

    2. In the event any second tax is paid with subsequent payments (made after the RDD), those payments may be refundedwith interest. Because latest credits on the module are refunded first, the subsequent payments would be refunded before the IRC section 4081(e) (TC 766) credit.


More Internal Revenue Manual