- 20.2.13.1 Tax Motivated Transactions Overview
- 20.2.13.2 Processing
- 20.2.13.3 Negligence and/or Fraud Penalty
- 20.2.13.4 870 Waiver Date Processing
- 20.2.13.5 Partial Payment Allocation
- 20.2.13.6 TMT Interest Calculation—Example
- Exhibit 20.2.13-1 TC 340 Computation – TMT and Normal Interest
-
IRC section 6621(c) was repealed for returns with due dates (without regard to extensions) after December 31, 1989. IRC section 6621(c) imposed an interest rate of 120% of the rate determined in IRC section 6621, for interest accruing after December 31, 1984, on substantial underpayments attributable to Tax Motivated Transactions (TMT).
-
Many TMT cases are still active and/or still in collection status, and TMT rates continue to apply to these balances.
-
For returns with due dates before January 1, 1990, without regard to extensions, Section 6621(c) requires that tax assessments based on TMT are subject to an interest rate of 120% of the rate determined in IRC section 6621(a).
-
Generally, 120% interest is computed on the underpayment from the later of the return due date (RDD) or December 31, 1984.
If the date of the assessment is: Then Prior to December 31, 1984 1. Compute interest at the applicable underpayment rate, on the tax motivated principal amount, to December 31, 1984.
2. Compute 120% interest on the tax motivated principal PLUS the total compounded interest from step 1, from December 31, 1984.After December 31, 1984 Compute 120% on the tax motivated principal amount from the RDD (taking into consideration Revenue Ruling 88–98). -
See Exhibits 20.2.14 –7 for 120% interest charts.
-
Special conditions which apply to the processing of 120% interest cases include:
-
the assessments are generally made only by Examination and Criminal Investigation.
-
the 120% interest ONLY applies to a TMT assessment over $1,000.
Note:
Once assessed, interest continues to accrue at the 120% rate even though the unpaid TMT tax liability drops below $1,000.
-
120% interest MUST be manually computed and input with TC 340, due to Master File limitations.
Caution:
DO NOT use the Non Restricting TC 340 by inputting an amount in the COMP-INT-AMT> field with this TC 340 transaction.
-
-
Reference Numbers (Ref. No.) are used to identify the portion of the total tax assessment and associated interest accruals related to TMT. Ref. No. 221 and 222 post to Master File and are displayed on IDRS and transcripts.
-
Amounts for Ref. No. 221 and 222 must be manually computed, appropriately adjusted (positive or negative) and input whenever there is an assessment or abatement of either the TMT tax amount or TMT interest amount.
-
Input Ref. No. 221 with TC 29X/30X for a significant tax amount to identify the portion of that total tax assessment related to TMT.
-
Ref. No. 221 should reflect the TMT tax for the specific tax adjustment it accompanies.
-
The total amount of TMT tax can be determined by totalling all of the TC 221 amounts on the module.
-
Interest on the Ref. No. 221 amount is computed at 120% of the applicable underpayment interest rate.
-
Ref. No. 221 posts to Master File and displays the literal "TX–MOTV–TRANS" .
Note:
As procedures have varied in the use of this transaction code, it may be necessary to request previous adjustments to determine the correct amount of TMT tax.
-
-
Input Ref. No. 222 with TC 340 to identify the portion of the total interest assessment related to TMT.
-
Interest accruals on the Ref. No. 222 amount must be manually computed.
-
Ref. No. 222 posts to Master File and displays the literal "TX–MOTV–INT" .
-
Additional Ref. No. 222 must be input to identify additional accruals of tax motivated interest until fully paid.
-
Include in the Ref. No. 222 the TMT interest associated with that adjustment up to the current adjustment date
-
The Ref. No. 222 amount does not have to match the TC 340 amount being input.
-
The total TMT interest on the module will be the sum of all Ref. Codes 222.
Note:
As procedures have varied in the use of this transaction code, it may be necessary to request previous adjustments to determine the correct amount of TMT interest.
-
-
If Ref. No. 221 and 222 were previously omitted or incorrect, update the module by inputting the Ref. No. and appropriate amounts. Input these Ref. Nos. with TC 290/300 for .00. Include an explanation with the source document.
-
The 120% rate is used to compute interest on a tax motivated underpayment of tax due to negligence or fraud and is also used to compute the 50% interest portion of the negligence or fraud penalty. IRC section 6653(a)(1)(B) and (b)(1)(B).
-
Use the TMT interest rate to compute the 50% interest portion of fraud and negligence penalties associated with a TMT underpayment.
-
After the penalties are assessed, normal interest rates apply to the interest accruals on the penalty amounts.
Note:
Interest on the tax motivated underpayment continues to accrue at 120%.
-
-
TMT interest is computed on all TMT tax assessments as of December 31, 1984; however, not all TMT tax assessments are subject to Deficiency Procedures per IRC section 6211.
