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Part 20. Penalty and Interest

Chapter 2. Interest

Section 14. Netting of Overpayment and Underpayment Interest

20.2.14  Netting of Overpayment and Underpayment Interest

20.2.14.1  (10-01-2006)
Interest Netting Overview

  1. The Tax Reform Act of 1986 authorized different interest rates for underpayments and overpayments of tax. Because of the difference, it is possible that a taxpayer may be charged interest on an underpayment at a higher rate for a period in which the taxpayer was entitled to overpayment interest at a lower rate.

    Example:

    Marin Corporation EIN 66–1000100, filed Form 1120 for the tax period ending December 31, 1999 showing an overpayment of $1,654,900.00, that was refunded with interest on October 22, 2000. It is later determined that Marin Corporation owes additional tax in the amount of $595,890.00 for the same tax return. Underpayment interest is accruing at a higher rate between March 15, 2000, (the return due date) and October 13, 2000, (the date of the refund minus 9-days back-off) than was allowed on the overpayment.

  2. Internal Revenue Code section 6601(f) provides that, if any portion of a tax is satisfied by credit of an overpayment, no interest shall be charged on the portion of tax satisfied for any period during which interest would have been allowed on the overpayment if the credit had not been made.

  3. The Service will consider, within a single tax period, all increases and decreases in a taxpayer’s liabilities before applying the statutory interest rules to a tax module. Known as "within module (or annual) netting" this is accomplished by computing underpayment interest at overpayment rates during a period of time when interest on an underpayment overlaps a period of time during which interest was allowed and refunded on an overpayment.

    Example:

    In the previous example, Marin Corporation’s underpayment interest on the underpayment of $595,890.00 would accrue at the lower overpayment interest rate from March 15, 2000 to October 13, 2000 (refund date minus 9-days). Interest would then resume at the higher underpayment interest rate from October 23, 2000, until paid.

  4. Section 3301 of the IRS Restructuring and Reform Act of 1998 added IRC section 6621(d), which authorizes "net rate" interest netting between two or more tax modules.

    Note:

    While within module netting allows for interest-free periods when no credit interest was paid, net rate netting does not. In this case, because the netting is within the same module, no debit interest is charged from October 14, 2000 to October 22, 2000. However, if this refund were being netted against another tax period, debit interest would begin on October 14, 2000, and be charged at the overpayment rate during the "netting period" .

  5. Effective January 1, 1999, underpayment and overpayment interest rates are equalized for non-corporate taxpayers, therefore interest netting under 6621(d) is not applicable.

  6. The Service purchased the Automated Computation Tool (ACT) InterestNet by Decision Modeling Inc. specifically designed to perform net rate interest netting computations. In addition to Command Code COMPA, the Service supports only the ACT InterestNet software for calculating interest . See IRM 20.2.6 for Methods of Computing Interest.

20.2.14.2  (09-20-2006)
Applicable Revenue Procedures

  1. Rules that affect interest netting include:

    • Revenue Procedure 94-60 provides procedures to equalize the interest rate differential between underpayment and overpayment rates during " overlapping" periods within the same tax module.

    • Revenue Procedures 99-19 and 99-43; provide guidance for net rate interest netting between modules for interest accruing prior to October 1, 1998.

    • Revenue Procedure 2000-26 provides guidance on the application of section 6621(d) for interest netting between modules, if the overlapping period of differential interest rates begins after September 30, 1998.

    Note:

    These procedures do not apply to interest accruing after December 31, 1998 for non-corporate taxpayers (the interest rate on underpayments and overpayment is equal for such taxpayers on or after January 1, 1999). However, non-corporate taxpayers, subject to the higher 120 percent (tax motivated transaction) rate of interest under the repealed IRC section 6621(c) are entitled to annual netting consideration.

20.2.14.3  (09-20-2006)
Annual Interest Netting

  1. Revenue Procedure 94-60 explains how the Service is to equalize or "net" underpayment and overpayment interest rates for the same tax module. When "netting" interest, underpayment interest is computed at overpayment rates during periods of time when an underpayment period on a subsequent assessment overlaps a period in time where credit interest was previously allowed on a tax overpayment.

20.2.14.3.1  (09-20-2006)
Overlapping Period Defined for Annual Interest Netting

  1. The following example illustrates an overlapping underpayment/overpayment interest period:

    Example:

    A taxpayer files an amended income tax return (Form 1040X), increasing his 1995 tax liability by $500.00. The 23C date of the additional assessment is September 9, 1996. The original return was timely filed and overpaid by $100.00 based on prepaid credits. The overpayment, with interest, was refunded on July 15, 1996.

  2. Steps required to determine the overlapping interest periods for annual interest netting:

    1. Determine the underpayment interest computation period. Debit interest is owed from April 15, 1996 (RDD), to September 9, 1996, (23C date of the assessment).

    2. Determine the overpayment interest computation period on the refund. Credit interest on the refund was computed from April 15, 1996 to July 2, 1996, (refund date less 13-days).

    3. The overlapping underpayment/overpayment interest period is from April 15, 1996 to July 2, 1996. This is the time frame during which both debit and credit interest accrued during the same time period. Because no interest was allowed during the period July 3, 1996 to July 15, 1996, that period becomes an interest-free period for underpayment interest too, up to the amount of the refund.

  3. Compute "netted interest" (debit interest charged at the lower credit interest rate) on the amount of underpayment " equal" to the overpayment during the overlapping period. Netted interest is "charged" on $100 of the $500 underpayment during the overlapping interest period from April 15, 1996 to July 2, 1996. Continue the debit interest computation on the netted underpayment amount of $100 plus the netted interest of $1.50 from the July 15, 1996 refund date to the interest computation ending date.

    Note:

    The 9/13-day "back-off period " for computation of overpayment interest on the refund (see IRM 20.2.4, Overpayment Interest) is "interest-free" . No overpayment interest is allowed during that period. Therefore, no underpayment interest is charged during that period (up to the amount of the original overpayment).

  4. Compute debit interest on the amount of underpayment that exceeds the overpayment from the return due date/applicable interest start date to the interest computation ending date. Underpayment interest is charged from April 15, 1996 on the remaining $400 to the September 9, 1996 assessment date.

20.2.14.3.2  (09-20-2006)
General Netting Computation Information

  1. Although there are some differences in the way netting is performed for a single module (within module netting) and multiple modules (net rate netting), the general computation method is the same. The following steps must be taken in order to determine the netted interest amounts:

    1. Determine the overlapping interest computation period(s).

      Note:

      It may be helpful to prepare a time line reflecting the underpayment and overpayment interest computation periods to determine where the overlapping period(s) occur.

    2. Determine the overlapping amount.

    3. Determine the overlapping rates.

    4. Compute netted interest.

    5. Compute underpayment interest.

    6. Determine amounts and periods still available for netting.

  2. Using the following example, each step of the process will be discussed throughout the section.

    Example:

    Marin Corporation, EIN 66-1000100, filed Form 1120 for the tax period ending December 31, 1999 showing an overpayment of $1,654,900.00 which was refunded with the 23C date of October 22, 2000. Overpayment interest of $62,829.13 was computed to October 13, 2000, at the "high" rate on the first $10,000.00 and at the GATT rate on the remainder. It is later determined that Marin Corporation owes additional tax in the amount of $595,890.00 for the same tax return and the taxpayer is not subject to large corporate underpayment (LCU) interest. The taxpayer sent a payment of $595,890.00 on August 21, 2002. There are no interest waiver periods. Interest will be computed to September 12, 2002 the date the notice was issued.

20.2.14.3.3  (09-20-2006)
Manually Computing Interest Netting

  1. All net rate interest netting cases should be computed using the Automated Computation Tool (ACT) which is the InterestNet software developed by Decision Modeling Inc. (DMI). Within module netting is usually less complex and should be computed using the ACT software. The ACT software completes the following steps for you:

    • Single module interest positions

    • Benefits of offsetting

    • Interest rate equalization

    Caution:

    The ACT software computes net rate interest netting to the taxpayer’s best benefit by doing a day by day comparison and applying the net rate where the interest rate spread is the greatest. It is not administratively feasible to do this kind of comparison with other interest computation tools or IDRS. The ACT software should always be used for net rate interest netting.

  2. It is necessary to know how interest netting was accomplished prior to use of the ACT.

20.2.14.3.3.1  (09-20-2006)
Determining the Overlapping Period

  1. Compute a running module balance on the tax module to verify the original debit and credit interest amounts.

  2. If you are unable to determine how the interest was originally computed, the original interest computations can often be found with the adjustment source document.

  3. If a source document is unavailable, and information on an adjustment is needed to accurately compute the interest computation, all avenues must be used to locate the required documentation, such as;

    1. Ordering all applicable Document Locator Numbers (DLN's).

    2. Calling the offices/employees that may have had the case in the past, to determine if an "office file" is available.

    3. Contacting the taxpayer directly to obtain copies of any documents they may have (e.g. ACT Reports, Form 2285, etc.)

20.2.14.3.3.2  (09-20-2006)
Prepare a Time Line

  1. Prepare a time line to determine where the overlapping period(s) occur.

    1. Begin the time line with the earliest tax event, usually the return due date of the oldest tax period,

    2. Continue building the time line with each event that impacts interest (such as payments, refunds, penalty assessment, waiver periods, etc.) for that entire tax module,

    3. Indicate relevant information, such as GATT/LCU/TMT along the time line,

    4. Superimpose a similar time line for the overlapping period over the first time line,

    5. Create and superimpose additional time lines as needed to cover all the overlapping periods.

    6. Indicate overlapping periods on the time line.

    7. Identify unused and unnetted periods and amounts.

    Note:

    The time line may be prepared by hand or through the use of the drawing feature in a word processing software. See Figure 20.2.14-1 for an example of a time line based on the previous example for Marin Corporation.

  2. In the Marin Corporation example, the overlapping period is from March 15, 2000, the return due date to October 13, 2000, the last day overpayment interest was paid. For netting purposes, do not include periods when no overpayment interest was paid.

20.2.14.3.3.3  (09-20-2006)
Determine the Overlapping Amount

  1. The overlapping amount is the lesser of the running module balance for either underpayment or overpayment including interest.

  2. In the previous Marin Corporation example, the interest start date for both the overpayment and the underpayment are the same, March 15, 2000. The overpayment amount on which credit interest is allowed is $1,654,900.00. The underpayment on which debit interest is charged is $595,890.00.

  3. In this example the underpayment is the lesser amount, so the overlapping amount is $595,890.00 as of March 15, 2000.

    Figure 20.2.14-1

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    Overlapping Period Time Line

20.2.14.3.3.4  (09-20-2006)
Determine the Interest Rate during the Overlapping Period

  1. Generally, the net rate adjustment is made to the underpayment module and underpayment interest is assessed at the overpayment rate allowed on the overlapping overpayment module.

  2. Because the Service calculated interest differently when computing GATT overpayment interest prior to January 1, 1999, overpayment interest is to be recomputed in the same manner as originally allowed. To allow the taxpayer the best benefit of netting, if the entire overpayment is not used, use the GATT rate first, then the higher rate for net rate purposes. See IRM 20.2.4.9.3 for instructions on computing interest at the " GATT" rate.

  3. In the example for Marin Corporation the amount of the overpayment subject to the GATT rate exceeds the underpayment amount so the entire net rate adjustment will be computed at the GATT rate.

    Figure 20.2.14-2

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Overlapping Period Time Line

20.2.14.3.3.5  (09-20-2006)
Compute Netted Interest

  1. Using the overlapping period, amount, and rates determined above, compute underpayment interest at the lower overpayment rate.

  2. In the Marin Corporation example, GATT interest is computed on $595,890.00 from March 15, 2000 to October 13, 2000 for a total of $22,590.66. This is the netted interest amount and will be input with a TC 772.

20.2.14.3.3.6  (09-20-2006)
Compute Underpayment and Overpayment Interest

  1. At the end of the netting period, underpayment interest continues on the running module balance at the underpayment rate.

  2. In the Marin Corporation example, the module balance at the end of the netting period is the principal of $595,890.00 plus the netted interest of $22,590.66. Because normal underpayment interest processing allows an interest-free (9-day back-off) period on this module from October 14 to October 22, begin corporate underpayment interest on $618,480.66 on October 23, 2000 and compute a running module balance until the date of the notice, September 12, 2002.

20.2.14.3.4  (09-20-2006)
Using the Automated Computation Tool (ACT)

  1. The Automated Computation Tool is programmed to complete all of the above steps to correctly compute both within module and net rate interest netting once the correct data has been input for each module.

    Note:

    While the ACT can perform the interest netting computations, it is vital that the module information is correctly analyzed and entered into the program.

  2. First, enter the tax module information into the program to verify the previous interest as shown in Figure 20.2.14–3.

    Figure 20.2.14-3

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    ACT Report Update Module Screen

  3. Next, enter the current adjustment as shown in Figure 20.2.14–4.

    Figure 20.2.14-4

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    ACT Report Update Module Screen

  4. The program will compute the netted and underpayment interest and provide a Report 490 Activity Summary (Figure 20.2.14–5) which is to be sent to the taxpayer. The report must also be used as documentation for the interest adjustment and be attached to the case to be filed.

    Figure 20.2.14-5

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    ACT Report 490 Activity Summary

  5. The Report 490 Figure 20.2.14–5 shows that the account needs the following interest adjustments made:

    • Netted interest (TC 772) in the amount of $22,590.66, and

    • Underpayment interest (TC 340) in the amount of $88,326.66.

      Note:

      Occasionally, there is a rounding difference of one cent shown on the report. This difference should be disregarded.

20.2.14.4  (09-20-2006)
Within Module Interest Netting under Revenue Procedure 94–60

  1. Revenue Procedure 94-60 describes procedures for the Service to calculate interest on an underpayment when the taxpayer has previously received a refund of an overpayment with interest for the same tax period (within module/annual interest netting).

  2. Overlapping periods are defined as occurring when a taxpayer owes underpayment interest on an underpayment for the same period of time that overpayment interest was previously paid on an excessive refund.

  3. Interest netting is unnecessary for interest periods prior to January 1, 1987, as underpayment and overpayment interest rates were equal prior to that date. Interest netting also does not apply to non-corporate taxpayers only for interest periods after January 1, 1999 as interest rates were equalized after that date.

    Note:

    The 120 percent interest rates applicable to tax motivated transactions (TMT) are subject to netting procedures.

20.2.14.4.1  (09-20-2006)
Master File Computation of Within Module Netting

  1. Effective January 1993, Master File programming was updated to accomplish netting within a single module where refunds were issued with interest. Master File posts the netted interest with a TC 777 which carries a "999" in the Julian Date field of the DLN as shown in Figure 20.2.14-6.

    Figure 20.2.14-6

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Computer Generated Within Module (Annual) Netting

  2. If multiple refunds are involved, beginning with the earliest refund, Master File separately calculates and posts netted interest charges attributable to each refund. Each netted interest charge posts with the 23C date of the related refund. Master File also calculates the netted interest and the underpayment interest amounts on quick and prompt assessments (Form 2859) on modules where interest is not restricted. See IRM 20.2.14.4.4, Within Module Netting for Quick and Prompt Assessments processing instructions.

  3. Master File calculates the netted interest amount by:

    1. Recomputing the correct refund amount (the amount the taxpayer should have received based upon consideration of the subsequent assessment), if any.

    2. Recomputing the correct overpayment interest amount (the amount of interest that the taxpayer should have received on the corrected refund). Master File uses the same computation method for the overpayment interest as originally used (see IRM 20.2.4 Overpayment Interest).

    3. Calculating the netted interest by finding the difference between the amounts of the interest paid on the refunded overpayment and the recomputed overpayment interest on the corrected refund.

  4. Underpayment interest (TC 336, TC 196) is then computed on:

    • The amount of the subsequent assessment, in excess of the refunded overpayment, FROM the due date of the liability to the appropriate interest TO date, and

    • The netted underpayment amount and the netted interest FROM the 23C date of the refund to the appropriate interest TO date.

20.2.14.4.2  (09-20-2006)
Master File Limitations in Computing Within Module Interest Netting

  1. Master File does not "net" interest on any tax module that contains a restricted interest transaction. A restricted interest transaction can be identified by:

    • Transaction Codes (TC) 340, 341, 772, or TC 770 input with Document Code 47 or 54.

    • The "-I" Freeze Code indicating that underpayment interest is restricted.

      Caution:

      When a tax module is restored from retention register, the "-I" Freeze is set. The interest computation is systemically restricted by Master File. A corresponding TC 34X may or may not be present.

  2. The process of applying within module interest netting results in an underpayment interest charge. Interest rules that pertain to underpayment interest also apply to netted interest. Master File may not be able to correctly compute netted interest in modules containing interest-free periods associated with refunds, IRC section 6601(c), waivers, etc. (see IRM 20.2.5, Interest on Underpayments) when an interest-free period(s) falls within an overlapping underpayment/overpayment interest period. Examples include, but are not limited to:

    • One or more interest-free periods due to section 6601(c) waiver periods.

