20.2.14  Netting of Overpayment and Underpayment Interest

Manual Transmittal

June 21, 2011

Purpose

(1) This transmits revised IRM 20.2.14, Interest, Netting of Overpayment and Underpayment Interest.

Background

This section provides the procedures used in netting of credit and debit interest.

Material Changes

(1) Most examples and exhibits found in IRM 20.2.14 were updated to more current years with the figures being adjusted accordingly. Most examples were changed to BMF where necessary, as net rate interest netting no longer applies to IMF accounts.

(2) IRM 20.2.14.1 - Major revision.

(3) IRM 20.2.14.2 - Moved and rewrote the note to appear in IRM 20.2.14.1. Other minor edits.

(4) Deleted the content of IRM 20.2.14.3 and IRM 20.2.14.3.1. Replaced these sections with the content from IRM 20.2.14.3.2 and IRM 20.2.14.3.3, respectively. The remaining subsections of IRM 20.2.14.3 were renumbered accordingly.

(5) Added to bullet list shown in IRM 20.2.14.3.1(1) that balances available for possible netting are shown on ACT/DMI 530 report.

(6) IRM 20.2.14.3.4(2) and (3) - Clarified statements regarding tax module verification.

(7) IRM 20.2.14.3.7(4) - added IRC 6631 requirements to include an interest calculation with billing notices sent to the taxpayer.

(8) IRM 20.2.14.4(2) - Added a new paragraph to better describe within module netting procedures. (2) Renumbered the remaining section.

(9) IRM 20.2.14.4(4) - Added new paragraph. (4) regarding Rev. Rul. 99-40 and within-module netting with an example and time line as Figure 14-6.

(10) IRM 20.2.14.4(5) - Added new paragraph. (5) stating that the benefit of IRC 6621(d) and within module netting cannot be allowed on the same overpayment for the same overlapping period and amount.

(11) IRM 20.2.14.4(6) - Clarification made to renumbered paragraph (6).

(12) IRM 20.2.14.4.1(1) - Added 23C Date information for TC 777 and other minor clarifications.

(13) IRM 20.2.14.4.2(1) - Added manual refund, TC 770 information.

(14) IRM 20.2.14.4.2(2) - Revised to insert a new Item 2 regarding no netting of interest by Master File on an MFT 31 tax module that is not established through mirroring of the MFT 30 tax module. Renumbered the remaining section.

(15) IRM 20.2.14.4.2(4) - Replaced the second sentence to clarify when netting computations are suspended during interest-free periods.

(16) Reminder added below IRM 20.2.14.4.2(5) to use non-restricting TC 340 whenever possible.

(17) IRM 20.2.14.4.3(2) - Removed a reference in the example to a payment made by the taxpayer.

(18) IRM 20.2.14.4.3(3) - Added an interest "run-to" date.

(19) Figure 20.2.14-7 was revised.

(20) Figure 20.2.14-8 was revised.

(21) IRM 20.2.14.4.3(5) - Changed the underpayment interest period and computation results. Added a note under Item (5)(f).

(22) IRM 20.2.14.4.3(6) - Revised information regarding input of TC 772.

(23) IRM 20.2.14.4.3(7) - Revised to add an exception statement regarding proper input of a netted interest TC 772 on MFT 31 tax modules. Inserted the exception under Item 7. Following the exception statement under Item 7, added a reminder statement regarding the use of a non-restricting TC 340.

(24) IRM 20.2.14.4.4 - Changed the sequence of Items 2 and 3.

(25) Information on within module netting and Tax Motivated Transactions (TMT) added as IRM 20.2.14.4.5. Figure 14-10 added for clarification.

(26) Deleted the content of IRM 20.2.14.5, and replaced it with the content from IRM 20.2.14.5.2. Change made to the erroneously computed credit interest table.

(27) IRM 20.2.14.6.1 - Note shown under Paragraph (1) and Paragraphs (2) and (3) moved to general information in IRM 20.2.14.1.

(28) IRM 20.2.14.6.1(2) - New paragraph added to explain that net rate interest netting is not permitted with interest paid at the Federal short-term rate on returned 6603 deposits.

(29) IRM 20.2.14.6.1.1(3) - Net Rate Netting requests are to be sent to the Ogden Campus at the address given. The exception statement was revised to state that interest netting claims are no longer forwarded to other functions when a net rate claim involves tax periods that are currently under consideration by any function of the Service (including Examination, Appeals, or a case before a federal court.

(30) IRM 20.2.14.6.2(2)(c) was added to provide information on the amount of credit or refund allowable when a Form 872, Consent to Extend the Time to Assess Tax, has been executed.

(31) IRM 20.2.14.6.3 was renamed "Guidelines for Filing Claims" .

(32) Added new title and text at IRM 20.2.14.6.4 providing the steps to be taken in determining a net rate interest adjustment. Former title and text at IRM 20.2.14.6.4 is now contained at IRM 20.2.14.6.4.1. Former title and text at IRM 20.2.14.6.4.1 is now contained at 20.2.14.6.4.3.

(33) IRM 20.2.14.6.4.1(1) - Clarified the credit and debit interest periods to which the net rate can be applied.

(34) IRM 20.2.14.6.4.1(3) - Added paragraph stating the benefit of Rev. Proc. 94-60 and Net Rate Interest Netting cannot be allowed on the same overpayment for the same overlapping period and amount.

(35) Text formerly contained at IRM 20.2.14.6.5 is now contained at IRM 20.2.14.6.4.2.

(36) Title and text at IRM 20.2.14.6.5.1 is now contained at IRM 20.2.14.6.4.4.

(37) Title and text at IRM 20.2.14.6.5.2 is now contained at IRM 20.2.14.6.4.5. IRM 20.2.14.6.4.5(3) and (4) was revised to change the interest run-to date in the example statement. The interest amount in IRM 20.2.14.6.4.5(3), and table at IRM 20.2.14.6.4.5(4) were adjusted accordingly.

(38) Title and text at IRM 20.2.14.6.6 is now contained at IRM 20.2.14.6.5. Paragraphs (1) and (2) of IRM 20.2.14.6.5 was revised to clarify the definitions of the terms "unused" and "unnetted" .

(39) Figure 20.2.14-13 was renumbered as Figure 20.2.14-16 and updated to reflect more current tax periods.