-
Per PL 97–248, "Tax Equity and Fiscal Responsibility Act of 1982" (TEFRA), TMT assessments made under the provisions of IRC section 6222 are not subject to Deficiency procedures. A Form 870 Agreement is not obtained for these tax assessments (known as "TEFRA" assessments).
Note:
ALL penalties are subject to deficiency procedures. A Form 870 Agreement may be obtained separately from the TEFRA tax assessment. The 870–Waiver period applies to the penalties (see Chapter 8.7).
-
The total assessment may include TMT items that are not TEFRA related, TEFRA related items, and/or penalties. TEFRA related items can be identified in the Administrative file or, after assessment, by the DLN associated with the DOC Code 47 adjustment. The following blocking series, located in the DLN, identifies TEFRA assessments:
-
080–090
-
180–199
-
680–699
-
750–769
-
780–789
-
980–999
-
-
Use the following chart to determine if the 870–Waiver period may be applicable:
If assessment is: Then 870–Waiver may apply: TEFRA tax, only NO Non-TEFRA tax, only YES Penalties, only YES TEFRA tax &
Non-TEFRA taxNO,
YESTEFRA tax &
penaltyNO,
YESNon-TEFRA tax &
penaltiesYES
YESTEFRA tax,
Non-TEFRA tax &
penaltyNO
YES
YES
-
Partial payments must first be applied against any underpayments that are NOT TMT on cases involving TMT underpayments. Reg. sec. 301.6621–2T provides that a taxpayer cannot make a partial payment that applies only to the TMT underpayment. Apply undesignated payments in the following order:
-
non-TMT tax,
-
TMT tax,
-
any penalties,
-
non-TMT interest,
-
TMT interest
Note:
For interest computation purposes only, amounts previously used to pay assessed interest may at a later date be used to pay an additional tax assessment. This has the effect of reducing the amount of interest charged on subsequent adjustment(s) in most instances. However, when a normal assessment follows a TMT assessment, the interest charges will increase after reallocation.
Exception:
Payments are reallocated from interest to tax for interest prior to December 31, 1983.
-
-
See Exhibit 20.2.14–1, "TC 340 Computation–TMT and Normal Interest" , which shows how interest is computed on a tax module when the total assessment includes:
-
TMT tax
-
Non-TMT Tax
-
Substantial understatement penalty (TC 240 Ref. #681)
-
-
A Form 870 Agreement was signed December 13, 1989. The taxpayer wants an explanation of the interest charges, computed to the date of payment, July 2, 1990. The taxpayer also requested a payoff amount.
-
Analyze the transcript of the tax module to determine:
Determination needed Action required What portion of the total tax assessment is TMT? Reference Number 221 shows that $7,260. of the total assessment is tax motivated. TMT interest will need to be computed on this amount. Interest will accrue at the normal rate on the remaining $1,826. Is the TMT underpayment TEFRA related? The blocking series in the DLN of the Doc Code 47 adjustment shows that the TMT tax amount is NOT TEFRA related. Therefore, since an 870 date is present, the entire liability would be subject to the 870 waiver period. Is the start date for debit interest prior to December 31, 1984? The start date IS PRIOR to December 31, 1984. TMT interest accruals prior to December 31, 1984 are computed at the normal underpayment rate. Is there an 870–Waiver period? There is more than a 30 day period between the Form 870 date and the 23C date of the assessment. The 870 Waiver period will apply to the total tax underpayment penalty, and interest. What is the start date of penalty interest? Per IRC section 6601(e)(2)(B), interest will accrue on a Substantial Understatement Penalty (IRC section 6661) as of July 18, 1984 with respect to a penalty assessment after July 18, 1984 (see Chapter 2.4).
-
Interest is computed at the normal underpayment rate on the non-TMT tax and penalty assessment from the RDD until 30 days after the 870 date. Suspended until the date of the TC 300 assessment, interest continues to accrue on the principal plus interest accruals (compounded to 30 days after the 870 date) from the 23C date of the TC 300 assessment until paid.
Figure 20.2.13-1
-
The following figure illustrates an example of TMT interest computation.
Figure 20.2.13-2
-
Determine the remaining balance as of the payment date. Subtract from the payment, tax liabilities, penalty liability, and interest liabilities. The total underpayment as of 070290 is $2,147.33.
($21,277.84) — Payment 1,826.00 — non-TMT tax 7,260.00 — TMT tax 1,452.00 — Substantial understatement penalty 3,173.04 — Normal interest non-TMT tax & penalty 1,596.17 — Normal interest/TMT tax 8,104.34 — TMT interest $2,133.77 — Module Balance as of July 2, 1990 -
Because all of the non-TMT liabilities have been paid, the remaining balance is unpaid TMT interest. Using CC COMPAP , compute TMT interest on the remaining balance from July 2, 1990 to the date requested by the taxpayer.