    • Two or more refunds (one issued without interest and one or more issued with interest) and the underpayment interest period on the subsequent assessment overlaps both types of refunds.

  3. Underpayment interest periods which are "interest-free " by law are also interest-free for netted interest computations. When computing netted interest with an underpayment interest-free period within the FROM and TO dates, suspend netting computations during that interest-free period.

  4. Underpayment interest must be restricted with TC 34X if it is determined that Master File programming is unable to calculate netted interest.

20.2.14.4.3  (09-20-2006)
Manually Computing Within Module Interest Netting

  1. Master File is currently programmed to compute within module netting. Do not restrict a tax module for within module netting unless there is another reason the module must be restricted or it is determined that Master File cannot correctly compute interest netting on that module.

  2. The following example illustrates an overlapping underpayment and overpayment interest period:

    Example:

    Mary James timely files a Form 1040 for the tax period ending December 31, 1997 showing an overpayment in the amount of $600.00 which was refunded with $9.28 interest on July 17, 1998. On February 22, 2000, the Service receives an amended income tax return (Form 1040X), increasing her 1997 tax liability by $800.00 with a payment for $800.00. The amended return is processed and the assessment posts to Master File on April 2, 2000.

  3. Using the Automated Computation Tool (ACT), compute a running module balance including the 13-day back-off period on the refund. The software is programmed to compute interest netting. See Figure 20.2.14-7 for the ACT input screen.

    Figure 20.2.14-7

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    ACT Report Update Module Screen

  4. The Report 490 Activity Summary shows that underpayment interest in the amount of $114.15 and netted interest in the amount of $9.28 must be assessed. See Figure 20.2.14-8.

    Figure 20.2.14-8

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    ACT Report 490 Activity Summary

  5. If the Automated Computation Tool is not used, take the following steps to determine the overlapping interest periods for within module interest netting:

    1. Determine the underpayment interest computation period. Underpayment interest is charged from April 15, 1998 (RDD), to February 22, 2000 (date of the payment for $800.00). Underpayment interest will continue to the date of the computation April 2, 2000.

    2. Determine the overpayment interest computation period on the refund. Overpayment interest on the refund was computed from April 15, 1998 to July 4, 1998 (refund date less 13-days).

    3. Prepare a time line reflecting the underpayment and overpayment interest computation periods to determine where the overlapping period(s) occur. When preparing a time line, the ending date for the overpayment interest computation period must be the date to which the overpayment interest was actually computed (i.e., the overpayment interest back-off date). The overlapping underpayment/overpayment interest period is from April 15, 1998 to July 4, 1998. This is the time frame during which both underpayment and overpayment interest accrued.

    4. Compute netted interest (underpayment interest charged at the lower overpayment interest rate) on the amount of underpayment equal to the overpayment during the overlapping period. Netted interest is computed on $600.00 of the $800.00 underpayment during the overlapping interest period from April 15, 1998 to July 4, 1998. Netted interest on the $600.00 amount totals $9.28.

    5. Continue the underpayment interest computation on the netted underpayment amount of $600.00 plus the netted interest of $9.28 from the July 17, 1998 refund date of the overpayment to the interest computation ending date. For purpose of this example, use the posting date of April 2, 2000.

      Note:

      The 9/13 day back-off period for computation of overpayment interest on a generated refund (see IRM 20.2.4 Overpayment Interest) is interest-free. No overpayment interest is allowed during that period so no underpayment interest is assessed during that period for within module netting.

    6. Compute underpayment interest on the amount of underpayment that exceeds the overpayment from the return due date/applicable interest start date to the interest computation ending date. In this example, underpayment interest is charged from April 15, 1998 on the remaining $200.00 to April 2, 2000.

    7. Manually calculated netted interest should mirror Master File computations.

    8. Begin the netting calculation with the earliest refund and continue through the latest refund when processing subsequent assessments with multiple prior refunds.

  6. Input a separate TC 772 for each netted interest amount for each overpayment that was netted.

    Exception:

    When processing erroneous refunds with TC 844 (on a module where the interest is not restricted) do not input TC 772. Master File programming will generate a TC 777 for the " netted interest" amount.

  7. Input the underpayment interest with a TC 340. DO NOT include the netted interest amount(s) with the TC 340 amount.

20.2.14.4.4  (09-20-2006)
Within Module Netting for Quick and Prompt Assessments

  1. Special procedures apply for netted interest related to quick and prompt assessments on Form 2859.

  2. If the interest is not restricted for another reason, take the following steps:

    1. Calculate the netted interest as shown in 20.2.14.4.3 above, and

    2. Enter as TC 190 the sum of the netted interest plus the underpayment interest, and

    3. Indicate in the "Remarks" area of Form 2859 (Request for Quick or Prompt Assessment) the separate components of the interest.

      Note:

      Master File will generate TC 777 (which should match the netted interest amount computed and entered on Form 2859) to adjust the TC 190 for the included amount of netted interest.

  3. If the interest is restricted, compute netted interest as shown above, input TC 772 for each netted interest amount, and input TC 340 for the underpayment interest.

20.2.14.5  (09-20-2006)
Manual Annual Netting Procedures

  1. Effective January 1993, netting procedures apply to all modules which contain refunds (with interest) with effective dates January 1, 1987, and subsequent.

    Reminder:

    Master File is able to perform interest netting on unrestricted modules. If a module is not or does not require restriction, DO NOT restrict the interest with TC 34X, unless there are specific issues on that module that would prevent Master File from netting.

  2. Manually calculate "netted interest" to mirror Master File computations except in netting situations where debit interest rules involving interest-free periods override credit interest rules (see Exhibit 20.2.14-2).

  3. Refer to the following chart for general manual netting procedures, when the overlapping period involves only one prior refund.

    If credit interest was Is there an overlapping interest period Then
    ALLOWED NO Annual netting does not apply, charge debit interest (see Chapter 5, Interest on Underpayments).
    NOT ALLOWED NO Annual netting does not apply, charge debit interest (see Chapter 5, Interest on Underpayments).
    ALLOWED YES Annual netting DOES apply:

    1. Charge netted interest, at the credit rate on the liability (up to the amount of the refunded overpayment) during the overlapping debit/credit interest periods(s).

    2. Charge interest at the underpayment rate on the liability in excess of the refunded overpayment from the appropriate start date to the interest ending date, and

    3. Charge debit interest on the netted underpayment and netted interest amounts from the 23C date of the refund (see 20.2.14.3.1, Determining the Overlapping Period, defined for Annual Interest Netting).

  4. Begin the netting calculation with the earliest refund and continue through the latest refund when processing subsequent assessments with multiple prior refunds.

  5. Input the "netted interest" amount with a TC 772 for overpayment(s) that were netted.

    Exception:

    When processing erroneous refunds with TC 844 (on a module where the interest is not restricted) do not input TC 772. Master File programming will generate a TC 777 for the "netted interest" amount.

  6. Input the underpayment interest with a TC 340. DO NOT include the netted interest TC 772 amount(s) with the TC 340 amount.

20.2.14.5.1  (09-20-2006)
Annual Interest Netting on Subsequent Assessments Involving Tax Motivated Transactions (TMT)

  1. When making an annual interest netting adjustment due to a subsequent assessment involving TMT interest:

    1. During the overlapping period, interest on the tax motivated transaction is charged at the same credit interest rate that was allowed on the overpayment.

    2. The amount of tax subject to the annual netting adjustment is limited to the amount of overpayment on which interest was allowed.

  2. The 50 percent interest component of a negligence or fraud penalty (asserted against tax attributable to a tax motivated transaction), is computed at the 120 percent interest rate. After computing the second component to arrive at the total penalty amount due, interest on the total penalty amount is computed at the underpayment rate.

  3. Use the following chart to determine the portion of the total assessment that would be subject to interest netting procedures.

    If total assessment is Then during the overlapping period
    Non-TMT tax Up to the amount of overpayment, charge debit interest at the same credit rate as allowed on the overpayment.
    TMT tax If any unnetted overpayment remains, charge debit interest at the same credit rate as allowed on the overpayment.

    Note:

    Apply annual netting procedures first to interest on the non-TMT tax adjustment.

20.2.14.5.2  (09-20-2006)
Erroneously Computed Credit Interest

  1. When refiguring a refund based on a subsequent assessment and it is determined that credit interest was originally overpaid or underpaid, the following procedures would apply:

    If credit interest was originally And the Statute for Then
    OVERPAID recovery is OPEN Implement erroneous refund procedures.
    OVERPAID recovery is CLOSED DO NOT implement erroneous refund procedures.
    UNDERPAID refund is OPEN Reduce the debit interest on the subsequent assessment by the amount of credit interest that was underpaid.
    UNDERPAID refund is CLOSED DO NOT reduce the debit interest on the subsequent assessment by the amount of credit interest that was underpaid.

20.2.14.6  (09-20-2006)
Net Rate Interest Netting

  1. Net Rate Interest Netting is defined in the Internal Revenue Code 6621(d) as follows: "Elimination of interest on overlapping periods of tax, overpayments and underpayments. To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period."

20.2.14.6.1  (09-20-2006)
Net Rate Interest Netting Post-Enactment Interest

  1. Code section 6621(d), added by the IRS Restructuring and Reform Act of 1998 and modified by the Tax and Trade Relief Extension Act of 1998, provides for a net interest rate of zero to the extent of overlapping tax underpayments and tax overpayments. While generally applying to interest accruing on or after October 1, 1998, section 6621(d) may apply to interest before that date if some conditions are satisfied. See IRM 20.2.14.6.1.2.

    Note:

    The reference in the provision that the "net rate of interest shall be zero" does not mean the IRS will not charge or allow interest. It means that interest allowed or allowable on the overpayment and interest paid or payable on the underpayment during the overlapping interest period will be equalized so that they net to zero. During an overlapping interest period(s) that occur between one or more tax periods, underpayment interest may be charged at the overpayment rate or overpayment interest may be allowed at the underpayment/debit rate. To implement the provision, the Service will use an interest computation method to "equalize/eliminate " the interest differential. This equalization procedure is referred to as "net rate" interest netting.

  2. Section 6621(d) applies to all types of tax. Therefore, taxpayers may apply the net rate to one type of tax that was charged underpayment interest based on an overpayment allowed (with interest) for a different type of tax. For example, a taxpayer may net an overpayment on a Form 941 against an underpayment on Form 1120 for the same taxpayer.

  3. The net rate can only be applied based on interest (that has been or will be) allowed on an overpayment and charged on an underpayment. The net rate cannot be applied based on an overpayment for the period during which credit interest is/was not allowed.

20.2.14.6.1.1  (09-20-2006)
Post-Enactment Date Interest Periods

  1. Revenue Procedure 2000-26 contains interest netting guidance for interest periods beginning on or after July 22, 1998, (i.e., interest during calendar quarters October 1, 1998 and later). There is no statutory requirement that the taxpayer request the IRS to apply IRC section 6621(d). However, the IRS does not currently have the ability to automatically apply the net rate of zero. Congress recognized this current limitation and intended that until such time as procedures are implemented that will allow for the automatic application of this section, the IRS will recalculate the interest charges upon the taxpayer's request in accordance with this section.

  2. Revenue Procedure 2000-26 advises taxpayers to file Form 843, Claim for Refund and Request for Abatement, to ensure they receive the benefit of interest netting for post-enactment interest periods. The Form 843 is to be sent to the IRS Service Center where the taxpayer filed its most recent federal income tax return.

  3. Post-enactment interest netting claims must be filed on or before the date on which the last applicable period of limitation closes (either the underpayment or overpayment period of limitation (see IRM 20.2.14.6.2(3)).

  4. Claims for post-enactment interest netting will be sent to the taxpayer's Service Center when the request involves solely interest accruing on or after October 1, 1998. If the request involves interest accruing prior to October 1, 1998, the claim is to be filed at the Ogden Service Center according to guidance provided in Revenue Procedure 99-43 (which superseded Revenue Procedure 99-19).

  5. Taxpayers who file a claim under Rev. Proc. 99-43 have until the later period of limitation expires to file:

    • Do not have to file separate claims under Rev. Proc. 2000-26 for the portion of the overlapping period that affects interest accruing on or after October 1, 1998

    • Interest netting will be applied for the entire overlapping period when processing these claims.

    Example:

    A taxpayer files a claim to net an overpayment refunded March 10, 1999 from the tax period ending December 31, 1995 against an underpayment from tax period ending December 31, 1996 which was paid on June 8, 2000. Part of the overlapping period occurs before October 1, 1998 and part occurs after that date. Only one claim is needed for this overlapping period. If the taxpayer later determines that an overpayment from another period overlaps part of the underpayment interest for December 31, 1996, a separate claim must be filed for that overlapping period.

  6. Form 843 is not required in connection with a return(s) under consideration by any function of the Service (including Examination, Appeals, or a case before a federal court that requires a computation of interest by any function of the Service). Rather than filing a Form 843, the taxpayer must provide the contact representative of such function a letter or written statement that:

    1. states that the taxpayer is requesting interest netting or the net interest rate of zero under section 6621(d);

    2. indicates the type of tax and type of return that affects the interest computation for the taxable period under consideration;

    3. states when and for what period(s) the refund or payment (that affects the interest computation for the taxable period under consideration) was made; and

    4. states that, to the extent of equivalent amounts of overpayment or underpayment, the net rate procedure has not previously been applied to obtain an interest adjustment under section 6621(d).

  7. When the taxpayer files a claim and the underpayment period of limitation is closed, but the overpayment period is open, make the net rate adjustment to the overpayment period.

20.2.14.6.1.2  (09-20-2006)
Pre-Enactment Date Interest Periods

  1. As part of Restructuring and Reform Act 1998, Rev. Proc. 99-19 was issued to provide guidance regarding the application of section 6621(d) with respect to interest. On earlier claims the procedures in Rev. Proc. 99-19 are still in effect. Rev. Proc. 99-19 was later modified and superseded by Rev. Proc. 99-43.

  2. Special rules apply to interest periods beginning before July 22, 1998, (i.e., interest during calendar quarters prior to October 1, 1998). The taxpayer must request the Service apply section 6621(d) and reasonably identify and establish the periods of underpayment and overpayments for which the net rate of zero applies.

  3. For claims involving interest periods prior to October 1, 1998, follow these procedures to determine if a claim is timely filed under IRC 6621(d):

    • Both the underpayment and overpayment period of limitation must be open on July 22, 1998, allowing the Service to pay additional overpayment interest and credit or refund underpayment interest for the tax periods involved with the net rate request. Refer to IRM 20.2.14.6.2, Applicable Statute of Limitations, for procedures on determining the applicable period of limitation for the underpayment and overpayment

    • The taxpayer's claim must be filed on or before December 31, 1999, if both the underpayment and overpayment period of limitations expired on or before December 31, 1999.

    • The six-year Statute of Limitation to refund additional credit interest on the overpayment year and the two-year Statute of Limitation to refund on the underpayment year are both open on July 22, 1998.

  4. If both applicable periods of limitation were open on July 22, 1998, and at least one of the applicable periods of limitation will be open after December 31, 1999, the claim must be filed on or before the date on which the last applicable period of limitation closes. A Form 843 is not required when a computation of interest is requested by a taxpayer in connection with a return(s) of the taxpayer under consideration by any function of the Service (including Examination, Appeals, or a case before a federal court that requires a computation of interest). Rather than filing a Form 843, the taxpayer must furnish a letter or written statement to such function (see IRM 20.2.14.6.1.1(6)).

20.2.14.6.2  (09-20-2006)
Applicable Statute of Limitations

  1. Section 6511(a) of the Internal Revenue Code (IRC) provides that claims for credit or refund of underpayment interest must be filed:

    1. Within three years from the time of the receipt of a timely filed return (including extensions); or

    2. Two years from the time the tax (including interest) was paid, whichever period expires later.

    3. If no return is filed by the taxpayer, the claim must be filed within two years from the time the tax was paid.

  2. If the claim is timely, determine the amount of tax that may be credited or refunded under IRC 6511(b).

    1. If a claim is filed during the 3-year period, the amount of credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim, equal to 3-years plus the period of any extension of time for filing the return.

    2. If the claim is not filed within the 3-year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the 2-years immediately preceding the filing of the claim. (On credit OFFSETS, add 2 years to the cycle date of the offset to determine the applicable 2-year period).

    Note:

    See IRC section 6511 and IRM 25.6, Statute of Limitations, for further details.

  3. The 3 or 2-year period of limitations is determined based on the underpayment that is to be netted.

  4. The Internal Revenue Code does not provide for a period of limitations for the allowance and payment of interest on an overpayment of tax. Sections 2401 and 2501 of Title 28 of the United States Code provide a six-year period in which a suit must be filed for the allowance of additional interest on an overpayment.