(40) Added new text at IRM 20.2.14.6.6 to describe the ACT/DMI netting status that must be used based on the period of limitations.

(41) New IRM 20.2.14.6.6.1 was added to provide information on determining the ACT/DMI netting status for credit or refund of underpayment interest.

(42) New IRM 20.2.14.6.6.2 was added to provide information on determining the ACT/DMI netting status for credit or refund of overpayment interest.

(43) New IRM 20.2.14.6.6.3 was added to provide information on determining the ACT/DMI "Unsettled" netting status.

(44) IRM 20.2.14.6.9(1) - Added Transaction Code 971, Action Code 355 and Accounts Management System (AMS), to the bullet list of information available on IDRS to identify a module affected by net rate interest netting.

(45) IRM 20.2.14.6.9(3) - Added note statement after the end of the bullet list regarding the "N" fields on Command Code ADJ54.

(46) IRM 20.2.14.6.10(3)(a) - Added a note statement after the 9th bullet item regarding the issuance of a notice for purposes of triggering LCU interest. This incorporates SERP IPU AM/C BMF/IMF 07388 dated February 14, 2007.

(47) IRM 20.2.14.6.10(6) - Made minor changes to incorporate SERP IPU AM/C BMF/IMF 07435 dated February 28, 2007.

(48) The note statement inserted under the 6th bullet item of IRM 20.2.14.6.10(3)(b), Step 1, was revised to include a note regarding the issuance of a notice for purposes of triggering the 2% Large Corporate Underpayment Rate.

(49) The 7th bullet item under IRM 20.2.14.6.10(3)(b), Step 1 - was revised to correct the IRM number referenced in the text.

(50) New IRM 20.2.14.6.12 was added to provide information on referencing IRM 4.10.26, Net Rate Netting Procedures for LMSB Cases, regarding the handling of net rate claims received by the Examination function before an audit is closed.

(51) Added new IRM 20.2.14.6.13, Requests for Abatement vs. Claims for Refund,, explaining the difference and that both are allowed for Net Rate Netting Requests.

(52) Exhibit 20.2.14-4(2) - Revised to add a note statement regarding the prohibition of netting between a foreign corporation and its related domestic corporation.

(53) Exhibit 20.2.14-4(4) - Removed Examples 1 and 2, renumbered Example 3 to Example 1.

(54) Exhibit 20.2.14-6 - Revised to remove an erroneous overpayment interest suspension. Adjusted tables and figures throughout accordingly. Also added the requirement to attach the ACT/DMI 530 report to the adjustment document.

(55) Exhibit 20.2.14-7 - Changed narrative to state the taxpayer received a manual refund.

(56) Exhibit 20.2.14-9 - Corrected dates and amounts in the first box of the table: "Underpayment Interest Computation" .

(57) Exhibit 20.2.14-11 - Revised to include an overpayment interest suspension on a carryback refund. Adjusted tables and figures throughout accordingly.

(58) Exhibit 20.2.14-16(2)(a) - Clarified a reason to partially disallow a net rate claim.

(59) Exhibit 20.2.14-16(3)(b) and (3)(c) - Clarified full disallowance processing.

(60) Exhibit 20.2.14-16(4)(c) - Clarified partial disallowance processing.

(61) Exhibit 20.2.14-19 - Flowchart titled Checking the Statute for Credit or Refund of Underpayment Interest was added.

(62) Exhibit 20.2.14-20 - Flowchart titled Checking the Statute for Credit or Refund of Overpayment Interest was added.

(63) Previous Exhibit 20.2.14-19 was renumbered as Exhibit 20.2.14-21.

(64) The following exhibits were updated to include more current tax periods:

  • Exhibit 20.2.14-1 through Exhibit 20.2.14-6.

  • Exhibit 20.2.14-10, Exhibit 20.2.14-12, and Exhibit 20.2.14-16 through Exhibit 20.2.14-18.

Effect on Other Documents

IRM 20.2.14, dated October 1, 2006, SERP IPU AM/C BMF/IMF 07435 dated February 28, 2007 , and SERP IPU AM/C BMF/IMF 07388 dated February 14, 2007 are superseded.

Audience

SB/SE Compliance Employees and other operating division employees that work with interest.

Effective Date

(06-21-2011)

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

20.2.14.1  (06-21-2011)
Interest Netting Overview

  1. Section 6611 of the Internal Revenue Code (IRC) authorizes the IRS to pay interest on any tax overpayment. IRC 6601 requires taxpayers to pay interest on any tax underpayment. The interest accrues at the rates established in IRC 6621(a)(1) for overpayments and IRC 6621(a)(2) for underpayments.

  2. Prior to December 31, 1986, the Service charged underpayment interest at the same rate that it paid overpayment interest. Then, in the Tax Reform Act of 1986, Congress set different compound interest rates in IRC 6621 for underpayments and overpayments. On January 1, 1987, dual interest rates were legislated. However, in a conference report that accompanied the Tax Reform Act of 1986, it was suggested that the Service implement comprehensive "netting" procedures within a single tax module.

  3. Annual netting is necessary to eliminate the interest rate differential during "overlapping" interest periods within a single tax module. "Overlapping" interest periods occur when a taxpayer owes debit interest on an underpayment, while through the same period of time, credit interest is allowed on an overpayment at a lower rate. To "net" debit and credit interest rates, the IRS "equalizes" the interest rates by charging debit interest at the lower credit interest rate during the overlapping period. The equalization of the different interest rates within the same tax module is called "within module netting" or "annual netting." See IRM 20.2.14.4.

  4. IRC 6621(d) provides for the equalization/elimination of the interest rate differential between overpayments and underpayments of two or more tax modules for the same taxpayer during overlapping periods so that the interest is netted to zero. The IRS calls this procedure "net rate interest netting." See IRM 20.2.14.6.

    Note:

    Effective for interest accruing on or after January 1, 1999, underpayment and overpayment interest rates are equalized for non-corporate taxpayers. Therefore, within module and net rate interest netting, on interest accruing on or after that date, is not needed. However, when subject to the higher 120 percent (tax motivated transactions) rate of interest under the repealed IRC 6621(c), taxpayers are entitled to "within module" and "net rate interest netting" consideration.