  5. Section 6621(d) of the Internal Revenue Code – Statute of Limitations.

    1. Pre-Enactment Claims: A claim is timely if made no later than December 31, 1999, if all applicable periods of limitation were open on July 22, 1998 but all will be closed on or before December 31, 1999. This rule was amended by Rev. Proc. 99-43, as follows:
      • If all applicable periods of limitation were open on July 22, 1998, and at least one of the applicable periods will be open after December 31, 1999, the claim must be filed or a written request made on or before the date on which the last applicable limitations period closed.

    2. Post-Enactment Claims: Claims must be filed on or before the date on which the last applicable period of limitations closes (either the underpayment or overpayment period of limitation).

  6. An adjustment of interest allowable on an overpayment may be allowed and paid upon request, within the six-year period beginning on the date of scheduling of the overpayment. Although Form 843 can be used to request additional overpayment interest, filing Form 843 will not stop the running of the six-year period (see Rev. Proc. 2000-26). If the claim is received within the six year period the claim can be allowed after the six-year period. The IRS should caution the taxpayer that the only manner, in which a taxpayer can fully protect the right to an adjustment, is to file suit within the six-year period.

  7. When a net rate adjustment is to be made to an underpayment based on an overpayment that was offset with credit interest, use the cycle date (not transaction date) of the credit transfer to determine the six-year period for timely filing of a claim for refund of additional interest.

  8. When a net rate adjustment is to be made and the underpayment period of limitations is closed, but the overpayment period is open, make the net rate adjustment to the overpayment period.

  9. Refer to Exhibit 20.2.14-19 which provides additional information on Statute Highlights for Net Rate Claims.

20.2.14.6.3  (09-20-2006)
Guidelines for Filing Claims Before and After December 31, 1999

  1. Refer to Exhibit 20.2.14–14, Net Rate Claim Processing Flowchart.

20.2.14.6.4  (09-20-2006)
Determining the Overlapping Interest Computation Period(s)

  1. The net rate can only be applied based on interest (that has been or will be) allowed on an overpayment and charged on an underpayment. The net rate cannot be applied based on an overpayment for the period during which credit interest is/was not allowed (e.g., 45-day interest-free rule, 9-day or 13-day back-off).

  2. To apply the net rate during an overlapping period where underpayment and overpayment interest was/will be charged and allowed:

    1. Determine the overpayment and underpayment interest computation periods for the tax years where interest has already been or will be charged/allowed.

    2. Compare the interest computation periods to each other to determine when the overlapping interest period(s) occurs. Prepare a time line or ACT Report 530, Adjustment/Positions, to "visually " determine when the overlapping interest period(s) occur. Refer to Exhibit 20.2.14-18 for specific information related to preparing a time line.

    Example:

    The Athens Corporation agrees to a 2000 Form 1120 tax underpayment of $150,000.00 and paid the tax plus interest on February 20, 2005. On March 21, 2005, a $79,000.00 refund with interest was issued on the taxpayer's 2003 Form 1120 return. On August 1, 2005, Athens Corporation files a claim requesting that the net rate be applied to the underpayment interest paid on its 2000 Form 1120 based on the 2003 overpayment that was issued with interest.

    DETERMINE THE OVERPAYMENT AND UNDERPAYMENT INTEREST COMPUTATION PERIODS.

    • Debit interest on the tax year 2000 Form 1120 tax underpayment of $150,000.00 was charged as follows:
      1. From: 03152001 (return due date)
      2. To: 02202005 (payment date)

    • Credit interest on the tax year 2003 Form 1120 overpayment of $79,000.00 was allowed as follows:
      1. From: 03152004 (return due date)
      2. To: 03122005 (refund schedule date less 9-days back-off period)

    • The net rate adjustment for this example will be made to the underpayment period.

    Note:

    When determining the overlapping period, always use the credit interest back-off date as the ending date for the credit interest computation period. Using the back-off date provides the actual time frame during which credit interest was allowed on the overpayment.

    THE TIME LINE OR ACT REPORT 530 CAN BE USED TO VISUALLY COMPARE AND DETERMINE WHEN THE INTEREST COMPUTATION PERIODS "OVERLAP."

  3. See Exhibit 20.2.14-18 for additional information on preparing a time line or ACT Report 530.

20.2.14.6.4.1  (09-20-2006)
Determining the Applicable Interest Rate during the Overlapping Period

  1. After determining the overlapping period(s), to apply the net rate you must also determine the interest rate to be "charged" or "allowed" during the overlapping "net rate" period.

  2. The interest rate originally charged or allowed on the underpayment and overpayment can be determined from reviewing the original interest computation.

  3. In the process of working a net rate case, if the documentation to support previously computed underpayment or overpayment interest is not readily available (attached to return or in the administrative file), all avenues must be used to locate the required documentation, such as:

    • Ordering applicable DLNs.

    • Calling the office(s)/employee(s) who may have had the case in the past, to determine if an "office file" (e.g., Audit reports/Form 4549CG, Form 2285, ACT reports, etc.) is available.

    • Contacting the examining official and request that they contact the taxpayer directly for any documents the taxpayer may have (such as information above) that would assist in completing the net rate case.


    If the tax examiner is still unable to locate the documentation and cannot "back into" the previous interest amount, make the adjustment using all available information and thoroughly document all actions taken. In some situations, due to a source document being unavailable, it may be necessary to verify the interest computation by backing into the original calculation.

  4. When applying the net rate to the underpayment period and credit interest on the overpayment was not correct, make the net rate adjustment based on the credit interest the taxpayer should have been allowed.

    IF THEN
    Making the net rate adjustment to the underpayment interest and the overpayment interest is recoverable. Compute the correct credit interest; follow erroneous refund procedures to recover the overpaid interest. Perform the net rate adjustment using the corrected overpayment interest calculation.
    Making the net rate adjustment to the underpayment interest and the overpayment interest is not recoverable. Compute the correct credit interest; do not follow erroneous refund procedures. Perform the net rate adjustment using the corrected overpayment calculation. Do not adjust the overpayment interest.
    Making the net rate adjustment on the overpayment and the underpayment interest is not correct. Perform the net rate adjustment based on the correct amount of underpayment interest.

  5. GATT credit interest computations made prior to January 1, 1999, are to be recomputed in the same manner as originally allowed. However, if an error was made in the overpayment interest computation originally allowed, make the net rate adjustment based on the interest that should have been allowed (using the same GATT computation methodology).

    Example:

    First Technology Inc. was issued an overpayment of $23,710.00 on July 25, 1998. Credit interest was allowed using the original GATT processing procedures that provided that all credit interest accruals through December 31, 1994 would continue to accrue at the prevailing higher credit interest rate. However, an error was made in the interest computation. The credit interest computation must be recomputed, correcting the error (using the original procedures) to ensure the taxpayer is allowed the net rate based on the credit interest that should have been allowed on the overpayment.

  6. When preparing the time line, in addition to the computation period dates, also enter the date for which interest begins at a different rate/effective date (i.e., corporate interest applicable date or GATT rate effective date).

  7. "Charge" or "allow" interest during the overlapping period as follows:

    If Then, During the Overlapping Period
    The net rate is applied to the underpayment period. Charge interest on the underpayment at the same credit rate as allowed on the overpayment. Up to the amount of overpayment available for netting.
    The net rate is applied to the overpayment period. Allow interest on the overpayment at the same debit rate as charged on the underpayment. Up to the amount of underpayment available for netting.

  8. When a net rate adjustment has been made to an underpayment period, underpayment interest is computed with interest being "charged " at the lower overpayment rate during the overlapping period.

    • For underpayment interest that has been paid, the abated debit interest that will be refunded or offset is allowed credit interest (if applicable). Credit interest (as appropriate) is allowed on the abated debit interest amount, from the credit availability date to the refund schedule date or liability due date (if offset). This overpayment interest period "creates " a new overpayment and interest period that may be used to apply the net rate against another underpayment period that overlaps this interest computation time frame.

  9. For underpayment interest that has yet to be assessed:

    1. Compute the interest to be assessed without considering the net rate adjustment. Retain a copy of the pre-netting computations for the case file. After arriving at the interest due, then apply the net rate.

    2. If the ASED is imminent, it may be necessary to post a TC 34X for the pre-netting interest amount with the tax assessment.

    3. Input a TC 34X for the net rate interest adjustment to reflect the increase/decrease to the interest previously posted. Adjust overpayment interest as appropriate with a TC 77X.

    4. Monitor the adjustments to ensure correct posting to Master File.

  10. When a net rate adjustment is made against an overpayment, interest is allowed at the same debit rate that was charged on the underpayment during the overlapping period. The interest allowed on the resulting overpayment (that is created by the net rate adjustment) would also create a new overpayment and credit interest period that may be used to apply the net rate against another underpayment period.

20.2.14.6.5  (09-20-2006)
Determining the Amount Subject to the Net Rate during the Overlapping Period

  1. The amount of the overpayment or underpayment subject to the net rate interest computation is determined as follows:

    If Then, During the Overlapping Period
    The underpayment interest is adjusted interest is, "charged at the credit rate" on the underpayment amount that is "equal" to the overpayment amount.
    The overpayment interest is adjusted interest is "allowed at the debit rate" on the overpayment amount "equal" to the underpayment amount.

  2. The legislative history of section 6621(c) does not provide a basis for excluding Tax Motivated Transaction (TMT) interest from netting under section 6621(d) on the grounds that the 120 percent interest rate is a penalty.

  3. When making a net rate adjustment due to an assessment involving 120 percent (TMT) interest:

    1. During the overlapping period, interest on the tax motivated transaction is charged at the same credit interest rate that was allowed on the refunded/offset overpayment.

    2. For net rate purposes, apply the net rate to interest on any non-TMT tax before applying the procedure to TMT tax. See IRM 20.2.6.7.1 for Payment Allocation information.

  4. If a net rate adjustment is made to TMT tax and the 50 percent interest component of the negligence or fraud penalty was computed at the 120 percent rate, the second component of the penalty must also be adjusted. The second component of the penalty is computed at 50 percent of the interest due on the tax motivated adjustment and must be adjusted if the net rate is applied in this situation.

20.2.14.6.5.1  (09-20-2006)
Determining the Amount of Net Rate Adjustment to Underpayment Interest

  1. To accurately determine the net rate underpayment interest adjustment:

    • Determine the overpayment amount that is equal to the underpayment as of the beginning of the overlapping period.

  2. The following example illustrates how to apply the net rate when the underpayment interest starts before interest begins to accrue on the overpayment.

    Example:

    Hunter Corporation filed a 1995 Form 1120X and fully paid the underpayment of $53,000.00 plus interest of $14,065.08 on December 3, 1998. On June 2, 1998, Hunter Corp. filed a Form 1120X claiming an overpayment of $32,000.00 from its 1996 tax return, which was refunded with interest on September 17, 1998.

    Figure 20.2.14-9

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Overlapping Period Time Line

    1. Debit interest begins on 03151996, which is prior to the date interest begins on the overpayment and the beginning of the overlapping period of 03151997.

    2. Since credit interest has not yet accrued on the overpayment amount as of the beginning of the overlapping period, the amount of the underpayment subject to the net rate (at the beginning of the overlapping period) equals only the principal overpayment amount of $32,000.00.

  3. Interest on the underpayment is computed as follows:

    1. Underpayment interest at the normal debit rate is computed from 03151996 to 03151997 to determine the balance due as of the beginning of the overlapping period.

    2. When the underpayment amount is greater than the overpayment amount (as of the beginning of the overlapping period), separate the amount of underpayment subject to the net rate from the underpayment amount charged interest at the prevailing debit rate.

      Note:

      The separation is performed automatically by the ACT software.

    Interest Computation Breakdown

    $53,000.00 03151996 to 03151997 (normal debit rate ) = 4,835.28
    4,835.28 Add accrued interest at the normal debit rate.
    57,835.28 Underpayment balance on 03151997
    (32,000.00) Subtract the amount of underpayment equal to the available overpayment on 03151997 (beginning of the overlapping period) which will accrue debit interest at the net (credit) rate from 03151997 to 09081998 (refund schedule date of 09171998 less 9-days back-off period).
    25,835.28 Equals the underpayment amount that will continue to accrue interest at the debit rate from 03151997 to 12031998.
    4,123.00 Add accrued interest at the normal debit rate
    $29,958.28 Balance due on 12031998

    Net Rate Interest Computation

    $32,000.00 03151997 to 09081998 (net rate period)
    3,334.16 Add accrued debit interest at the credit rate
    35,334.16 Balance due on 09081998
    672.27 Add accrued debit interest at the normal rate from 09081998 to 12031998
    $36,006.43 Balance due on 12031998
    Interest previously assessed $14,065.08
    Total interest with netting 12,964.71
    Net Rate Adjustment/Netting Benefit (TC 341) (1,100.37)

    Reminder:

    Allow credit interest (as appropriate) on the net rate adjustment amount that will be refunded or offset.

  4. The next example illustrates how to apply the net rate when the underpayment interest computation and the beginning of the overlapping period start after interest begins to accrue on the overpayment.

    Example:

    Stetson Corporation received a refund of an overpayment in the amount of $9,200.00 plus $1,880.11 in interest on August 18, 1998 from its 1995 Form 1120. On November 21, 1998, Stetson Corporation also signed an agreement for a 1996 Form 1120 tax underpayment of $27,000.00. They have requested a net rate adjustment on the 1996 return.

    Figure 20.2.14-10

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Overlapping Period Time Line

    1. Overpayment interest begins on 03151996, which is prior to the date interest begins on the underpayment and the beginning of the overlapping period of 03151997.

    2. Since credit interest begins accruing prior to the date interest starts on the underpayment, the amount of underpayment subject to the net rate equals the available overpayment amount of $9,200.00 plus the credit interest of $739.68 that has accrued to 03151997 (the beginning of the overlapping period).

    Interest Computation Breakdown Prior to the Overlapping Period

    $9,200.00 03151996 to 03151997 (credit) = 739.68
    739.68 Add accrued interest at the credit rate
    9,939.68 Available overpayment amount that is equal to the underpayment that will be charged interest at the net (credit) rate as of the beginning of the overlapping period.

  5. Interest on the underpayment is computed as follows:

    Interest Computation Breakdown on the Unnetted Portion

    $27.000.00 Underpayment due 03151997
    9,939.68 Subtract the amount of underpayment equal to the available overpayment on 03151997 (beginning of the overlapping period) which will accrue debit interest at the net (credit) rate from 03151997 to 08091998 (refund schedule date of 08181998, less 9-days back-off).
    17,060.32 Equals the underpayment amount that will accrue debit interest at the prevailing rate from 03151997 to 12211998.
    2,800.81 Add accrued interest at the prevailing debit rate
    19,861.13 Balance due on unnetted portion to 12211998 (870 waiver + 30-Days)

    Net Rate Interest Computation

    $9,939.68 03151997 to 08091998 (net rate period)
    1,140.43 Add accrued debit interest at the credit rate
    11,080.11 Balance due that continues to accrue debit interest at the prevailing rate from 08091998 to the 12211998 interest ending date.
    330.21 Add accrued debit interest at the prevailing rate
    $11,410.32 Balance due on the netted portion to 12211998 (870 waiver + 30-Days)
    Total Interest Due with Netting $4,271.45 (2,800.81 + 1,140.43 + 330.21)
    Interest Previously Assessed .00
    Net Rate Adjustment (TC 340) $4,217.45

  6. When a net rate adjustment is made to an underpayment year (for which payments/credits had previously been made), applying the net rate causes the balance due to decrease. Since the former balance due is decreased, this results in a lesser amount of the previous payments/credits being needed to pay the revised balance due. These "excess" payments/credits are now available for refunding or offset to another year's tax liability. The resulting refund or offset may be available to apply to a future net rate adjustment.

20.2.14.6.5.2  (09-20-2006)
Determining the Amount of Net Rate Adjustment to Overpayment Interest

  1. Net rate adjustments are generally made to the underpayment period. When the taxpayer files a claim/request and the underpayment period of limitations is expired, the net rate adjustment is made to the overpayment period. However, the six-year period for refunding of overpayment interest must be open.

  2. Applying the net rate to an overpayment period follows the same methodology as applicable to an underpayment period. The net rate is applied by allowing overpayment interest at the debit rate on the amount of the overpayment that is equal to the underpayment (plus accrued interest, as applicable) as of the beginning of the overlapping period.

  3. The example below illustrates how to apply the net rate to the overpayment period when the statute on the underpayment period has expired, however, the overpayment is open (within the six-year period).

    Example:

    Hunter Corporation filed a 1995 Form 1120X and fully paid the underpayment of $53,000.00 plus interest of $14,065.08 on December 3, 1998. On June 2, 1998, Hunter Corporation filed a Form 1120X claiming an overpayment of $32,000.00 from its 1996 tax return, which was refunded with interest on September 17, 1998. The taxpayer filed a net rate claim on December 31, 2000.

    Figure 20.2.14-11

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    Overlapping Period Time Line

  4. Interest on the overpayment is computed as follows:

    Since the statute on the underpayment period has expired, credit interest will be computed at the underpayment interest rate during the overlapping period. The overpayment that was created during the overlapping period will continue to accrue credit interest at the prevailing rate to the refund schedule (23C) date, less the 9-days back-off.

    Net Rate Interest Computation

    $32,000.00 03151997 to 09081998 (net rate period)
    4,414.00 Add credit interest at the debit interest rate
    36,414.00 Available credit on 09081998
    35,334.16 Amount refunded on 09081998
    1,079.84 Available credit @ 09081998 (Netting benefit)
    370.20 Add accrued credit interest at the prevailing rate to 03152003 (current 23C date, less the 9-day back-off.)
    $1,450.04 Amount of refund @ 03152003 (TC 770)

    Reminder:

    Ensure credit interest (as appropriate) is to be allowed on the net rate adjustment amount that will be refunded or offset.

20.2.14.6.6  (09-20-2006)
Unused and Unnetted Interest Computation Period(s)

  1. When a net rate computation is made during an overlapping period, the amount of overpayment or underpayment may not always be completely used for that period. The part of an interest computation period and the amount of overpayment/underpayment that is not used to make a net rate adjustment is considered the "unused " portion.

    • If another tax year’s interest computation period overlaps with a remaining "unused" period and amount, a net rate adjustment may be made to the underpayment and/or overpayment interest based on that remaining unused period and amount.

    Reminder:

    Consideration must still be given to whether the statute of limitations remains open for the unused period and amount to allow another net rate adjustment.

  2. For the tax year that the net rate adjustment is applied, if the net rate was not applied during any part of the overlapping interest computation period, the time frame and amount that was not netted, is considered an "unnetted" underpayment/overpayment period and amount. An unnetted period/amount can also occur outside of the overlapping interest computation period (i.e., when an underpayment/overpayment accrues interest before the overlapping period, netting does not occur during that time frame, so an unnetted period and amount exists).

  3. If there is an overlapping interest period(s) against which the net rate has not been applied, the unused overpayment period can be applied to, or created by, one tax period multiple times.

  4. When the net rate is applied to debit interest that bas been paid, credit interest is allowed on the refunded debit interest amount from the credit availability date to the refund schedule date or liability due date (if offset). This credit interest period creates an overpayment period that may be used to apply the net rate against another underpayment period.

  5. The time line in Figure 20.2.14-12, illustrates that the credit interest period (from 03151997 to 01011998) was not completely used. Only part of the computation period was used for the net rate adjustment, from 03151997 to 07071997. The part of the overpayment computation period not used for the net rate adjustment runs from 07071997 to 01011998. This time frame is the "unused" overpayment computation period.

    • If a subsequent adjustment occurs for another tax year and the underpayment interest computation period overlaps with this remaining "unused " overpayment period, a net rate adjustment may be made during this unused time frame.

    • In addition to reflecting the unused computation period, the amount of overpayment/underpayment available for use for another net rate adjustment must also be determined. This amount is shown in the interest computation source documents. Refer to Exhibit 20.2.14-18, which outlines requirements for information to be shown on the time line and/or source documents.

    Figure 20.2.14-12

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    Overlapping Period Time Line

  6. To determine the unused amount that is available for use for a future net rate adjustment, identify the amount of overpayment or underpayment at the beginning of the unused period that was not used for the net rate adjustment as follows:

    • As of the end of the overlapping period (which is the beginning of the unused period when an unused amount and period exists), determine the total overpayment/underpayment amount plus accrued interest that is available for netting during the overlapping period.

    • Subtract from this amount, the overpayment/underpayment plus accrued interest that was used for the net rate adjustment.

    • The difference represents the balance of overpayment/underpayment plus accrued interest that was not used for the net rate adjustment. This is the amount of unused overpayment/underpayment plus accrued interest that is available for another net rate adjustment.

  7. The time line illustrates that the net rate was not applied on the underpayment from 03151996 to 03151997. Therefore, 03151996 to 03151997 represents the"unnetted" underpayment period. The unnetted amount represents the underpayment of $175,000 as of the beginning of this unnetted period. If another overpayment overlaps this unnetted period, the net rate can be applied to the $175,000 from 03151996 to 03151997.

  8. Refer to the following Exhibits for additional information:

    • Exhibit 20.2.14-6 Special Net Rate Interest Computations – More than One Overpayment Period.

    • Exhibit 20.2.14-7 Special Net Rate Interest Computations – Overlapping Period Completely Used.

    • Exhibit 20.2.14-9 Net Rate Interest Computation – Later Assessment Interest Period Overlaps a Previously Unused Overpayment Period.

20.2.14.6.7  (09-20-2006)
Net Rate Adjustments Involving More Than Two Tax Periods

  1. There will be occasions where multiple tax periods are involved in a net rate adjustment that can result in more than one overlapping/net rate period.

  2. There can be multiple overlapping periods that may not be used in making a net rate interest adjustment.

    Note:

    An overlapping period may not be used to the extent it involves an overpayment that was issued without interest.

    Example:

    On August 10, 1998, Garfield Incorporated files an informal claim requesting that the net rate be applied to Form 1120 for the taxable year 199309. On September 23, 1996, Garfield Inc. agreed to and fully paid an underpayment of $97,000.00 determined for its 199309 Form 1120. A $27,000.00 overpayment was allowed for Garfield Inc.’s Form 1120 for the tax year 199409, due to an amended return. A refund with interest was issued on October 15, 1995. On April 3, 1997, an audit of the taxpayer’s Form 941 for the fourth quarter of 1994 determined an overpayment of $5,000.00 that was refunded with interest on August 22, 1997. See Figure 20.2.14-13, Overlapping Period Time Line.

    Figure 20.2.14-13

    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Overlapping Period Time Line

    • 199309 Form 1120 underpayment period is from 12151993 to 09231996 (normal corporate rate).

    • 199409 Form 1120 overpayment period is from 12151994 to 10061995 (normal and GATT rate).

    • 199412 Form 941 overpayment period is 01311995 to 06291997 (corporate overpayment rate).

    • First overlapping period is 12151994 to 10061995.

    • Second overlapping period is 01311995 to 09231996.

    • Unused overpayment period remains from 09231996 to 06291997 based on the 199412 Form 941 overpayment.

    • Unnetted debit period remains from 12151993 to 12151994 based on the 199309 Form 1120 underpayment.

20.2.14.6.8  (09-20-2006)
Offset Methodology - Impact on Overlapping Interest Periods

  1. Whenever possible (except as stated in 20.2.14.6.8 (3)), offset a credit against a liability to avoid creating an overlapping interest period. When an underpayment and an overpayment are processed concurrently, offsets will take place systemically if no restrictions exist on the modules involved with the offset. If Master File restrictions do not allow systemic offset, the offset must be made manually.

  2. Refer to Exhibit 20.2.14-3 Offset Methodology Examples to illustrate the impact of the offset process on the net rate provision.

  3. To the extent that an underpayment has been partially or fully paid, the liability is not considered to be "outstanding" for purposes of offsetting an overpayment with an earlier availability date. If the advance payment constitutes a deposit, see Service Center Advice SCA 1998-002.

    Example:

    A TC 640 is posted to a 199812 Form 1120 underpayment module on 08262001 (the payment could also be posted with other transaction codes (TC), such as 670, 680, 706, etc.). An overpayment of timely credit from 200012 later becomes available, and is for an amount greater than the remaining balance due on 199812. The amount offset from 200012 to 199812 should only be sufficient to fully satisfy the outstanding portion of the 199812 liability. Do not offset excess credit on 03152001 that will cause a refund of all or part of the TC 640. The remaining 200012 overpayment may then be refunded with interest from 200012.

    Note:

    The limitation on the amount offset creates an overlapping period between 03152001 and 08262001. There is no authority to increase the offset amount to avoid the interest rate differential.

20.2.14.6.9  (09-20-2006)
Identifying Modules Involved in Net Rate Adjustments

  1. The following information is available on IDRS to identify a module affected by net rate netting:

    • A TC 34X with a correspondence date of 07221998 (the enactment date of IRC 6621(d)). This date will appear only if the adjustment was input using IDRS command code ADJ54; it is not input with ADJ47.

    • A control base closed with the activity code "netrate" and/or control category INTC.

    • The Net Rate "N" information, described later in this section, input via ADJ54.

    Caution:

    The above information may not be present on all affected modules. Regardless of the information that appears on IDRS, the net rate source document(s) must be secured before proceeding with a subsequent adjustment.

  2. The complexity of net rate adjustments requires extensive documentation of the facts used to make the computation. In addition, all interest computations described in IRM 20.2.14.6.10 should be included with the workpapers for each tax period involved with the net rate request. The relevant ACT computation reports and the information they contain that is specific to net rate netting are described as follows:

    1. ACT Report 020 Principal and Interest Adj. Summary. The "Computed Individual Modules" section of the ACT Report 020 summarizes the results of all modules without net rate netting , while "Computed Modules with Netting" , shows the modules after netting has taken place. The "Deficiency Interest" , "Overpayment Interest" and "Principal" columns correspond to the "Adjustment " columns in the final sections of the pre and postnetting Reports 490. The "Netting Benefit " that appears in the lower right hand corner of the ACT Report 020 is the difference between the "Total" columns in the top and bottom sections of the report.

    2. ACT Report 490 Activity Summary. This report header does not differ from the non-netting report; however, the module’s underpay/overpay status (open, use, or closed) in the upper right hand corner is significant for net rate netting purposes. When Report 490 is created based on net rate interest netting, it will differ from a single module report because of the transactions added as result of the netting adjustment(s). The netting transactions, numbered in the 1500 and 1600 series, are unique numbers to the ACT program and do not correspond to any actual transaction codes found on IDRS transcripts. The first section of the report will show all the transaction numbers with their descriptions, while the second section of the report will show how the transactions were utilized in the net rate computation. The transaction numbers themselves will not be displayed in the second section, but their affect upon the computation will appear with the letters "NR" for net rate (e.g. NR underpay @ GATT, NR overpay @ underpay, etc.), and correspond to the overlapping periods and amounts on the Report 530. The third and final section on this report shows the total overpayment and underpayment interest, with "Adjustment" column figures that correspond to the amounts of the second section of the Report 020.

    3. ACT Report 530 Adjustments/Positions. This report is used to show the Net Rate "N" information (see Exhibits 20.2.14-6, Exhibit 20.2.14-7, and Exhibit 20.2.14-18). The Report 530 shows unused and unnetted periods and amounts.

  3. The "N" information consists of:

    • "N-Amt/Net Rate Amount" – provides the amount of overpayment or underpayment that the net rate was applied to. The same "N-Amt" information is shown for each year involved with the net rate adjustment.

    • "N-Beg/Beginning Overlapping Period" - provides the beginning date of the overlapping interest period used in the net rate computation. The same "N-Beg" information is shown on the year that caused the net rate adjustment to be made (usually the overpayment year) and the year on which the net rate adjustment was made.

    • "N-End/Ending Overlapping Period" - provides the ending date of the overlapping interest period used in the net rate computation. The same "N-End" information is shown on the year that caused the net rate adjustment to be made (usually the overpayment year) and the year on which the net rate adjustment was made.

    • "N-MFT/Net Rate MFT" – provides the Master File Tax Class Code for the return to which the net rate was applied and the return that caused the net rate adjustment. On the return to which the net rate adjustment was made, the MFT Code is the return that caused the net rate adjustment to be made. On the return that caused the net rate adjustment, the MFT Code is the return to which the net rate adjustment was made.

    • "N-Per/Net Rate Tax Period" - provides the tax period for the return to which the net rate adjustment was made and the tax period of the return that caused the net rate adjustment. For the return to which the net rate adjustment was made, enter the "N-Per" for the return that caused the net rate adjustment to be made. For the return that caused the net rate adjustment to be made, enter the "N-Per" is the return to which the net rate was applied.

20.2.14.6.10  (09-20-2006)
Processing Actions for Posting Net Rate Interest Adjustments

  1. Specific actions must be taken to post the required adjustment(s) to all tax modules involved with the net rate request.

  2. When processing a net rate claim for abatement or refund and no current tax adjustment activity exists, post the adjustment as follows:

    REQ54

    • BLK – Use BLK 00 with controlling DLN. Without controlling DLN, use BLK 18. If the account has an open AIMS base, use BLK 05 or 15.

    • TC 34X – Debit Interest Adjustment (TC 340 for "zero " is required if no decrease/increase is applicable). See note below.

    • Debit-Int-To-DT – Input date debit interest is computed to (RDD is used if no interest exists on that year).

    • TC 770 – Credit Interest Adjustment (input is not required if interest adjustment amount is zero). TC 772 can be input as long as the account will be in a balance due after posting. If the account will be overpaid after the TC 772 posts, consider IRM 20.2.14.6.10(4).

    • Credit-Int-To-DT – Date credit interest is computed to (input is not needed if amount is zero or if TC 772 is input).

    • Correspondence DT – 07221998 (IRC 6621(d) enactment date).

    • AMD-CLMS-DT – Received date of the claim.

    • Activity CD – netrate.

    • Hold CD – 3 (Do not allow a generated notice to be issued to the taxpayer. Send the taxpayer the appropriate letter).

    • Attach any relevant information pertaining to the claim.

    • Attach all appropriate documentation to the adjustment (see IRM 20.2.14.6.10(6)).

    Note:

    Even when the net rate adjustment is made to the underpayment year, it is necessary to input a TC 340 with a " zero" amount on all overpayment years involved with the net rate adjustment(s). This action is required to identify all overpayment periods included in the current net rate adjustment so that used, overlapping periods may not be used again in a subsequent netting adjustment. If a year requested in the claim is unused because of no overlapping periods, input a TC 290 for " zero" with Blocking Series 18, to properly identify the account.

  3. For tax periods in which current tax adjustment activity exists, there are two types of input formats to consider. Enter the adjustments based on the input format your area uses. A two-step process is required to allow for a notice of adjustment to be issued that does not contain a correspondence date of July 22, 1998.

    1. For non-Examination or non-Appeals related tax adjustments:

      Step 1: Input the following information using CC REQ54:

      • BLK - Use BLK 00 with controlling DLN. Without controlling DLN, use BLK 18. If the account has an open AIMS base, use BLK 05 or 15.

      • TC 29X - Tax Adjustment.

      • TC 34X – Debit Interest Adjustment (TC 340 for "zero " is required if no interest decrease/increase is applicable. See note below).

      • Debit-Int-To-DT – Input date debit interest is computed to (RDD if no interest exists on that year).

      • TC 770 – Credit Interest Adjustment (input is not required if interest adjustment amount is zero). A TC 772 can be input if the account will be in a balance due after posting. If the account will be overpaid after the TC 772 posts, follow procedures in IRM 20.2.14.6.10(4).

      • Credit-Int-To-DT – Date credit interest is computed to (input is not required if amount is zero or if TC 772 is input).

      • Correspondence DT – Date of the correspondence.

      • AMD-CLMS-DT – Received date of the claim.

      • If the tax adjustment is an increase of $100.000 or more, do not use a hold code to suppress the adjustment notice.

      • Attach any relevant information pertaining to the claim.

      • Attach all appropriate documentation to the adjustment (see IRM 20.2.14.6.10(6)).

      Step 2: Use CC REQ54 and post delay one cycle the following information:

      • BLK – 05 or 15.

      • TC 340 for "zero" .

      • Debit-Int-To-DT – Input the same debit interest date used in step 1 above (RDD is used if no interest exists on that year).

      • Correspondence DT – 07221998 (IRC 6621(d)) enactment date).

      • AMD-CLMS-DT – Claim received date.

      • Activity CD – netrate

      • Hold CD – 3

      • PSTNG-DLAY-CD – 1

      • Notate in "Remarks" "that the interest computations are attached to the previous interest adjustment made one cycle earlier" .

      Note:

      Even when the net rate adjustment is made to the underpayment year, it is necessary to input a TC 340 with a "zero" amount on all overpayment years involved with the net rate adjustment(s). This action is required to identify all overpayment periods included in the current net rate adjustment so that used overlapping periods may not be used again in a subsequent net rate adjustment. If a year requested in the claim is unused because of no overlapping periods, input a TC 290 for "zero " with Blocking Series 18, to properly identify the account.

    2. For Examination or Appeals related adjustments, a two-step process is required.

    Step 1: Input the following information on the appropriate adjustment Form 5344 or Form 5403 and submit for processing:

    • TC 30X – Tax Adjustment.

    • TC 34X – Debit Interest Adjustment (TC 340 for "zero " is required if no interest decrease/increase is applicable. See note below).

    • Debit-Int-To-DT – Input date debit interest is computed to (RDD is used if no interest exists on that year).

    • TC 770 – Credit Interest Adjustment (input is not required if interest adjustment amount is zero). A TC 772 can be input if the account will be in a balance due after posting. If the account will be overpaid after the TC 772 posts, consider IRM 20.2.14.6.10(4).