  5. The reference in IRC 6621(d) 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 a rate of zero. To accomplish this, during overlapping interest periods that occur between one or more tax periods, underpayment interest may be charged at the overpayment/credit rate or overpayment interest may be allowed at the underpayment/debit rate. To implement IRC 6621(d), the Service will use the interest computation method referred to as "net rate interest netting" to "equalize/eliminate" the interest rate differential.

  6. IRC 6621(d) applies to all types of tax. Therefore, taxpayers may request net rate interest netting 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 request that the Service net an overpayment on a Form 941, Employer's Quarterly Federal Tax Return, against an underpayment on Form 1120, U.S. Corporation Income Tax Return, for the same taxpayer.

  7. The net rate cannot be applied during periods of time in which credit interest is not legally allowable or when debit interest is not legally payable, (e.g., the 45-day interest-free rule, 9/13/20-Day back-off period for credit interest or Revenue Ruling 99-40 for debit interest).

20.2.14.2  (06-21-2011)
Applicable Revenue Procedures

  1. Guidance that addresses net rate interest netting includes:

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

    • Rev. Proc. 99-19 and Rev. Proc. 99-43, which provide guidance for net rate interest netting between two or more modules for interest accruing prior to October 1, 1998.

    • Rev. Proc. 2000-26, which provides guidance on the application of IRC 6621(d) for interest netting between two or more modules, if the overlapping period of differential interest rates begins after September 30, 1998.

20.2.14.3  (06-21-2011)
General Netting Computation Information

  1. Although there are some differences in the way netting is performed for a single module [within module netting, see IRM 20.2.14.1 (3)] versus multiple modules [net rate interest netting, see IRM 20.2.14.1 (4)], 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 period(s) to determine where the overlapping period(s) occur.

    2. Determine the overlapping amount.

    3. Determine the overlapping rates.

    4. Compute netted interest (underpayment interest computed at the overpayment interest rate or overpayment interest computed at the underpayment interest rate).

    5. Compute underpayment or overpayment interest on any remaining amounts.

    6. Determine amount(s) and period(s) still available for netting.

  2. It is necessary to know how interest netting is accomplished before using the Automated Computation Tool (ACT). ACT is a customized version of the COTS product, "InterestNet" , by Decision Modeling Inc. (DMI). Using the following example, each step of the process will be discussed.

    Example:

    On March 15, 2007, Marin Corporation filed Form 1120 for the tax period ending December 31, 2006, showing an overpayment of $1,654,900.00, which was refunded with a 23C Date of October 22, 2007. Overpayment interest of $53,805.81 was computed to October 13, 2007, (9-Day back-off) at the "high" rate on the first $10,000.00 (see IRM 20.2.4.9, Special Credit Interest Rules for Corporations) 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, 2009. There are no suspension periods of underpayment interest (e.g., there is no "credit elect" issue from the previous year). Underpayment interest will be computed to September 12, 2009, the date the notice was issued.

20.2.14.3.1  (06-21-2011)
Manually Computing Interest Netting

  1. All interest netting cases must be computed using the Automated Computation Tool (ACT), which is the InterestNet software developed by Decision Modeling Inc. (DMI). This software program is referred to as ACT/DMI and is available and supported by the Office of Servicewide Interest. Although "within module netting" is usually less complex, it too must be computed using the ACT/DMI software. Using the tax module data that is loaded/entered, the ACT/DMI software is able to:

    • Identify overlapping periods.

    • Computes interest rate equalization.

    • Identify balances available for potential future netting (i.e., the 530 Report).

    • Identify possible offsetting benefits. See IRM 20.2.14.6.6.3.

    Caution:

    The ACT/DMI 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/DMI software must always be used for net rate interest netting.

20.2.14.3.2  (06-21-2011)
Determining the Overlapping Periods

  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 recreate the interest computation, all avenues must be used to locate the required documentation, such as:

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

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

    3. Contact the taxpayer or power-of-attorney (POA) to obtain copies of any documents they may have (e.g., ACT/DMI Reports, Form(s) 2285,Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments (Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal Revenue Code, etc.). Or, if applicable, contact the examining official to request that they contact the taxpayer/POA directly.

  4. 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. For each period, indicate whether the period of limitations for overpayments or underpayments was open at the time the Service received the request.

    4. Indicate relevant information, such as GATT/LCU/TMT interest rates, along the time line.

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

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

    7. Indicate overlapping periods on the time line.

    8. Identify the amount of tax and overpayment that overlap for each overlapping period.

    9. Identify "unused" amounts and "unnetted" periods for possible additional net rate interest netting claims.

    Note:

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

  5. In the Marin Corporation example, the overlapping period is from March 15, 2007, the return due date, to October 13, 2007, the last day overpayment interest was paid. Do not include periods when no overpayment interest was paid or payable.

20.2.14.3.3  (06-21-2011)
Determine the Overlapping Amount

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

  2. In the Marin Corporation example, the interest start date for both the overpayment and the underpayment are the same: March 15, 2007. 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, 2007.

    Figure 20.2.14-1

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    Overlapping Period Time Line

20.2.14.3.4  (06-21-2011)
Determine the Interest Rate during the Overlapping Period

  1. The net rate adjustment is generally accomplished by computing underpayment interest at the overpayment rate that was used through the overlapping period of time.

  2. Because the Service calculated GATT overpayment interest differently prior to January 1, 1999, overpayment interest is to be recomputed in the same manner as originally allowed.

  3. 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 "within module netting" and "net rate interest netting" purposes. See IRM 20.2.4.9.3,GATT Rate, for instructions on computing interest at the "GATT" rate.

  4. In the Marin Corporation example, 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

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    Overlapping Period Time Line

20.2.14.3.5  (06-21-2011)
Compute Netted Interest

  1. Using the overlapping period, amount, and rate determined in the prior section, compute underpayment interest at the lower overpayment rate.

  2. In the Marin Corporation example which illustrates within module netting, GATT interest is computed on $595,890.00 from March 15, 2007, to October 13, 2007, for a total of $19,341.66. This is the netted interest amount (underpayment interest computed at the overpayment interest rate) and will be input with a TC 772 or computer generated with a TC 777.

20.2.14.3.6  (06-21-2011)
Compute Underpayment and Overpayment Interest on Remaining Amounts

  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 $19,341.66. Because normal overpayment interest processing on the originally issued "taxpayer initiated" overpayment allows an interest-free (9-Day back-off) period on this module from October 14 to October 22, no underpayment interest can be charged during this period up to the amount of the overpayment. Thus, underpayment interest on the $615,231.66 begins on October 23, 2007.