    • Credit-Int-To-DT – Date credit interest is computed to (input is not needed if the interest adjustment amount is zero or if TC 772 is input).

    • If the tax adjustment is an increase of $100,000 or more, do not use a hold code to suppress the adjustment notice.

    • Any and all other pertinent or required entries per IRM 4.4, AIMS/Processing Handbook and IRM 2.8, Audit Information Management System (AIMS) etc.

    • Attach all appropriate documentation to the adjustment (see IRM 20.2.14.6.10(6)).

    Step 2: Use CC REQ54 and post delay one cycle the following information:

    • BLK – 05 or 15.

    • TC 340 for "zero" .

    • Debit-Int-To-DT – Input the same debit interest date used in step one above (RDD is used if no interest exists on that year).

    • Correspondence DT – 07221998 (IRC 6621(d) enactment date).

    • AMD-CLMS-DT – Claim received date if applicable.

    • Activity CD – netrate.

    • Hold CD – 3.

    • PSTNG-DLAY-CD – 1.

    • Notate in "Remarks" that the "interest computations are attached to the previous interest adjustment entered one cycle earlier" .

    Note:

    Even when the net rate adjustment is made to the underpayment year, it is necessary to input a TC 340 with a "zero" amount on all overpayment years involved with the net rate adjustment(s). This action is required to identify all overpayment periods included in the current net rate adjustment so that used overlapping periods may not be used again in a subsequent net rate adjustment. If a year requested in the claim is unused because of no overlapping periods, input a TC 290 for "zero " with Blocking Series 18, to properly identify the account.

  4. Master File does not recognize a TC 772 as a total consideration of all credit interest (i.e. a credit interest combination adjustment which may include netted or additional allowable interest etc.), and as a result, if the tax period has an overpayment at the time of posting, it will calculate credit interest again, post an erroneous TC 776 amount, and issue a refund with too much interest. To avoid this, it is necessary to cycle the adjustment into two parts. The first part will be to calculate your computation to the 23C date of the following cycle, 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. The second part is to cycle delay one week (to match the interest to date) and input a TC 340 for " zero" and TC 770 for "zero" to release the credit for refund. Be sure to use a hold code that only holds the notice.

    Note:

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

  5. Transaction code TC 971 action code 355 is used to readily identify BMF modules affected by net rate interest netting computations (Master File programming does not allow input of this information for IMF modules). If a tax period included with the claim is unused due to no overlapping periods, input of TC 971 AC 355 is not necessary. The latest tax period adjusted is cross-referenced by the input of TC 971 AC 355 using CC REQ77 on all other modules (see exception below for cases involving multiple TINs). Referencing the latest tax period adjusted will identify where the complete copy of the case file is located.

    The following information is required for input on all but the tax period where the case file is to be located:

    • TC> 971

    • TRANS-DT> The received date of the claim.

    • TC971/151-CD> 355

    • XREF-TIN> The EIN where the case file is to be located.

    • XREF-TX-PRD> The tax period where the case file is to be located.

    • XREF-MFT> The MFT where the case file is to be located.

    • The literal "NET-RATE" is automatically moved into the MISC field.

    On the tax period where the complete copy of the case file is to be located, input separate Transaction Codes 971-355 to cross-reference each module for every EIN and tax period involved in the claim.

    Exception:

    When multiple TINs are involved, the case file should be associated with the latest tax period adjusted for the parent corporation or surviving entity.

  6. In addition to the actions described above, ensure the following information is part of the source documents sent with all but the last tax year involved with the net rate adjustment. (Refer to Exhibit 20.2.14-17, Net Rate Claim Processing, which provides additional documentation requirements). The latest tax period adjusted should be cross-referenced with TC 971-355. (See the TC 971-355 procedures above, including the exception for multiple TIN cases.)

    • A copy of the written request or claim Form 843. (The original is to be attached to the last year of the adjustment.)

    • ACT Report 490 (post-netting). Only the tax year in which the adjustment pertains.

    • A copy of the appropriate Power-of-Attorney form.

    • A copy of the current allow/partial allowance letter from the IRS. The taxpayer's copy of the letter must include copies of ACT reports 020, 490, and 530 for all tax periods involved.

    • Any re-file documents that you have in your possession.

      In addition to the attachments described above, the last year of adjustment must include the following information:

    • ACT Report 490 (pre and post-netting) and ACT Report 530 (post-netting), as well as all interest computations made by the taxpayer, for all tax periods involved.

    • ACT Report 020.

    • Any pertinent correspondence and information from the taxpayer or the representative.

    • Any personal notes or observations pertaining to the claim that would be helpful to the next tax examiner who may have to update the interest or process a subsequent adjustment on the account.

    Note:

    These are in addition to any normal attachments required in the work process, regardless of the area working the account.

    Exception:

    If a claim includes adjustments to both Form 94X and Form 1120 accounts, the attachments for the last year of the adjustment should be associated with the most recent tax year Form 1120 account. This is because the retention period for Forms 1120 is much longer than for Forms 94X. (e.g. A net rate claim is filed that results in adjustments to Forms 1120 accounts for tax periods ending December 31, 1997 through December 31, 2000, and a Form 941 account for the period that ends March 31, 2003. Although the Form 941 is the last year of adjustment, the attachments will be associated with the Form 1120 account for the tax period ending December 31, 2000.)

20.2.14.6.11  (09-20-2006)
Special Net Rate Interest Computations

  1. When a net rate adjustment has previously been made and only part of the overpayment period was used, you must be aware of the available overpayment /underpayment amount as of the beginning of any unused overpayment/underpayment period(s). If a subsequent underpayment/overpayment occurs that overlaps any of the unused period(s), we must determine the available overpayment/underpayment amount at the beginning of the subsequent/new overlapping period(s). This information will reflect how much of an underpayment or overpayment that can be netted during this time frame. Refer to Exhibit 20.2.14-5 for examples illustrating the special computations required in this situation.

  2. Refer to Exhibit 20.2.14-6 for net rate computations involving more than one overpayment period. The exhibit provides the interest computation using the ACT InterestNet computation tool and explains how to determine whether the net rate computation was accurately computed. When using ACT, special information is provided that must be considered when verifying the accuracy of a net rate adjustment.

  3. Refer to Exhibit 20.2.14-8 for non-corporate computations before and after the 1/1/1999 rate equalization provided by section 3302 of RRA 1998. The exhibit also explains how to verify unused amounts and the accuracy of a net rate computation.

  4. Refer to Exhibit 20.2.14-10 for applying the net rate to a settled underpayment year when currently working on an overpayment year that creates an overlapping period. This example also explains verifying the accuracy of the net rate computation using the ACT InterestNet computation tool.

  5. Refer to Exhibit 20.2.14-11 for net rate computations when Form 2285 is used reflecting the tax liability adjustments.

  6. Refer to Exhibit 20.2.14-12 for net rate computations involving a subsequent interest adjustment after the net rate was applied. The exhibit provides a two-part example to illustrate that a taxpayer can only receive a one-time benefit of a net rate interest period that is used to the extent of equivalent amounts of overpayment and underpayment.

Exhibit 20.2.14-1  (09-20-2006)
Computer Generated Within Module (Annual) Netting
IRM Reference 20.2.14.4.1

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Exhibit 20.2.14-2  (09-20-2006)
Manually Computed Within Module (Annual) Netting
IRM Reference 20.2.14.5

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Exhibit 20.2.14-3  (09-20-2006)
Offset Methodology Examples
IRM Reference 20.2.14.6.8

Example:

1. Tom and Mary Chase's 1994 and 1995 individual income tax returns are examined and an overpayment of $5,000.00 is determined on their 1994 return. They agreed to an underpayment of $3,000.00 on their 1995 tax return. There are no restrictions on either module. The appropriate closing documents are completed and input to Master File in the same cycle. The overpayment interest is computed from the due date of the 1994 return to the due date of the 1995 underpayment. Interest is allowed on the remaining overpayment from the date the liability is paid (1995 return due date) to the refund schedule date. Since the 1995 liability is paid by an overpayment that has an earlier availability date, no underpayment interest is charged. No overlapping period of underpayment and overpayment interest exists because the offset process avoids creation of an overlapping period.

Example:

2.
In 1998, John and Ann Dunn agree to an underpayment of $4,300.00 on their 1995 individual income tax return and file a Form 1040X claiming an overpayment of $13,325.00 on their 1996 return. The Form 1040X is reviewed and allowed; and processed at the same time as their 1995 underpayment. There are no restrictions on either module. The appropriate closing documents are completed and input to Master File in the same cycle. The underpayment interest is charged from the due date of the 1995 return to the availability date of the 1996 overpayment. The amount of overpayment needed to pay the tax and interest liability is offset, and the remaining overpayment has interest allowed to the refund schedule date. Even though both underpayment and overpayment interest were computed, no overlapping interest period exists because the offset process avoids creation of an overlapping period.

Example:

3.
When a previously assessed, but unpaid, underpayment exists, any subsequently determined overpayment from another module is offset to the underpayment, preventing creation of an overlapping period. If computer restrictions prohibit a systemic offset, a manual offset must be made. Greene Corporation previously agreed to, but did not pay, an underpayment of $43,000.00 determined on its 199508 corporate return. It is assessed and underpayment interest is computed to the waiver date plus 30-Days. There are no restrictions on the module and when the subsequent notices are issued, Master File updates the underpayment interest accordingly. Greene Corporation files an amended return claiming an overpayment of taxes in the amount of $24,000.00 on its 199608 return. The Form 1120X is accepted and processed. When the overpayment is posted, it will offset to the 199508 module. Since an overpayment is being used to reduce an earlier liability, no interest is allowed on the overpayment, and the underpayment interest assessed on the 199508 module, is reduced. No overlapping period of underpayment and overpayment interest exists.

Example:

4.
To the extent that an overpayment is offset against an underpayment, an overlapping period does not occur "between" the modules involved with the offset. However, either the overpayment or underpayment involved in the offset can have an overlapping interest period caused by another module in which an overpayment was refunded or offset with interest or an underpayment was determined or previously paid with interest. On September 10, 1998, an overpayment of $527,000.00 is determined for Morgan Corporation's 1995 Form 1120. A tax increase of $200,000.00 on Morgan Corporation's 1993 Form 1120 is also determined. The 1995 overpayment is offset to pay the $200,000.00 tax increase. An overlapping interest period does not occur (between 1993 and 1995) because, as a result of the offset, interest on the overpayment and underpayment does not accrue during the same time period. The remainder of the 1995 overpayment is refunded with interest. Before Morgan Corporation's offset is made, the taxpayer advises the examining officer that they previously paid a $53,000.00 tax underpayment on its 1994 Form 1120 on November 25, 1997. Morgan Corporation requests that the net rate be applied to the 1994 underpayment based on the overlapping interest period caused by the 1995 overpayment that refunded after offsetting the $200,000.00 to 1993.

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The time line determines that an overlapping interest period exists from March 15, 1996 (the availability date of the 1995 overpayment) to November 25, 1997 (the date the 1994 underpayment was paid). The previously paid debit interest that was due during the overlapping period will be abated after applying the net rate to the underpayment period. The amount abated represents the interest differential paid by the taxpayer.

Exhibit 20.2.14-4  (09-20-2006)
Net Rate Computations - More than One Taxpayer Identification Number

Reviewing Requests Involving More than One Taxpayer Identification Number (TIN)

Note:

The following procedures should be followed by Campus Complex Interest Specialists or Exam Centralized Case Processing interest employees. Revenue Agent(s) and/or Appeals Officer(s) should follow the guidelines provided in IRM 4.10.26.

  1. The examiner must review the net rate request to determine whether the request includes more than one taxpayer identification number, a net rate adjustment cannot be made between different taxpayers. If the request involves more than one TIN, a determination must be made whether section 6621(d) applies. Counsel or Revenue Agent advice must be requested if this determination cannot be made.

  2. The examiner must ascertain the facts surrounding the relationships between TIN holders and analyze the facts in terms of applicable law. See Service Center Advice: IRS FSA 200212028; 2002 FSA Lexis 4; 2002 WL 442928.

  3. If it is determined that the multiple TINs are not the "same taxpayer" the Service will disallow the claim. A formal disallowance letter that indicates the reason for the denial of the netting between TINs must be sent to the taxpayer if the request is a claim for refund.

  4. (4) If multiple TINs are involved they must be jointly liable for the tax. The following examples may assist in making determinations in the taxpayer relationship:

    Example:

    1.
    Corporation A files a net rate request with multiple TINs. Corporation A has only underpayment periods. Subsidiaries B, C, and D have only overpayment periods. Corporation B, C, and D are determined notto be the same taxpayer as Corporation A. These overpayment periods may not be netted against the underpayment periods of Corporation A.

    Example:

    2.
    Corporation A files a net rate request with multiple TINs. Corporation A has overpayments for periods 1, 2, and 3, and an underpayment for period 4. Subsidiary B has underpayments for periods 1, 2, 3, and 4. Subsidiary B joined the consolidated group at the beginning of period 2. Subsidiary B cannot net its underpayment with the overpayment of Parent A for period 1, but the overpayments and underpayments of periods 2 and 3 can be netted.

    Example:

    3.
    Parent Corporation A files a net rate request for overlapping periods of underpayment and overpayment interest involving Corporation A and its subsidiaries B and C. These three entities have separate TINs. The IRS determines that Corporation A is not the same taxpayer as Corporations B and C for purposes of interest netting because Corporation A’s underpayment was incurred before Corporations B and C became members of a consolidated group with Corporation A as the parent. Therefore, Corporations B and C are not jointly liable with Corporation A for the income tax underpayment. However, the IRS determines that Corporation B can file a net rate request for its own underpayment of employment taxes and its own overpayment of excise taxes. Similarly, the IRS determines that Corporation C can file its own net rate request. The IRS will advise Parent Corporation A (the entity that filed the net rate request) that its request will not be approved, but that Corporations B and C must file their own requests for their own overlapping periods.

  5. If the examiner determines that any portion of the request will be denied because the multiple TINs are not the same taxpayer, and the taxpayer has not fully paid the liability, the taxpayer does not have the right to elevate the issue to Appeals.

  6. If the taxpayers (multi TINs) can not be determined to be the same taxpayer the request must be forwarded to Counsel or a Revenue Agent, which ever is applicable to make the appropriate determination.

Exhibit 20.2.14-5  (09-20-2006)
Special Net Rate Interest Computations

When a net rate adjustment has previously been made and only part of the overpayment period was used, you must be aware of the available overpayment amount as of the beginning of any unused overpayment period(s). If a subsequent underpayment occurs that overlaps any of the unused overpayment periods(s), we must determine the available overpayment amount at the beginning of the subsequent/new overlapping period(s).

Example:

On May 4, 1998, David and Lynne Wilkes previously agreed to and paid an underpayment of tax for $7,300.00 and interest of $2,294.50 on their 1994 Form 1040. On August 25, 1998, they filed a Form 1040X on their 1996 Form 1040. A refund was issued on November 30, 1998, for $4,500.00 plus overpayment interest of $578.81 (computed to the refund date, less the 13-day back-off period). On January 6, 1999, the taxpayers filed a Form 843 and requested a net rate adjustment based on the overlapping period on the 1996 overpayment and the 1994 underpayment interest. The Service complied and issued the taxpayer a refund of overpaid underpayment interest on March 15, 1999. A TC 341 was input for the amount of interest to be refunded to the taxpayer. Credit interest was allowed on this amount from the availability date of the released credit(s) to March 2, 1999, (the refund date, less the 13-day back-off period). Subsequently, on April 2, 1999, the taxpayer signed an agreement for an underpayment of $6,000.00 on their 1995 return. They have requested that the net rate be applied based on the 1996 unused overpayment period (05041998 to 11171998) and the 1994 overpayment period that resulted from the previous net rate adjustment TC 341 (05041998 to 03021999).

Note:

Since the interest rates were equalized for non-corporate returns on 01011999 (IRC section 3302) the taxpayer would be allowed a net rate adjustment from 05041998 to 12311998. The ACT program will continue to compute interest from 01011999 to 03021999 at the normal debit interest rate. A miscellaneous transaction code 1111 has been entered to clarify the Report 490 by separating the interest computed before and after the rates equalized (the 1111 is for illustration purposes only, and does not need to be used when working actual cases).

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In reviewing the time line, the entire overpayment interest computation period that caused the original net rate adjustment, runs from 04151997 to 11171998. However, the full overpayment amount and only part of the overpayment period was used to make the original net rate adjustment; from 04151997 to 05041998. The unused part of the overpayment period runs from 05041998 to 11171998.

Because we have only used a part of an overpayment period, the date that the original net rate computation ends (05041998), becomes the beginning date of the overpayment period for any future net rate adjustment (if a subsequent underpayment "overlaps" this unused period). In this situation, the overpayment plus accrued interest as of the end of the previously netted period, becomes the overpayment amount available as of 05041998, the beginning of the subsequent/new overpayment period.