20.2.14.3.7  (06-21-2011)
Using the Automated Computation Tool (ACT/DMI)

  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 tax module data has been input.

    Note:

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

  2. First, enter the tax module information into the program to verify the previous overpayment interest to the refund date of October 22, 2007, as shown in Figure 20.2.14-3.

    Figure 20.2.14-3

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    ACT/DMI Report Update Module Screen

  3. Next, enter the tax assessment and subsequent payment as shown in Figure 20.2.14-4 and compute a running module balance until the date of the notice. For this example, a notice date of September 12, 2009 was used.

    Figure 20.2.14-4

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    ACT/DMI Report Update Module Screen

  4. The program will compute the netted and underpayment interest and provide a Report 490 Activity Summary (See Figure 20.2.14-5) which is to be sent to the taxpayer showing the restricted interest computation. The report must also be used as documentation for the interest adjustment and be attached to the case to be filed. Since this computation format and content cannot be duplicated on IDRS, retention of this report in more than one location ensures a copy will be obtainable if needed.

    1. IRC 6631 requires that an explanation of interest computations be sent to an individual (IMF) taxpayer "with each notice which includes an amount to be paid." The requirements of IRC 6631 also apply to employment and excise tax liabilities of sole proprietors. Master File programming will systemically include an explanation of the interest calculation with notices sent to taxpayers. However, if interest is manually computed or restricted, an interest computation must be mailed to the taxpayer. See IRM 20.2.8.3(5), Manual Computations.

    2. IRC 6631does not apply to statutory notices of deficiency (i.e., 90-Day letters), or refunds. IRC 6631 applies to notices that "include an amount to be paid."

    Note:

    While there is no statutory "requirement" to provide an explanation on Business (BMF) modules, it is recommended that an explanation be provided to the taxpayer when the interest is manually computed.

    Figure 20.2.14-5

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    ACT/DMI Report 490 Activity Summary

  5. The Report 490 (Figure 20.2.14-5) shows the following manual interest adjustments that need to be made to the module:

    • Netted interest (TC 772) in the amount of $19,341.66, and,

    • Underpayment interest (TC 340) in the amount of $67,164.90.


    The two amounts shown above equal the total interest being assessed on the module, $86,506.56.

20.2.14.4  (06-21-2011)
Within Module Interest Netting under Revenue Procedure 94-60

  1. Rev. Proc. 94-60 describes procedures for the Service to use to calculate interest on an underpayment when the taxpayer has previously received a refund of an overpayment with interest for the same tax period and time frame (within module or annual interest netting).

  2. During the period interest was paid on a refund, interest will be charged at the same rate on the portion of the underpayment (including accruing interest) that does not exceed the refund principal.

  3. Overlapping periods occur when a taxpayer owes underpayment interest on an underpayment for the same period of time that overpayment interest was previously paid on a refund. In most cases, the overlapping period occurs between the overpayment availability date and the refund date less the applicable back-off period.

  4. The Service applies the rules of Rev. Rul. 99-40 (regarding the treatment of "credit elect" payments) before computing within module netting. If an interest-free overpayment period exists at the same time as an overpayment that accrued interest, within module netting will only apply to the extent a subsequent underpayment exceeds the interest free amount. Careful analysis is needed to determine if this situation exists.

    Example:

    San Pete Sand & Gravel Corporation timely paid the tax shown on Form 1120 for the 200712 tax year and has an overpayment of $85,000.00. A credit elect of $50,000.00 is forwarded to the 200812 tax year and a refund of $35,290.94 is issued. (Credit interest is paid because the 45-day period was not met.) Later, Exam makes a general tax assessment of $42,000.00. The tax module information is shown below.

    200712 Tax Account for San Pete Sand & Gravel Corporation Example

    Tax Account Information
    TC 150 03152008 120,000.00
    TC 650 03152008 205,000.00
    TC 836 04152008 50,000.00
    TC 776 06142008 290.94
    TC 846 06142008 35,290.94
    TC 300 08092009 42,000.00

    When the tax module information is input to ACT/DMI, the TC 300 must be entered with a due date of April 15, 2008. Otherwise, ACT/DMI will apply within module interest netting for the period from March 15th to April 15th. Based on Rev. Rul. 99-40, debit interest is not due on the Exam assessment until April 15, 2008. Therefore, within module interest netting cannot be applied during this period because debit interest is not being charged.

    Figure 20.2.14-6

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    Time Line Applying Rev. Rul. 99-40 before "Within Module Netting"

  5. If the benefit of net rate interest netting under IRC 6621(d) has previously been allowed on an overpayment period, the benefit of within module netting for the same overpayment period and amount will not be allowed. The same overpayment cannot be used for both within module netting and net rate interest netting.

  6. Interest netting (within module or net rate interest netting) is unnecessary for interest periods prior to January 1, 1987, as underpayment and overpayment interest rates for corporate and non-corporate taxpayers were equal prior to that date. Interest netting also does not apply to non-corporate taxpayers for interest periods beginning on or after January 1, 1999, as interest rates were equalized as of that date.

    Exception:

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

20.2.14.4.1  (06-21-2011)
Master File Computation of Within Module Netting

  1. Effective January 1993, Master File programming was updated to accomplish netting within a single module. When refunds are issued with interest, Master File posts the netted interest amount with a TC 777, which carries the 23C date of a prior refund and a "999" in the Julian Date field of the DLN as shown in the following partial txmod example.

    Computer Generated Within-Module (Annual) Netting

    T /C POSTED TRANS-AMOUNT CYC DLN
    150 05262008 2,500,000.00 200822 00311-302-00002-8
    660 06152007 5,000,000.00- 200726 00397-101-00000-7
    776 05262008 16,231.85- 200822 00311-302-00002-8
    846 05262008 2,516,231.85 200822 00311-302-00002-8
    420 09192009 0.00 200944 00977-000-00000-9
      PBC>000 SBC>00000 EGC>00  
    300 12072009 729,890.00 200950 00347-532-00000-9
    336 12072009 55,806.10 200950 00347-532-00000-9
    777 05262008 4,731.39 200950 00311-"999" -00002-8
          Julian Date "999" denotes netted interest

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

  3. Master File calculates the netted interest amount by finding the difference between the amounts of the interest paid on the refunded overpayment and the recomputed overpayment interest on what the corrected refund should be.

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

    1. 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

    2. The netted underpayment amount plus the netted interest FROM the 23C Date of the refund to the appropriate interest TO date.

20.2.14.4.2  (06-21-2011)
Master File Limitations in Computing Within Module Interest Netting

  1. Master File is generally unable to figure "within module netting" accurately when an interest restriction is present. A restricted interest transaction can be identified by:

    • Transaction Codes (TC) 340, 341, 772, 770 input with Document Code 47 or 54, or TC 770 (even for zero) posted with a manual refund.

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

      Caution:

      When a tax module is restored from the retention register, a "-I" Freeze is set. The interest computation is systemically restricted by Master File. A corresponding TC 34X may or may not be present. These tax modules require all underpayment interest to be manually computed and input with a TC 34X.

    For more information on restricted interest processing, see IRM 20.2.8, Restricted Interest.

  2. Master file does not perform "within module netting" on a MFT 31 tax module that is not established through mirroring of its corresponding MFT 30 tax module. See IRM 21.6.8.5, Mirrored Account Overview. Those tax modules that are not mirrored require all interest to be manually computed and input with TC 34X. See IRM 20.2.14.4.3 (7).

  3. The process of applying "within module netting" results in an underpayment interest amount. Master File may not be able to correctly compute netted interest in modules containing interest-free periods associated with refunds when an interest-free period(s) falls within an overlapping underpayment/overpayment interest period. Examples include, but are not limited to:

    1. One or more interest-free periods due to IRC 6601(c) (i.e., waiver periods covered by Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment). See IRM 20.2.5,Interest on Underpayments.

    2. 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. See IRM 20.2.4,Overpayment Interest.

  4. Underpayment interest periods that are "interest-free" by law are also interest-free for netted interest computations. If, during an overlapping period, an interest-free period for an underpayment exists, suspend netting computations during that interest-free period to the extent the underpayment is subject to the interest-free period.

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

    Reminder:

    Always use a non-restricting TC 340 to allow a systemic interest update on a tax module after it has been restricted if possible. See IRM 20.2.8.11, Non-Restricting TC 340.

20.2.14.4.3  (06-21-2011)
Manually Computing Within Module Interest Netting

  1. Master File is currently programmed to compute within module netting on tax modules that are not previously restricted. 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. See IRM 20.2.8, Restricted Interest, for some of the reasons a module may need to be restricted.

  2. The following example illustrates an overlapping underpayment and overpayment interest period that requires within module netting:

    Example:

    On March 15, 2006, James Corp. filed a Form 1120 for the tax period ending December 31, 2005, reporting an overpayment in the amount of $6,000.00, which was refunded with $115.83 of interest on July 17, 2006. On February 22, 2008, the Service receives a Form 1120XAmended U.S. Corporation Income Tax Return, increasing the 2005 tax liability by $8,000.00. The amended return is processed and the assessment posts to Master File on April 2, 2008.

  3. Because it is important to understand how Master File performs within module netting, using the Automated Computation Tool (ACT/DMI) and the information in the James Corp. example above, compute a running module balance to the assessment posting date of April 2, 2008. (include the 9-Day back-off period on the refund.) The software is programmed to compute "within module" interest netting. See Figure 20.2.14-7 for the ACT/DMI 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/DMI Report Update Module Screen

  4. The Report 490 Activity Summary shows that underpayment interest in the amount of $1,222.86 and netted interest in the amount of $115.83 was computer generated and posted to the module with the tax assessment. 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/DMI Report 490 Activity Summary

  5. If the Automated Computation Tool is not used, take the following steps (as defined in IRM 20.2.14.3, General Netting Computation Information), to determine the overlapping interest periods for within module interest netting for the James Corp:

    1. Determine the underpayment interest computation period. Underpayment interest is charged from March 15, 2006 (RDD), to April 2, 2008 (23C Date of the $8,000.00 tax increase).

    2. Determine the overpayment interest computation period on the refund. Overpayment interest on the refund was computed from March 15, 2006, to July 8, 2006 (refund date less 9 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 9/13/20-Day back-off date). The overlapping underpayment/overpayment interest period is from March 15, 2006, to July 8, 2006. This is the time frame during which both underpayment and overpayment interest accrued.

    4. Compute netted interest (underpayment interest computed at the lower overpayment interest rate) on the amount of underpayment equal to the overpayment during the overlapping period. Netted interest is computed on $6,000.00 of the $8,000.00 underpayment during the overlapping interest period from March 15, 2006, to July 8, 2006. Netted interest on the $6,000.00 totals $115.83.

    5. Continue the underpayment interest computation on the netted underpayment amount of $6,000.00, plus the netted interest of $115.83, from the July 17, 2006 refund date of the overpayment to the assessment posting date of April 2, 2008, for an interest computation of $879.21.

      Note:

      No "within module netting" takes place during the 9/13/20-Day back-off period for computation of overpayment interest on a generated refund. See IRM 20.2.4, Overpayment Interest. However, debit interest accrues through that period on any portion of the tax assessment that exceeds the principal amount of the previous refund.

    6. Compute debit interest on the amount of underpayment that exceeds the overpayment principal from the applicable interest start date to the interest computation ending date. In this example, underpayment interest of $343.66 is computed from March 15, 2006, on the remaining $2,000.00 to April 2, 2008. When this amount is added to the interest computation of $879.21 from the prior step and the netted interest of $115.83, it results in a total debit interest amount of $1,338.70.

      Note:

      When comparing separate interest computations with a single running module computation, the result may vary by a few cents due to rounding.

    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 refunds.

  6. Input a TC 772 for the interest amount of the underpayment that was netted, or if one interest adjustment involves multiple overpayments that were netted, combine the netted amounts for a single TC 772 adjustment.

    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. If the module is restricted (or needs to be), input debit interest with a TC 340. DO NOT include the netted interest amounts with the TC 340 amount. The netted interest amounts are input as a separate TC 77X.

    Exception:

    Because TC 772 will not post to an MFT 31 tax module that was not established through mirroring of its corresponding MFT 30 tax module, any netted interest amount(s) must be included with the TC 340 amount.

    Reminder:

    Whenever possible, use a non-restricting TC 340 to allow a systemic interest update on a tax module after it has been restricted. See IRM 20.2.8.11, Non-Restricting TC 340.