In this example, the overlapping period for the current adjustment runs from 05041998 to 11171998. (We are now "using" this former "unused" overpayment period to apply the net rate to the current adjustment). When computing underpayment interest on the current adjustment, compute debit interest from the 04151996 start date to the beginning of the current overlapping period (05041998). At the beginning of the overlapping period, the amount of underpayment equal to the overpayment on 05041998 will accrue debit interest at the credit rate to the end of the " overlapping" period (11171998). To determine the amount of underpayment subject to the net rate, you must know what the available overpayment amount is as of 05041998 (the beginning of the overlapping period). You can determine this by looking at the work papers for the previous net rate computation, or run a computation on the overpayment amount from the beginning of the overpayment period (04151997) to the beginning of the new/subsequent overlapping period (05041998).

In the previous underpayment interest computation (1994), debit interest at the credit rate was computed from 04151997 to 05041998 on the amount of underpayment equal to the overpayment on 04151997 ($4,500.00); resulting in netted interest of $390.53. The overpayment principal amount ($4,500.00) added to the accrued interest ($390.53) to 05041998 (the end of the overlapping period) now becomes the overpayment available ($4,890.53) as of 05041998 (the beginning of the new overlapping period). The accrued interest during the unused part of the overpayment period from 05041998 to 11171998 is $188.28. The netted and accrued interest amounts ($390.53 + $188.28) total $578.81, which is the amount of interest that was originally allowed on the $4,500.00 overpayment.

Therefore, debit interest computed at the credit rate on the current adjustment would run from 05041998 to 11171998 (the end of the current overlapping period) on $4,890.53 (the amount of underpayment equal to the overpayment on 05041998), for a netted interest amount of $188.28. The entire 1996 overpayment period has now been completely used.

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Exhibit 20.2.14-6  (09-20-2006)
Special Net Rate Interest Computations - More than One Overpayment Period
IRM Reference 20.2.14.6.11

The following example illustrates a situation where more than one overpayment period is involved.

The examination of Siena Corporation’s 1989 Form 1120 return results in a tax assessment of $5,000,000.00 (plus interest), to which the corporation agrees and fully pays on July 12, 1997. A 30-Day letter is issued on August 21.1994 (applicable date September 20, 1994). The Siena Corporation files a 1995 carryback claim for $2,500,000.00 to be applied to its 1992 tax year which is allowed and refunded with interest on December 30, 1997. In addition, an examination of its 1990 Form 1120 return results in a $1,000,000.00 refund which is issued with interest on May 21, 1998. Siena Corporation now files a Form 843 to request that the interest computed on the underpayment be recomputed using the net rate. The statute of limitations for all of the years involved is open, so the interest previously assessed and paid must be recomputed. The refund is scheduled to be issued on February 14, 2000.

Interest Computations Prior to Application of the Net Rate

198912 1120 $5,000,000.00 Large Corp. Underpayment (LCU) rate applicable date is 09201994
    $5,082,506.95 Interest 03151990 to 07121997 (full paid date)
199012 1120 ($1,000,000.00) Overpayment refund with interest 05211998
    ($638,502.67) Interest 03151991 to 04061998 (manual refund IRS initiated)
199212 1120 ($2,500,000.00) Overpayment refunded with interest 12301997
    ($302,202.34) Interest 03151996 to 12301997 (manual refund/TP initiated)

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Application of the Net Rate to the Previously Paid Underpayment

Note:

The Net Rate Interest is computed at normal rates until the effective or applicable date for GATT or Large Corporate (LCU) interest has been reached.

Underpayment Interest Computation

$5,000,000.00 03151990 to 03151991 (normal corp. rate) = 581,297.86 (computed at the normal rate since applicable date not yet reached)
581,297.86 Add accrued interest
5,581,297.86 Balance due 03151991
(1,000,000.00) Subtract underpayment amount equal to the overpayment amount on 03151991
4,581,297.86 03151991 to 09201994 (normal corp. rate) and 09201994 to 03151996 (LCU rate) = 2,591,150.43
2,591,150.43 Add accrued interest
7,172,448.29 Balance due 03151996
(2,500,000.00) Subtract underpayment amount equal to the overpayment amount on 03151996
4,672,448.29 03151996 to 07121997 (LCU rate) = 718,919.22
718,919.22 Add accrued interest
5,391,367.51 Balance due 07121997

Net Rate Interest Computation

$1,000.000.00 03151991 to 07121997 (normal and GATT rate) = 558,071.88
558.071.88 Add accrued interest
1,558,071.88 Balance due 07121997
2,500,000.00 03151996 to 07121997 (normal and GATT rate) = 218,084.89
218,084.89 Add accrued interest
$2,718,084.89 Balance due 07121997

$581,297.86
2,591,150.43
718,919.22
558,071.88
218,084.89
$4,667,524.28		 Total Revised Interest
$5,082,506.95 Posted Interest
$4,667,524.28 Revised Interest
(414,982.67) Netting Benefit/Interest to be abated (TC 341)
43,251.39 Add: Accrued interest at the prevailing rate to 02052000
$458,234.06 Total Refund (23C date minus 9-day back off period

Note:

Ensure credit interest is computed on the amount of abatement that will refund/offset.

Input the following transaction information using the appropriate adjustment document and include as part of the workpapers.

1989 1990 and 1992
TC 341 - ($414,982.67) TC 340 - (.00) to indicate that the net rate has been applied
Db-Int-To-Dt - 07121997 Db-Int-ToDt - Applicable date
Correspondence Dt - 07221998 Correspondence Dt - 07221998
Activity Code - netrate Activity Code - netrate
Amd-Clms-Dt - Claim Received Date Amd-Clms-Dt - Claim Received Date

Input the following N information as part of the workpapers. (The ACT 530 Report should be used for this purpose.)

198912:
N-AMT - 1,000,000.00
N-BEG = 03151991
N-PER = 199012 		N-END = 07121997
N-MFT = 02
198912:
N-AMT - 2,500,000.00
N-BEG = 03151996
N-PER = 199212 		N-END = 07121997
N-MFT = 02
199012:
N-AMT - 1,000,000.00
N-BEG = 03151991
N-PER = 198912 		N-END = 07121997
N-MFT = 02
199212:
N-AMT - 1,000,000.00
N-BEG = 03151996
N-PER = 199012 		N-END = 07121997
N-MFT = 02

Refer to the time line in Exhibit 20.2.14–6.

Always include the "unused" and " unnetted" periods in your workpapers, the ACT 530 Report should be used for this purpose.

For 199012, there is an unused credit interest period from 07121997 to 04061998. The amount of overpayment on 07121997 is 1,558,071.88 (overpayment plus interest accrued through 07121997).

For 199212, there is an unused credit interest period from 07121997 to 12301997. The amount of overpayment on 07121997 is 2,718,084.89 (overpayment plus interest accrued through 07121997).

Reminder:

When using a time line, the following verification process should be used to determine whether the net rate adjustment was correctly computed:

• Add the net rate interest amount that was used to the interest amount that accrues during the unused credit period. If the total does not equal the overpayment interest amount originally allowed, an error has been made in the interest computation.

Unnetted debit interest periods exist from 03151990 to 03151991, 03151991 to 03151996, and from 03151996 to 07121997.

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Amount of unused overpayment at the beginning of the unused credit period 07121997 to 04061998 is $1,558,071.88.

Amount of unused overpayment at the beginning of the unused credit period 07121997 to 12301997 is $2,718,084.89.

Unnetted underpayment period still exists from 03151990 to 03151991, from 03151991 to 03151996, and from 03151996 to 07121997.

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Verification of the Net Rate Computation

To verify accrued interest during the unused overpayment period, it is necessary to determine what the non-GATT and GATT overpayment balances are as of the end of the overlapping period in the net rate computation. This information is then used to compute interest during the unused overpayment period. When you add the net rate interest amount with the interest accrued during the unused overpayment period, the total interest amount determined must equal the interest originally allowed on the overpayment. If these amounts do not equal, an error has been made in either the net rate computation or when verifying the accrued interest.

Note:

This procedure may be used to verify the accuracy of a net rate computation made on ACT; however, it is not required because the verification process is automated within that program.

Exhibit 20.2.14-7  (09-20-2006)
Special Net Rate Interest Computations - Overlapping Period Completely Used
IRM Reference 20.2.14.6.6

The following example illustrates the situation where the overlapping period is completely used in the net rate computation.

Orleans Corporation receives a refund of $135,295.81 on September 30, 1997 due to a tax decrease of $100,000.00 based on a Form 1120X for its 1992 tax year that was filed on June 30, 1997. Interest in the amount of $35,295.81 is paid for the period from March 15, 1993 (return due date) to September 30, 1997. Due to an examination of the 1991 Form 1120, the amount of $350,000.00 is assessed and a notice is issued. The taxpayer pays the balance of $602,324.75 on February 15, 1998. The balance includes interest of $252,324.75, from March 15, 1992 (return due date) to February 15, 1998. The large corporate interest rate (LCU) is charged on the underpayment based on a 30-Day letter dated June 2, 1995 (applicable date of July 02, 1995).

On July 30, 1998, the Orleans Corporation files a claim to request that the net rate be applied to its 1991 Form 1120, based on the 1992 overpayment that was refunded on September 30, 1997. The statute of limitations applicable to both the underpayment and overpayment are open on July 22, 1998. Interest on the underpayment must be recomputed to allow the net rate adjustment.

Interest Computations Prior to Application of the Net Rate

199112 1120 $350,000.00 LCU rate applicable date is 07021995
    252,324.75 Interest from 03151992 to 02151998 (full paid date)
199212 1120 ($100,000.00) Overpayment refunded with interest on 09301997
    (35,295.81) Interest from 03151993 to 09301997 (manual refund/taxpayer initiated)

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Application of the Net Rate to the Previously Paid Underpayment

Note:

The Net Rate Interest is computed at normal rates until the effective or applicable date for GATT or LCU interest has been reached.

Underpayment Interest Computation
$ 350,000.00 03151992 to 03151993 (normal Corp. rate) = 27,528.89
27,528.89 Add accrued interest
377,528.89 Balance due 03151993
(100,000.00) Subtract the underpayment amount equal to the overpayment amount on 03151993
277,528.89 03151993 to 07021995 (normal corp. rate) 07021995 02151998 (LCU rate ) = 165,251.82
165,251.82 Add accrued interest
442,780.71 Balance due 02151998
Net Rate Interest Computation
$100,000.00 03151993 to 09301997 (normal and GATT rate) = 35,295.81
35,295.81 Add accrued interest
135,295.81 09301997 to 02151998 (LCU rate) = 5,744.61
5,744.61 Add accrued interest
$141,040.42 Balance due 02151998
 
$ 27,528.89
165,251.82
35,295.81
5,744.61
$ 233,821.13 		Total Revised Interest
$ 252,324.75 Posted Interest
$ 252,324.75 Revised Interest
(18,503.62) Netting Benefit/Interest to be abated (TC 341)

Note:

Compute credit interest accordingly on the amount of abatement that will refund/offset.

Input the following transaction information using the appropriate adjustment document and include as part of the workpapers:

1990 1991
TC 341 – ($18,503.62) TC 340 – ($.00) to indicate that the net rate has been applied
Db-Int-To-Dt – 02151998 Db-Int-To-Dt – Applicable date
Correspondence Dt – 07221998 Correspondence Dt - 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – Claim Received Date Amd-Clms-Dt – Claim Received Date
Include the following N information as part of the workpapers. (It is recommended that ACT 530 Report be used for this purpose)
199112:  
N-AMT = 100,000.00
N-BEG = 03151993
N-PER = 199212 		N-END = 09301997
N-MFT = 02
199212:  
N-AMT = 100,000.00
N-BEG = 03151993
N-PER = 199112 		N-END = 09301997
N-MFT = 02

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No unused overpayment period or unused amount remains.

An unnetted debit period exists from 03151992 to 03151993 on $350,000.00, from 03151993 to 09301997 on $277,528.89, and from 09301997 to 02151998 on $135,295.81.

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Exhibit 20.2.14-8  (09-20-2006)
Special Net Rate Interest Computations - Non-Corporate Computations before 01/01/1999 Rate Equalization
IRM Reference 20.2.14.6.11

This example illustrates that, given the equalized rates effective January 1, 1999, a net rate adjustment may be allowed on "non-corporate " returns for interest periods prior to January 1, 1999.

A $2,000.00 tax overpayment was refunded with interest on February 5, 1999 on Ed and Pauline Ascot’s 1996 Form 1040 return. On May 10, 1999, a $5,000.00 tax underpayment was paid on their 1997 Form 1040 return. The time line illustrated below reflects the overlapping period during which the net rate can be allowed.

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An overlapping period exists from 04151998 to 01231999. However, the taxpayer is only entitled to a net rate adjustment from 04151998 to 01011999. This is because no interest rate differential exists after January 1, 1999.

Exhibit 20.2.14-9  (09-20-2006)
Special Net Rate Interest Computations - Later Assessment Interest Period Overlaps a Previously Unused Overpayment Period
IRM Reference 20.2.14.6.6

This example illustrates a claim requesting the net rate on a previously assessed and paid tax liability.

A 30-Day Letter was issued on March 10, 1993 to Athens Corporation which agreed to the 1990 Form 1120 tax increase of $150,000.00. The tax, plus interest, was paid on February 20, 1997. A claim was filed on January 22, 1998 and a manual refund of $79,000.00 plus interest was allowed March 19, 1998 on the 1993 Form 1120. Interest on the refunded overpayment consisted of normal and GATT rate allowed on the overpayment. On August 1, 1998, Athens Corporation filed a claim to request that the net rate be applied on the 1990 underpayment as a result of the 1993 overpayment. The statute of limitations on the underpayment and overpayment are both open as of July 22, 1998. Underpayment interest must be recomputed to apply the net rate. On the new claim filed, a refund for $13,134.10 ($11,710.22 plus $1,423.93) was issued on September 1, 1998. During the overlapping period(s), interest on the underpayment is computed at the normal and GATT rate because interest on the 1993 overpayment was allowed at the normal and GATT rate. The recomputation of underpayment interest results in a decrease to the interest assessed and refund of underpayment interest.

The overpayment period is not adjusted. The interest rate differential is eliminated on the underpayment by recomputing debit interest at the credit rate during the overlapping interest period(s).

Interest Computations Prior to Application of the Net Rate

199012 1120 $150,000.00 Large Corporate Underpayment (LCU) rate applicable date is 04091993.
    117,256.17
267,256.17 		Interest from 03151991-02201997 payment date
Payment
199312 1120 ($ 79,000.00)
( 24,778.19) 		Overpayment refund dated 03191998 Interest 03151994 to 03191998 (manual refund taxpayer initiated).

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Application of the Net Rate to the Previously Paid Underpayment

Underpayment Interest Computation
$ 150,000.00 0304101993 to 03151994 (LCU) = 45,109.76
04101993 to 03151994 (LCU) = 45,109.76
45,109.76 Add accrued interest
195,109.76 Balance due 03151994
(79,000.00) Subtract the underpayment amount equal to the overpayment amount on 03151994
116,109.76 03151994 to 02201997 (LCU rate) = 42,934.31
42,934.31 Add accrued interest
159,044.07 Balance due 02201997
Net Rate Interest Computation
$ 79,000.00 03151994 to 02201997 (normal and GATT rate) = 17,501.93
17,501.93 Add accrued interest
96,501.93 Balance due 02201997
Underpayment Interest Computation continued
$ 45,109.76
42,934.31
17,501.93
$ 105,546.00 		Total Revised Interest
$ 117,256.17 Posted Interest
105,546.00 Revised Interest
(11,710.17) Netting Benefit/Interest to be abated (TC 341)

Input the following transaction information using the appropriate adjustment document and include as part of the workpapers.

199012 199312
TC 341 – (11,710.17) TC 340 – To indicate that the net rate has been applied.
Db-Int-To-Dt – 02201997 Db-Int-To-Dt -= Applicable date
Correspondence Dt – 07221998 Correspondence Dt – 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – Claim received date Amd-Clms-Dt – Claim received date

Include the following N information as part of the workpapers. (The ACT 530 Report should be used for this purpose.)

199012:
N-AMT – 79,000.00
N-BEG = 03151994
N-PER = 199312 		N-END = 02201997
N-MFT = 02
199312:
N-AMT – 79,000.00
N-BEG = 03151994
N-PER = 199012 		N-END = 02201997
N-MFT = 02

The $11,710.17 creates a new overpayment period for another net rate adjustment. For 199312 there is an unused credit interest period that exists from 02201997 to 03191998 for the $79,000.00, plus accrued interest of $17,501.93 as of the end of the current overlapping period. For 199012 an unnetted debit period exists from 03151991 to 03151994.