20.2.14.4.4  (06-21-2011)
Within Module Netting for Quick and Prompt Assessments

  1. Special procedures apply for netted interest amounts related to quick and prompt assessments made by Form 2859, Request for Quick or Prompt Assessment.

  2. If interest is restricted, input a separate TC 772 for each netted interest amount and TC 340 for the debit interest.

  3. If interest is not restricted and does not need to be restricted, take the following steps:

    1. Calculate the netted interest as shown in IRM 20.2.14.4.3, Manually Computing Within Module Interest Netting.

    2. Enter as TC 190 the sum of the netted interest plus the debit interest.

    3. Indicate in the "Remarks" area of Form 2859 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.

      Caution:

      It is recommended the assessment be monitored to ensure netting posts properly; if not, a manual correction must be input.

20.2.14.4.5  (06-21-2011)
Within Module Interest Netting on Subsequent Assessments Involving Tax Motivated Transactions (TMT)

  1. When making a within module 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 within module netting adjustment is limited to the amount of overpayment on which interest was allowed.

    3. Prior refunds must be shown as "tax motivated" within the ACT/DMI computation. To accomplish this, highlight the TC 846/840 in the input screen, then click on the "Adv." tab in the upper right hand corner. Choose "Motivated" from the drop down menu in the "Transaction type" box. Be sure and click on the "Save" button. This action must also be completed for the accompanying TC 1003/1004.

    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.

    Changing Transaction Type with the Adv. Tab

  2. Use the following chart to determine the order in which netting will be applied to the total assessment in the case of TMT tax.

    If total assessment is Then during the overlapping period
    Non-TMT tax Charge debit interest at the credit rate that was allowed on the overpayment.
    TMT tax If any unnetted overpayment remains, charge debit interest at the 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  (06-21-2011)
Erroneously Computed Credit Interest

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

    If credit interest was originally And the period of limitations for Then
    OVERPAID recovery is OPEN Implement Category D Erroneous Refund procedures. See IRM 21.4.5.4.5, Overview of Category D Erroneous Refunds.
    OVERPAID recovery is CLOSED DO NOT implement erroneous refund procedures.
    • The excess may need to be written off with TC 534 or TC 608 on ACT/DMI. It may also be necessary to contact the Accounting/Erroneous Refund function to have a (false) credit applied for an amount equal to any expired balance. See IRM 21.4.5.4.5, Overview of Category D Erroneous Refunds.


    Note:

    The exception is the common-law right-of-offset which may apply if a new overpayment is to be issued from the module

    . IRM 20.2.4.11.2(3), Excessive Interest Paid and Refunded and/or Offset, contains instructions regarding the common-law right-of-offset.
    UNDERPAID claiming additional credit interest is OPEN Allow the applicable credit interest. Reduce the debit interest and/or increase the credit interest accordingly.
    UNDERPAID claiming additional credit interest is CLOSED DO NOT allow relevant credit interest. Also, DO NOT reduce the debit interest by the underpaid amount.
    • Use a TC 1011 to suspend the amount of credit interest that cannot be allowed. This will force ACT/DMI to accrue the same amount of overpayment interest already present on the module.

20.2.14.6  (06-21-2011)
Net Rate Interest Netting

  1. Net Rate Interest Netting is authorized by IRC 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  (06-21-2011)
Net Rate Interest Netting Post-Enactment Interest

  1. IRC 6621(d) provides for a net interest rate of zero to the extent of overlapping tax underpayments and tax overpayments for the same taxpayer. While generally applying to interest accruing on or after October 1, 1998, IRC 6621(d) may apply to interest before that date if some conditions are satisfied. See IRM 20.2.14.6.1.2, Pre-Enactment Date Interest Periods.

  2. Section 2.05 of Rev. Proc. 2005-18 specifies that interest allowable under IRC 6603(d) on a deposit returned to the taxpayer at the applicable Federal short-term rate cannot be used to establish a net interest rate of zero for the same overlapping period.

20.2.14.6.1.1  (06-21-2011)
Post-Enactment Date Interest Periods

  1. Post-Enactment periods as defined by Rev. Proc. 2000-26 are 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 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 amounts upon the taxpayer's request in accordance with IRC 6621(d).

  2. Rev. Proc. 2000-26 instructs 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.

    Note:

    Net rate interest netting may be requested through correspondence under limited circumstances. Information regarding the overlapping periods of time should be included. See IRM 20.2.14.6.1.1 (5).

  3. Requests for net rate interest netting are to be filed and processed at the Ogden Campus. Requests for net rate interest netting are sent to the following address:
    Internal Revenue Service
    1973 N. Rulon White Blvd
    Mail Stop 6800
    Ogden, UT 84404

    Exception:

    DO NOT FORWARD to the Ogden Campus requests for net rate interest netting that involve tax periods that are currently 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).

  4. Post-enactment interest netting requests must be filed on or before the date on which the last applicable period of limitations closes (either the underpayment or overpayment period of limitations). See IRM 20.2.14.6.2 (3), Exhibit 20.2.14-13, and Rev. Proc. 2000-26, section 4.01.

  5. 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 may provide the contact representative of such function a letter or written statement that:

    1. States that the taxpayer is requesting net rate interest netting or the net interest rate of zero under IRC 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, net rate interest netting has not previously been applied to obtain an interest adjustment under IRC 6621(d).

  6. When the taxpayer files a request and the underpayment period of limitations is closed, but the overpayment period is open, make the net rate adjustment to the overpayment period by equalizing the overpayment interest rate to the underpayment interest rate. This only applies if both periods of limitations were open on July 22, 1998.

20.2.14.6.1.2  (06-21-2011)
Pre-Enactment Date Interest Periods

  1. Following the enactment of the Restructuring and Reform Act 1998, Rev. Proc. 99-19 was issued to provide guidance regarding the application of IRC 6621(d) with respect to interest. 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 still request the Service to apply IRC 6621(d) and reasonably identify the periods and amounts of underpayments and overpayments for which the net rate of zero applies.

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

    1. Both the two-year underpayment period of limitations and the six-year overpayment period of limitations 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 interest netting request. Refer to IRM 20.2.14.6.2, and Exhibit 20.2.14-13, for procedures on determining the applicable period of limitations for the underpayment and overpayment.

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

    3. If both applicable periods of limitations were open on July 22, 1998, and at least one of the applicable periods of limitations will be open after December 31, 1999, the request must be filed on or before the date on which the last applicable period of limitations closes.

    Note:

    A Form 843 is not required when a computation of interest is requested by a taxpayer in connection with a return 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 may furnish a letter or written statement to such function. See IRM 20.2.14.6.1.1 (5).

20.2.14.6.2  (06-21-2011)
Applicable Periods of Limitation for Post-Enactment Periods

  1. IRC 6511(a) provides that claims for credit or refund of underpayment interest must be filed by the later of:

    1. Three years from the time of 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.


      See Exhibit 20.2.14-13.

    Note:

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

    1. If a request 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 request, equal to 3 years, plus the period of any extension of time for filing the return.

    2. If the request 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 request. For credit OFFSETS, add 2 years to the cycle date of the offset to determine the applicable 2-year period.

      Exception:

      If the offset is a misapplied payment, use the date of the payment to determine the applicable 2-year period.


    3. If an agreement is made between the taxpayer and the Service to extend the period of time for assessment (i.e., Form 872,Consent to Extend the Time to Assess Tax), the request must be filed within 6 months of the extended ASED. The amount of credit or refund may not exceed the portion of the tax paid after the execution of the agreement and before the filing of the request. It is also limited to the portion of the tax that would have been open under the two or three year period of limitations described above, if a request had been filed on the date the agreement was executed.

    Note:

    See IRC 6511 and IRM 25.6.1, Statute of Limitations Processes and Procedures, 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. However, 28 U.S.C. section 2401 and 28 U.S.C. section 2501 provide a six-year period within which a suit must be filed for the allowance of additional interest on an overpayment.

    1. The IRS uses the schedule date of the overpayment as the starting event for the six-year period.

    2. For administrative purposes, the 23C Date of the refund or cycle date of the offset will be considered the schedule date of the overpayment.

  5. An adjustment of interest allowable on an overpayment may be allowed and paid within the six-year period of limitations beginning on the 23C Date of the refund or the cycle date of an overpayment offset. 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 request is received within the six-year period of limitations, the Service may allow and pay additional overpayment interest after the six-year period has expired. However, the IRS should caution the taxpayer that filing a claim does not protect the six-year period for filing suit. The only manner in which a taxpayer can fully protect the right of a judicial review of the IRS determination is to file suit within the six-year period.

  6. IRC 6621(d) – Period of Limitations.

    1. Pre-Enactment Interest: A request is timely if made no later than December 31, 1999, if all applicable periods of limitations 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 limitations were open on July 22, 1998, and at least one of the applicable periods will be open after December 31, 1999, the request must be filed on or before the date on which the last applicable limitations period closes.

    2. Post-Enactment Interest: If all applicable periods of limitations were open on July 22, 1998, then requests 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).

  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 request for refund of additional interest. See Paragraph (1)(b) Note in Exhibit 20.2.14-21.

  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. See Exhibit 20.2.14-21, which provides additional information on Statute Highlights for Net Rate Claims.

20.2.14.6.3  (09-20-2006)
Guidelines for Filing Claims

  1. See Exhibit 20.2.14-14, Net Rate Claim Processing Flowchart.

20.2.14.6.4  (06-21-2011)
Net Rate Interest Netting Steps to Computation

  1. The following steps must be taken in order to determine the net rate interest adjustment.

    1. Determine the overlapping period(s).

    2. Determine the amount subject to the net rate during the overlapping period(s)

    3. Determine the applicable interest rate during the overlapping period(s)

    4. Determine the adjustment amount to the underpayment interest.

    5. Determine the adjustment amount to overpayment interest.

20.2.14.6.4.1  (06-21-2011)
Determine the Overlapping Interest Computation Period(s)

  1. The net rate of zero can only be applied based on interest legally allowed or allowable on an overpayment and legally paid or payable on an underpayment. The net rate cannot be applied based on an overpayment for the period during which credit interest is not legally allowed (e.g., 45-day interest-free rule, 9/13/20-Day back-off), nor on an underpayment for the period during which debit interest is/was not legally charged (e.g., Revenue Ruling 99-40).

    Caution:

    Section 2.05 of Rev. Proc. 2005-18 specifically prohibits the use of interest allowed on an IRC 6603 deposit at the Federal short-term rate to establish a net interest rate of zero for the same period.

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

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

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

    Example:

    The Athens Corporation is a calendar year taxpayer and agrees to a 200412 Form 1120 tax underpayment of $150,000.00. The taxpayer paid the tax plus interest on February 20, 2009. On March 23, 2009, a $79,000.00 refund with interest was issued from the taxpayer's 200712 Form 1120 return. On August 1, 2009, Athens Corporation filed a claim requesting that the net rate be applied to the underpayment interest paid to its 200412 Form 1120 based on the 200712 overpayment that was issued with interest. The overlapping period is from March 15, 2008 to February 20, 2009.

    DETERMINE THE OVERPAYMENT AND UNDERPAYMENT INTEREST COMPUTATION PERIODS.

    • Debit interest on the tax year 200412 Form 1120 tax underpayment of $150,000.00 was charged as follows:
      1. From: 03152005 (return due date)
      2. To: 02202009 (payment date)

    • Credit interest on the tax year 200712 Form 1120 overpayment of $79,000.00 was allowed as follows:
      1. From: 03152008 (return due date and the return was timely filed)
      2. To: 03142009 (refund schedule date, less 9-Day back-off period)

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

    • The overlapping period is from 03152008 to 02202009.

    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.

    A time line or ACT/DMI Report 530 can be used to visually compare and determine when the interest computation periods "overlap."

    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

  3. If the benefit of within module netting under Rev. Proc. 94-60 has previously been allowed on an overpayment period, the benefit of net rate interest netting for the same overpayment period and amount will not be allowed. The same overpayment cannot be used for both within module netting and net rate interest netting.

20.2.14.6.4.2  (06-21-2011)
Determine the Amount Subject to the Net Rate during the Overlapping Period(s)

  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.

20.2.14.6.4.3  (06-21-2011)
Determine the Applicable Interest Rate during the Overlapping Period(s)

  1. After determining the overlapping periods, the interest rate to be "charged" or "allowed" during the overlapping "net rate" period must also be determined.

  2. The interest rate originally payable on the underpayment and allowable on the overpayment can be determined from reviewing the original interest computation.