Important Note: During the overlapping period, to correctly compute interest at the GATT rate on a subsequent assessment with an interest period that overlaps a previously unused period, we must determine the amount of interest accruing at the "HIGH" (non-GATT) rate as of the end of the previous overlapping period. Interest at the " HIGH" rate must continue to accrue on the original $10,000.00, plus accruals, to the end of the current overlapping period. Therefore, to correctly determine the amount of overpayment available at the beginning of the "new/subsequent" overlapping period, the GATT threshold amount is the $10,000.00, plus the accrued interest. *

*The GATT threshold can be obtained from the overpayment interest computation that is used to make the net rate adjustment. Use the "High Rate " /non-GATT amount that consists of the $10,000.00 threshold plus accrued interest as of the date that is used as the beginning of the " new/subsequent" overlapping period.

Note:

If a credit interest freeze (I-) exists on the module on which you are abating the previously paid interest, manually compute the credit interest on the abatement amount to the appropriate interest ending date

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Amount unused at the beginning of the unused credit period 02201997 to 03191998 is $96,501.93.
Unnetted debit period exists from 03151991 to 03151994. A net rate adjustment can be made if another overpayment period overlaps this time frame.

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Exhibit 20.2.14-10  (09-20-2006)
Net Rate Interest Computation - Settled Underpayment Year and Current Overpayment Year
IRM Reference 20.2.14.6.11

This example illustrates applying the net rate to a " settled" underpayment module when currently processing an overpayment on a separate tax year. This will result in an overlapping period available for netting.

The Harmon Corporation had a prior examination on its 1993 Form 1120 return which resulted in a tax assessment of $200,000.00. A 30-Day letter was issued on August 8, 1995 (applicable LCU date is September 7, 1995). The taxpayer paid both the tax and interest on December 17, 1996. The current examination of the 1995 Form 1120 has resulted in a tax decrease of $725,000.00. A manual refund for the overpayment, plus credit interest is scheduled to be refunded on October 25, 1998. (Because this is an IRS initiated adjustment there is a 45-Day back-off period.)

In this situation, compute credit interest on the overpayment first, then recompute interest on the underpayment period applying net rate.

Underpayment interest computed prior to the application of net rate:
199312 1120 Underpayment $200,000.00
60,799.56 		Tax increase
Interest from 03151994 (LCU rate applicable date is 09071995) to 12171996 (full paid date)

Overpayment interest currently being allowed:
199512 1120 Overpayment $725,000.00
121,357.16 		Tax decrease
Interest from 03151996 to 09101998 (refund schedule date of 10251998 less the 45-day back-off period)

Since the 1995 overpayment is greater than the 1993 underpayment (plus accrued interest), the entire underpayment balance that is due during the net rate period is "charged" interest at the GATT credit rate.

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Application of the Net Rate to the Previously Paid Underpayment

Note:

The Net Rate Interest is computed at normal rates until the effective or applicable date for GATT or Large Corporate (LCU) interest has been reached

Underpayment Interest Computation
$200,000.00 03151994 to 09071995 (normal corp. rate) and 09081995 to 03151996 (LCU) rate = 40,567.05
40,567.06 Add accrued interest
$240,567.06 Balance due 03151996
Net Rate Interest Computation
$240,567.06 03151996 to 12171996 (GATT rate) = 11,501.87
11,501.87 Add accrued interest
$252,068.93 Balance due 12171996
Underpayment Interest Computation continued
$ 40,567.06
11,501.87
$ 52,068.93 		Total Revised Interest
$ 60,799.56 Posted Interest
52,068.93 Revised Interest
(8,730.63) Netting Benefit/Interest to be abated (TC 341)
(1,338.75) Add: Accrued interest at the prevailing rate to 09101998
$10,069.37 Refund to 23C date minus 45-day back off period (Total is $.01 off due to DMI programming error)

Note:

Compute credit interest accordingly on the amount of abatement that will refund/offset.

Input the following transaction information using the appropriate adjustment document and include as part of the workpapers:

1993 1995 (A two-step process is required)
TC 341 – ($8,730.63)
Db-Int-To-Dt – 12171996
Correspondence date - 07221998
Activity Code - netrate
Amd-Clms-Dt – Claim Received Date 		Step 1: (ADJ47)
TC 301 – $725,000.00 (Hold Code 1 to issue notice and hold credit for manual refund)
TC 340 – (.00) to indicate that the net rate has been applied Db-Int-To-Dt – Applicable date

Step 2: (ADJ54)
TC 340 - $.00 (Hold Code 3, Posting Delay Code 1)
Db-Int-To-Dt - Same date used above
Correspondence date - 07221998
Activity Code - netrate
Amd-Clms-Dt – Claim Received Date
Include the following N information as part of the workpapers. (The ACT 530 Report should be used for this purpose. )
199312:
N-AMT – 240,567.06
N-BEG = 03151996
N-PER = 199512 		N-END =12171996
N-MFT = 02
199512:
N-AMT – 240,567.06
N-BEG = 03151996
N-PER = 1999312 		N-END =12171996
N-MFT = 02

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Always include the "unused" and " unnetted" periods in your workpapers. (The ACT 530 Report should be used for this purpose.):

Computation to Verify Unused Amount(s) and Determine the Accuracy of Net Rate Computation

Refer to the time line Exhibit 20.2.14-10.

There is an unused overpayment period in 1995 from 03151996 to 12171996. The overpayment amount on 03161996 is $484,432.95. The amount of credit available at the beginning of the unused overpayment period from 12171996 to 09101998 is $759,663.33. There is an unnetted debit period from 03151994 to 03151996 on the $200,000.00 underpayment.

03151996 The unused overpayment amount at the beginning of the overlapping period is $484,432.95 (original $725,000.00 overpayment minus $240,567.06; the amount the net rate was applied to).
12181996 The amount of the available overpayment at the beginning of the unused overpayment period from 12181996 to 09101998 is $759,663.33. This amount is obtained by taking the principal of $725,000.00 and adding the accrued overpayment interest from 03151996 to 12171996 of $34,663.33.
  These are the amounts on which underpayment interest at the overpayment rate may be computed should a subsequent net rate adjustment be requested.

Reminder:

When using a time line the following verification process should be used to determine whether the net rate adjustment was correctly computed:

Add the net rate interest amount that was used to the interest amount that accrues during the unused credit period. If the total does not equal the overpayment interest amount originally allowed, an error has been made in the interest computation.

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Amount of unused overpayment at the beginning of the overlapping period (03151996) is $484,432.94.

Amount of available overpayment at the beginning of the unused overpayment period from 12181996 to 09101998 is $759,663.33.

An unnetted underpayment period still exists from 03151994 to 03151996.

The amount of underpayment that the net rate can still be applied to at the beginning of the unnetted debit period from 03151994 to 03151996, is $200,000.00.

Exhibit 20.2.14-11  (09-20-2006)
Special Net Rate Interest Computations - Net Rate Computation when a Form 2285 is Used
IRM Reference 20.2.14.6.11

Jack and Brenda Freemont filed a Form 843 requesting the application of net rate interest netting on their 1993 Form 1040. An overpayment from the 1994 Form 1040 creates an overlapping interest period. The 1993 and 1994 adjustments were a combination of a general adjustment and a carryback adjustment. The account transaction information for the 1993 and 1994 tax periods is shown below.

Interest Computations Prior to Application of the Net Rate
199312: General Adjustment Underpayment
199512 Partial Carryback Recapture 		$35,000.00
$27,000.00
The taxpayer previously received a refund on 06071996 of $37,000.00 without interest, based on a carryback to 1993 from their 1995 loss year return. The taxpayer paid the balance due of $83,712.26 which includes interest of $21,712.26 on 08131998.
199412: General Adjustment Overpayment

1995 Carryback Recapture 		($58,000.00) Original return was timely filed and paid.
$16, 000.00

The taxpayer previously received a refund on 06071996 of $16,000.00 without interest, based on a carryback applied to 1994 from their 1995 loss year return.

On 10261997, an IRS initiated refund is issued for $52,455.91 which included interest of $10,455.91 based on the general adjustment overpayment and offset of the 1995 carryback recapture.

Account Transaction Information

199312 Module Information
TC 150
806
309
846
300
308
190/340
670 		50,000.00
50,000.00-
37,000.00-
37,000.00
35,000.00
27,000.00
21,712.26
83,712.26


199512 carryback allowed
Refunded 06071996
General adjustment
199512 carryback recapture

Payment received
199412 Module Information
TC 150
430
309
846
301
308
776
846 		60,000.00
60,000.00-
16,000.00-
16,000.00
58,000.00
16,000.00
10,455.91
52,455.91


199512 carryback allowed
Refunded 06071996
General adjustment
199512 carryback recapture
23C 10261997 (58-day back-off to 08291997)
23C 10261997

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Application of the Net Rate to the General and Carryback Adjustment (1993)

Underpayment Interest Computation
$ 35,000.00 04151994 to 04151995 (debit rate) = 3,056.21
3,056.21 Add accrued interest
38,056.21 Balance due 04151995 04151995 to 04151996 (credit rate) = 3,244.64
3,244.64 Add accrued interest
41,300.85 Balance Due 04151996
(10,000.00) Subtract carryback amount not subject to recapture 04151996 (Use of money)
31,300.85 04151996 to 06071996 (credit rate) = 318.87
318.87 Add accrued interest
10,000.00 Add carryback previously used for the interest-free period on the refund date 06071996
27,000.00 Add the carryback recapture underpayment
68,619.72 Balance Due 06071996
(47,586.27) Subtract the amount on 06071996 that is subject to the net rate (see Exhibit 20.2.14-11 (Cont 6) for the Time Line Breakdown)
21,033.45 06081996 to 08131998 (debit rate) = 4,452.96
4,452.96 Add accrued interest
$ 25,486.41 Balance due 08131998
Net Rate Interest Computation
$ 47,586.27 06071996 to 08291997 (credit rate) = 4,869.64
4,869.64 Add accrued interest
52,455.91 08291997 to 08131998 ( debit rate) = 4,502.39
4,502.39 Add accrued interest
$ 56,958.30 Balance due 08131998
$ 3,056.21
3,244.64
318.87
4,452.96
4,869.64
4,502.39
$ 20,444.71 		Total Revised Interest
$21,712.26 Posted Interest
20,444.71 Revised Interest
(1,267.55) Netting Benefit/Interest to be abated (TC 341)

Note:

Compute credit interest accordingly on the amount of abatement that will refund/offset.

Input the following transaction information using the appropriate adjustment document and include as part of the workpapers:

1993 1994
TC 341 - ($1,267.55) TC 340 – ($.00) to indicate that the net rate has been applied
Db-Int-To-Dt – 08131998 Db-Int-To-Dt – Applicable date
Correspondence Dt – 07221998 Correspondence Dt – 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – Claim received date Amd-Clms-Dt – Claim received date

Include the following N information as part of the workpapers. (It is recommended that ACT 530 Report be used for this purpose.)

199312:
N-AMT = 38,056.21
N-BEG = 04151995
N-PER = 199412

N-END = 08291997
N-MFT = 02
199412:
N-AMT = 38,056.21
N-BEG = 04151995
N-PER = 199312

N-END = 08291997
N-MFT = 02

Always include the "unused" and " unnetted" periods in your workpapers, (it is recommended that ACT 530 Report be used for this purpose).

The time line in Exhibit 20.2.14-11 reflects the unnetted periods and amounts.

Reminder:

When using the time line the following verification process should be used to determine whether the net rate adjustment was correctly computed:

• Add the net rate interest amount that was used to the interest amount that accrues during the unused credit period. If the total does not equal the overpayment interest amount originally allowed, an error has been made in the interest computation.

Unused Overpayment Period 1
Overpayment Available 04161995 		04161995-04151996
19,943.79 (58,000.00 overpayment less the 38,056.21 net rate amount)
Unused Overpayment Period 2
Overpayment Available 04151996 		04161996-06071996
31,644.18 (58,000.00 overpayment plus 4,945.04 interest accrued from 04151995 to 04151996 (62,945.04) less the 31,300.86 that the net rate was applied to as of 04151996)
Unnetted Debit Interest Periods:
1. 04161994 to 04151995 on $35,000.00
2. 06081996 to 08291997 on $21,033.45
3. 08301997 to 08131998 on $75,927.69 		 

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Exhibit 20.2.14-12  (09-20-2006)
Net Rate Interest Computation Involving a Subsequent Interest Adjustment after the Net Rate was Applied
IRM Reference 20.2.14.6.11

Subsequent Interest Adjustment After Net Rate was Applied

This is a two-part example. The first part is a claim, and the second part applies to a future adjustment. The taxpayer can only receive a one-time net rate period that is used to the extent of the applicable overpayment and underpayment. However, if an overpayment interest period (bearing credit interest) is not fully used, the net rate may be allowed for a subsequent underpayment if that underpayment period overlaps with the overpayment period not previously used for the net rate.

Example:

On April 12, 1997, a refund of $78,000.00 (plus interest) was issued for Armstrong Corporation’s Form 1120X (filed on January 23, 1997) for its 199508 return. On May 16, 1998, Armstrong Corporation agrees to and pays an underpayment of $113,000.00 (plus interest), for its 199608 Form 1120. A 30-Day letter dated March 10, 1997, was sent to the taxpayer. On August 19, 1998, Armstrong filed a claim requesting the net rate on its 199608 Form 1120.

Interest Computations Prior to Application of the Rate:

1120 199508 ($78,000.00)
(7,340.33) 		Overpayment refunded with interest
Interest 11151995–04031997 (back-off date)
1120 199608 $113,000.00
19,023.30 		Underpayment 30-Day letter dated 03101997
Interest 11151996–05161998 (full paid date)

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Subsequent Interest Adjustment after Net Rate was Applied

Refer to the overlapping period time line in Exhibit 20.2.14-12.

Reminder:

When the overpayment accrues interest before interest begins on the underpayment AND the start of the overlapping period, we must determine the overpayment amount available at the beginning of the overlapping period (11151996).

Review the time line computation breakdown in Exhibit 20.2.14-12 (Cont. 1) which provides the net rate interest computation periods for this example.

TC 341 – 848.43 refunded on 10211998 (new overpayment period)
Deb-In-To-Dt – 05161998
Claim Date – 08191998 (199608 Form 1120X)
TC 340 (.00) – overpayment module to prevent annual netting on future underpayment computation

Unused Overpayment Period/Amount – 11151995 -11151996/$78,000.00
Unnetted Period – 04031997 to 05161998

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The facts are the same as described in Exhibit 20.2.14-12.

Armstrong Corporation is currently undergoing an examination of its 199408 Form 1120, and on March 10, 1999, an agreement was signed for an $85,000.00 underpayment. Armstrong advises that a net rate period still exists based on the overpayment issued on its 199508 Form 1120. An unused overpayment period remains from 11151995 to 11151996 that can be used for the net rate adjustment on the current underpayment.

Refer to the detailed time line in Exhibit 20.2.14-12 for the interest computation and adjustment information.

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Exhibit 20.2.14-13  (09-20-2006)
Examples Illustrating how to Determine Timely Filing of a Net Rate Claim
IRM Reference 20.2.14.6.3

Example:

1 - Both Periods of Limitation Open
The Service examined Hesston Corporation’s Form 1120 return for the 1992 and 1994 tax years. For the 1994 tax year, Hesston Corporation was entitled to a refund of $30,000.00. The IRS initiated refund was made on September 21, 1997, with interest computed from March 15, 1995, to July 29, 1997. For the 1992 tax year, a tax underpayment of $80,000.00 was determined.
The Service sent a notice and demand for payment dated May 3, 1998, which Hesston Corporation paid on May 12, 1998, with interest computed from March 15, 1993 to May 3, 1998. On April 27, 1999, Hesston Corporation filed a Form 843 claim requesting the net rate during the overlapping interest period from March 15, 1995 to July 29, 1997.
On July 22, 1998, both the 6-year period of limitations (09/21/2003) for claiming additional overpayment interest on Hesston Corporation’s 1997 refund and the 2-year period of limitations (05/12/2000) for claiming a refund of underpayment interest paid in 1998 were open. Hesston Corporation’s claim is timely filed. In applying the net rate, the Service will refund underpayment interest in an amount equal to the difference between the underpayment interest paid on $30,000.00 for the period from March 15, 1995, to July 29, 1997, and the overpayment interest computed and paid on $30,000.00 for that period.

Example:

2 - One Period of Limitation Open
On November 9, 1998, the Rice Corporation filed a net rate interest claim. Rice Corporation requested that the net rate be applied to the tax underpayment for its 1993 Form 1120 based on an overlapping interest period resulting from an overpayment allowed with interest for its December 31, 1994 Form 941 return. The tax underpayment plus interest was paid on January 10, 1996. The overpayment on the Form 941 was refunded on July 9, 1996. For the underpayment year, the 3-year period of limitations expired on March 15, 1997, and the 2-year period expired January 10, 1998. The period of limitations for the overpayment expires on July 9, 2002. For net rate adjustments involving interest periods prior to October 1, 1998, both the underpayment and overpayment period of limitations must be open on July 22, 1998. Since only the overpayment period of limitations is open, a net rate adjustment cannot be allowed.

Example:

3 - Periods of Limitations Expires on or Before 12/31/1999
The Service examined Sheeling Incorporated’s Form 1120 for the 1990 and 1992 tax years. For 1990, Sheeling Incorporated was entitled to a refund of $40,000.00. The IRS initiated refund was made on November 21, 1993, with interest computed from March 15, 1991, to September 28, 1993. For the 1992 tax year, an underpayment of $60,000.00 was determined. Sheeling Incorporated was issued a notice and demand for payment dated October 3, 1996, which was paid on October 12, 1996, with interest computed from March 15, 1993, to October 3, 1996. On July 22, 1998, both the 6-year period of limitations for claiming additional overpayment interest on the 1993 issued refund and the 2-year period of limitations for claiming a refund of underpayment interest paid in 1996 were open. However, both these periods of limitations will be closed before December 31, 1999. Sheeling Incorporated must have filed a Form 843 on or before December 31, 1999, to request a net rate adjustment during the overlapping period from March 15, 1993 to September 28, 1993. The net rate adjustment will be made to the underpayment year and the taxpayer will receive a refund of the overpaid debit interest amount.

Example:

4 - Period of Limitations Open after 12/31/1999
Kingman Research Labs Form 1120 for the 1990 and 1992 tax years were examined. For the 1990 tax year, the taxpayer was entitled to a refund of $80,000.00. The IRS initiated refund was made on November 21, 1994, with interest computed from March 15, 1991, to September 28, 1994. For the 1992 year, a tax underpayment of $97,240.00 was determined. A notice and demand for payment dated October 3, 1996 was sent and the tax was paid on October 12, 1996. On December 31, 1999, the 6-year period of limitations for claiming additional overpayment interest will be open, but the 2-year period for claiming a refund of underpayment interest paid in 1996 will not be open. After December 31, 1999, but on or before the close of the 6-year period of limitations (11/21/2000) for claiming additional overpayment interest, a Form 843 claim must have been filed to apply the net rate during the overlapping interest period from March 15, 1993, to September 28, 1994.

Exhibit 20.2.14-14  (09-20-2006)
Net Rate Processing Flowchart
IRM Reference 20.2.14.6.3

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Note:

* See IRM 20.2.14.6.2
** Make sure claim is filed timely by checking postmark/received date. If the taxpayer filed claim on/or before 12-31-99, the Service will refund underpayment interest based on the netting adjustment (see Rev. Proc. 99-43 Net Rate Pre-enactment Example 3).
*** If the underpayment period of limitations has expired, the net rate is applied against the overpayment year (see section 20.2.14.6.2).

Exhibit 20.2.14-15  (09-20-2006)
Procedures for Processing Net Rate Claims - Claim Reject

Note:

Net Rate claims which do not contain enough information to process, must be rejected (not disallowed).

(1) Revenue Procedure 99-43 states that Form 843 must be filed for pre-enactment interest periods (interest accruing before October 1, 1998). Informal Claims may be accepted and worked provided the tax years are under consideration by any function of the Service, and they contain all relevant information.

(2) At a minimum, the taxpayer must provide the following information:

a. Type(s) of tax and/or type(s) of return(s).
b. Tax periods involved.
c. Underpayment amount(s) and approximate date of payment, if paid.
d. Overpayment amount(s) and approximate date of refund or offset.
e. Approximate overlapping period(s)
f. A statement that the full amounts of the underpayment and overpayment for the periods identified have not previously been used in a request to obtain the net rate of zero under section 6621(d).
g. Signature
Items a - f are Mandatory

Note:

The IRS cannot assume the taxpayer intent, so do not research for or include possible overlapping periods that are not addressed by the claim.

(3) Return an incomplete claim to the taxpayer/representative with Letter 916C (or local letter, or for Exam procedures see IRM 4.10.26) including Paragraph Q (open paragraph) along with a copy of Rev. Proc. 99-43 using the following language:
"Your claim did not provide the following necessary information" , (include only the applicable information that was not provided by the taxpayer from the list provided in (2) above).

(4) If the claim is for additional overpayment interest, (net rate adjustment to overpayment year) include in Paragraph Q (open paragraph) the following statement: "
This claim does not extend the 6-year statute of limitations for filing suit for the recovery of allowable interest provided for in sections 2401 and 2501 of Title 29 of the United States Code" .

Exhibit 20.2.14-16  (09-20-2006)
Procedures for Processing Net Rate Claims - Full or Partial Claim Disallowance

Full or Partial Claim Disallowance

(1) Full Disallowance. The following information reflects some of the reasons for fully disallowing a net rate claim.

a. The statute of limitations is not open for refunding underpayment interest or allowing additional overpayment interest. Refer to IRM 20.2.14.6.2 for information regarding the statute of limitations (IRC 6511).
b. The underpayment and overpayment statute of limitations are both closed on July 22, 1998.
c. There are no overlapping periods of differential underpayment and overpayment interest periods for the specified tax years.
d. Underpayment interest overlaps a period when no overpayment interest was allowed on an amount refunded or offset.
e. Claim not timely filed.
f. Claim is for two or more taxpayer identification numbers (TINs) that do not qualify as the "same taxpayer" for purposes of claiming a net rate interest adjustment under 6621(d) (see guidance in Field Service Advise FSA 200212028 dated January 16, 2002).

(2) Partial Disallowance. The following information reflects some of the reasons for partially disallowing a net rate claim.

a. The major reason for partially disallowing a net rate claim is because the application of the net rate interest netting differs from the taxpayer’s requested claim/refund amount. (e.g. " Open" ACT module status requested by the taxpayer was changed to "Use" or "Closed" ).
b. There may also be other specific reasons for the partial disallowance of the claim for which an explanation must be provided to the taxpayer.

(3) Full Disallowance Processing.

a. Send a certified full disallowance letter including appeal rights (105C, local letter, or for Area Offices, use the L-906).

Note:

Add the following paragraph if the request is for additional credit interest.


"This claim does not extend the 6-year statute of limitations for filing suit for the recovery of allowable interest provided for in sections 2401 and 2501 of Title 28 of the United States Code."
b. Input a TC 290 "$.00" , Blocking Series 98/99 (this is a claim disallowance blocking series; 98 without return, 99 with return), Reason Code 74 (interest). Exhibit 20.2.14-16 (XX-XX-XXXX) Procedures for Processing Net Rate Claims – Full or Partial Claim Disallowance IRM Reference 20.2.14
c. Attach a copy of the letter (as described above) with the claim to your adjustment. Make sure you put a (y) reflecting that the source document is attached. Close case. Add history to DI (Desktop Integration) screen if available.

(4) Partial Disallowance Processing.

a. Send a certified partial disallowance letter including appeal rights (106C, local letter, or for Area Offices, use L-905).

Note:

Add the following paragraph if the request is for additional credit interest: "This claim does not extend the 6-year statute of limitations for filing suit for the recovery of allowable interest provided for in sections 2401 and 2501 of Title 28 of the United States Code."


b. Input a TC 34X/77X for the interest adjustment to be made, Blocking Series 00 (with return) 18 (without return), Reason Code 74 (interest). Refer to IRM 20.2.14.6.10 (2) for more detailed information.
c. Attach a copy of the letter (as described above), claim, interest computations (such as ACT Report Numbers 490, 530, 020) and other pertinent information to the adjustment. Refer to IRM 20.2.14.6.10 (5) for more detailed information. Add history to DI (Desktop Integration) screen if available.

(5) Taxpayer Appeal Processing. The taxpayer responds and wants to appeal our decision.

a. Open a control base.
b. Order the administrative file of the fully or partially disallowed claim.
c. When the administrative file is received, close the control base leaving a history of where the case was sent (e.g., C01,AppealsDO86,C). Send the appropriate transfer letter (86C or local letter).
d. Send the case to the appropriate Appeals Office with a Form 3210, and recharge any documents to Appeals.
e. Add history to DI (Desktop Integration) screen if available.

Exhibit 20.2.14-17  (09-20-2006)
Net Rate Claim Processing
IRM Reference 20.2.14.6.10

Identifying Overlapping Interest Periods

IRC section 6621(d) applies only when there are overlapping periods of both underpayment and overpayment interest running simultaneously. To determine if this situation exists, verify the underpayment/overpayment interest computations.
1. Determine the overlapping periods by:

a. Reviewing ACT Report Number 530 (see Exhibit 20.2.14-18).

OR

b. Preparing a time line (see Exhibit 20.2.14-18).

Note:

It is recommended that the ACT Report Number 530 be used for this purpose; however, a time line will also show the overlapping periods.


2. If no overlapping period (s) exists, reject the claim (see Exhibit 20.2.14-15).
3. If an overlapping period(s) exists, process the claim. See claim allowance processing procedures below.

Claim Allowance Processing

When processing a net rate claim for abatement or refund and:
1. Current tax adjustment (TC 29X, 30X) activity exists; see IRM 20.2.14.6.10(3).
2. No current tax adjustment (TC 29X, 30X) activity exists, see the instructions below.

REQ54

a. Blocking Series (BLK) – Use BLK 00 with controlling DLN. Without controlling DLN, use BLK 18. If the account has an open AIMS Base, use BLK 05 or 15.
b. TC 34X – Debit Interest Adjustment (TC 340 for "zero" is required if no decrease/increase is applicable). See note below.
c. Debit-Int-To-DT – Input date debit interest is computed to (RDD is used if no interest exists on that year).
d. TC 770 – Credit Adjustment (input is not required if interest adjustment amount is zero). TC 772 can be input as long as the account will be in balance due after posting. If the account will be overpaid after the TC 772 posts, consider IRM 20.2.14.6.10(4).
e. Credit-Int-To-DT – Date credit interest is computed to (input is not needed if zero or TC 772 is input).
f. Correspondence DT – 07221998 (IRC 6621(d) enactment date).
g. AMD-CLMS-DT – Received date of the claim.
h. Activity CD – netrate
i. Hold CD – 3 (Do not allow a generated notice to be issued to the taxpayer. Send the taxpayer the appropriate letter).
j. Input the " N" amount information or attach the ACT Report 530 to the adjustment document (the 530 Report shows all "N " amount information).
k. Attach any relevant information pertaining to the claim.

Note:

When the net rate adjustment is made to the underpayment year, it is necessary to input a TC 340 with a "zero" amount on all overpayment years involved with the net rate adjustment(s). This action is required on all of the overlapping periods that are used in the current net rate adjustment to identify them as no longer being available for subsequent annual or net rate adjustments for those years. If a year requested in the claim is unused because of no overlapping periods, input a TC 290 for "zero" , with Blocking Series 18, to properly identify the account.

3. Ensure all of the following information is part of the source documents sent with each tax year involved with the net rate adjustment:
a. A copy of the written request or claim Form 843.
b. ACT Reports 490 and 530 (these reports must be attached to the adjustment document of the tax period they are for).
c. ACT Report 020.
d. Any pertinent correspondence and information from the taxpayer or the representative.
e. A copy of the appropriate Power-of-Attorney form.
f. Any personal notes or observations pertaining to the claim that would be helpful to the next examiner who may have to update the interest or process a subsequent adjustment on the account.
g. A copy of the current allowance/partial allowance letter from the IRS (the taxpayer’s copy of this letter must include copies of the ACT Reports 020, 490 and 530 for all the tax periods involved).
h. Any refile documents you may have in your possession.

Note:

These are in addition to any normal attachments required in the work process, regardless of the area working the account.

Exhibit 20.2.14-18  (09-20-2006)
Preparing a Time Line & Creating ACT Report 530
IRM Reference 20.2.14.6.4

Preparing a Time Line and Creating ACT Report 530 to Identify Overlapping Interest Periods



Case Scenario: The Delphinium Corporation timely filed a calendar year 2000 return with a balance due. In 2001, the taxpayer paid the balance due and the interest that accrued from 3/15/2001 to 10/20/2001. An examination of the taxpayer’s 1999 return resulted in an overpayment of $27,000.00. The refund has not been processed. The refund date is 02/14/2002. The overlapping interest period runs from 3/15/2001 to 10/20/2001. The overlapping period involves an underpayment that was previously paid. Therefore, when the 199912 overpayment is processed, netting will apply. This case scenario will be used in preparing a time line and creating ACT report number 530.

MFT 02 199912   MFT 02 200012  
150
660
660
660
846
301 		03152000 04151999 06151999 12151999 03302000 03152000 71,660.00
25,000.00-
25,000.00-
25,000.00-
3,340.00
27,000.00- 		150
660
196
670
196 		03152001 09152000 04092001 10202001 10202001 75,000.00 50,000.00-
148.37 26,160.25- 1,011.88

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The overlapping period occurs between 03/15/2001 and 10/20/2001.

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During the overlapping period, debit interest on the underpayment for the 2000 tax year is charged at the same rate interest was paid on the 1999 tax year.

$25,000.00 03/15/2001 (Balance due at the start of the overlapping period.)
132.77 Debit Interest at the Credit Rate (03/15/2001 to 10/20/2001)
668.88 Debit Interest at the GATT rate (03/15/2001 to 10/20/2001)
25,801.65 Due as of 10/20/2001
26,160.25- Underpayment as Originally Assessed
$(358.60) Debit Interest to be abated (TC 341)

≠ USED "N" amounts are the amounts from both the underpayment and overpayment years that have been used to " NET" or equalize interest rates during an overlapping period.

1999 2000
N-AMT $25,000.00 N-AMT $25,000.00
N-BEG 03–15–01 N-BEG 03–15–01
N-TXPD 199912 N-TXPD 200012
N-MFT 02 N-MFT 02
N-END 10–20–01 N-END 10–20–01

< UNUSED "N" amounts are what has not been used and are still available to be netted with another overlapping period. Since the credit balance on the 199912 year was not entirely used in netting with the 2000 tax year, there is a remaining balance that may still be netted. This unused credit is shown below.

Unused overpayment @ GATT rate
Unused overpayment @ Overpay rate
Available Suspended Overpay
Unused overpayment @ GATT rate Unused overpayment @ Overpay rate Unused overpayment @ Overpay rate 		$20,340.00 $6,660.00 $3,340.00 $20,385.90 $6,679.13 $3,903.55 From 03/16/00 to 03/30/00
From 03/16/00 to 03/30/00
From 03/16/00 to 03/30/00
From 03/31/00 to 03/15/01
From 03/31/00 to 03/15/01
From 03/16/01 to 10/20/01

The following screens illustrate the input of the 199912 and 200012 account data (before netting) and the resulting 530 reports generated (after netting) for each year.

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Exhibit 20.2.14-19  (09-20-2006)
Statute Highlights for Net Rate Claims
IRM Reference 20.2.14.6.2

Claims for Credit or Refund of Underpayment Interest

Section 6511(a) of the Internal Revenue Code (IRC) provides that a claim for refund of an overpayment must be filed within 3-years from the time the return was filed or 2-years from the time the tax (including interest) was paid, whichever period expires later. If no return is filed by the taxpayer, the claim must be filed within 2-years from the time the tax was paid.

See IRC 6511(c) for additional information on the applicable rules in case of extension of time by agreement on additional assessments.

When a return is filed after the due date under an extension of time for filing and a claim is filed within 3-years after the return is filed, amounts to be refunded include not only payments made within the 3-years preceding the date of the claim, but those made within that 3-years plus the extension for filing the return.

Apply Section 6621(d) to Such Periods

A Senate amendment to section 3301(c)(2) added that Section 6621(d) applies in the case of interest for periods beginning before July 22, 1998, provided the statute of limitations have not expired on either the applicable underpayment or overpayment. The Senate amendment language was not included in section 3301(c) (2) as enacted. However, the Conference Committee indicates that the intention of Congress is to follow the Senate amendment.

For interest periods beginning before July 22, 1998, based on the Technical Correction, the statute of limitations must be open for both the underpayment and overpayment tax periods involved with the net rate request. If the statute of limitations is closed for either the underpayment or overpayment, a net rate interest adjustment is not allowed.

Determine if Statute is Open on July 22, 1998

1. The credit that would refund, as a result of your TC 341 must be dated less than two years prior to July 22, 1998.

a. If it is a payment (TC 640 not a cash bond, TC 670, TC 680, etc), the date of the payment must be July 22, 1996 or later.
b. If it is an offset credit (TC 706, TC 700, TC 736, etc.) the 2-year rule is based on the cycle. Cycle 9630 or later.

2. A TC 30X created the underpayment on the account.

a. If the TC 300 audit adjustment was posted within 6-months of the enactment date (July 22, 1998), the statute is open to input a TC 341. The agreement to extend the time to assess the tax (ASED) must have been January 23, 1998 or later.

3. The overpayment year TC 77X must be dated less than 6-years prior to July 22, 1998.

a. If the TC 77X were dated July 22, 1992 or later the statute would be open.


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