  3. If the documentation to support previously computed underpayment or overpayment interest is not readily available (attached to the return or in the administrative file), all avenues must be used to locate the required documentation, such as:

    • Order applicable DLNs.

    • Call the offices/employees who may have had the case in the past, to determine if an "office file" (e.g., Audit reports/ Form 4549, Income Tax Examination Changes, Form 2285, Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments (Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal Revenue Code, ACT/DMI reports, etc.) is available.

    • Contact the taxpayer or power-of-attorney (POA) to obtain copies of any documents they may have (e.g., ACT/DMI Reports, Form(s) 2285, etc.) Or, if applicable, contact the examining official to request that they contact the taxpayer/POA directly.


    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 in the case file all actions taken and attach it to the interest adjustment. Accounts Management Services (AMS), [previously Desktop Integration (DI)] can also be used to document all actions taken.

  4. If the original calculation of interest for the underpayment or overpayment periods was not correct, make the net rate adjustment based on the correct interest the taxpayer should have paid or been allowed.

    IF THEN
    Making the net rate adjustment to the underpayment interest and the overpayment interest is recoverable based on the period of limitations. Compute the correct credit interest and 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 to the underpayment interest and the overpayment interest was underpaid and the period of limitations is NOT open to allow additional overpayment interest. Restrict the ACT/DMI program from allowing the additional overpayment interest by using TC 1011.
    Making the net rate adjustment to the underpayment interest and the overpayment interest was underpaid and the period of limitations IS open to allow additional overpayment interest. Perform the net rate adjustment based on the correct amount of 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. That is, the interest on the overpayment accrued interest at the 2% plus the Federal Short Term Rate rather than the lower corporate/GATT 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, debit 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 statutory 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 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 (within 60 days), 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 credit interest period that may be used to apply the net rate against another underpayment period.

  11. Net rate interest netting is allowed on TMT interest. 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.

20.2.14.6.4.4  (06-21-2011)
Determine the Net Rate Adjustment Amount to Underpayment Interest

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

    • Determine the overpayment amount that is equal to the underpayment amount 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 200612 Form 1120X and fully paid the underpayment of $53,000.00 plus interest of $6,706.66 on December 3, 2008. On June 2, 2008, Hunter Corp. filed a Form 1120X claiming an overpayment of $32,000.00 from its 200712 tax return, which was refunded with interest on September 17, 2008.

    Figure 20.2.14-11

    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 03152007, which is prior to the date interest begins on the overpayment and the beginning of the overlapping period of 03152008.

    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.

  3. Interest on the underpayment is computed as follows:

    1. Underpayment interest at the normal debit rate is computed from 03152007 to 03152008 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/DMI software.

    Interest Computation Breakdown
    $53,000.00 03152007 to 03152008 (normal debit rate ) = 4,306.19
    4,306.19 Add accrued interest at the normal debit rate.**
    57,306.19 Underpayment balance on 03152008
    (32,000.00) Subtract the amount of underpayment equal to the available overpayment on 03152008 (beginning of the overlapping period) which will accrue debit interest at the net (credit) rate from 03152008 to 09082008 (refund schedule date of 09172008, less the 9-Day back-off period).
    25,306.19 Equals the underpayment amount that will continue to accrue interest at the debit rate from 03152008 to 12032008.
    1,060.04 Add accrued interest at the normal debit rate**
    $26,366.23 Balance due on 12032008

    Net Rate Interest Computation
    $32,000.00 03152008 to 09082008 (net rate period)
    572.17 Add accrued debit interest at the credit rate**
    32,572.17 Balance due on 09082008
    442.58 Add accrued debit interest at the normal debit rate from 09082008 to 12032008**
    $33,014.75 Balance due on 12032008
    Interest previously assessed $6,706.66
    **Add all interest amounts above (**) to equal the total interest with netting 6,380.98
    Net Rate Adjustment/Netting Benefit (TC 341) (325.68)

    Reminder:

    Allow statutory 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 $1,537.99 in interest on August 18, 2008, from its 200512 Form 1120. On November 21, 2008, Stetson Corporation also signed an agreement for a 200612 Form 1120 tax underpayment of $27,000.00. As a part of the agreement, the corporation requested a net rate adjustment on the 200612 return.

    Figure 20.2.14-12

    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 03152006, which is prior to the date interest begins on the underpayment and the beginning of the overlapping period of 03152007.

    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 $638.13 that has accrued to 03152007 (the beginning of the overlapping period).

    Interest Computation Breakdown Prior to the Overlapping Period
    $9,200.00 03152006 to 03152007 (credit) = 638.13
    638.13 Add accrued interest at the credit rate
    9,838.13 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 03152007
    9,838.13 Subtract the amount of underpayment equal to the available overpayment on 03152007 (beginning of the overlapping period) which will accrue debit interest at the net (credit) rate from 03152007 to 08092008 (refund schedule date of 08182008, less 9-Day back-off).
    17,161.87 Equals the underpayment amount that will accrue debit interest at the prevailing rate from 03152007 to 12212008.
    2,228.81 Add accrued interest at the prevailing debit rate**
    19,390.68 Balance due on unnetted portion to 12212008 (870 waiver + 30 days)

    Net Rate Interest Computation
    $9,838.13 03152007 to 08092008 (net rate period)
    899.86 Add accrued debit interest at the credit rate**
    10,737.99 Balance due that continues to accrue debit interest at the prevailing rate from 08092008 to the 12212008 interest ending date.
    222.89 Add accrued debit interest at the prevailing rate**
    $10,960.88 Balance due on the netted portion to 12212008 (870 waiver + 30 days)
    **Total Interest Due (**) with Netting $3,351.56 (2,228.81 + 899.86 + 222.89)
    Interest Previously Assessed .00
    Net Rate Adjustment (TC 340) $3,351.56

  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 use for a future net rate adjustment.

20.2.14.6.4.5  (06-21-2011)
Determine the Net Rate Adjustment Amount 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 at the time the request is filed.

  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 period of limitations on the underpayment period has expired, but the overpayment period is open.

    Example:

    Hunter Corporation filed a 200612 Form 1120X and fully paid the underpayment of $53,000.00 plus interest of $5,617.29 on August 3, 2008. On June 2, 2008, Hunter Corporation filed a Form 1120X claiming an overpayment of $32,000.00 from its 200712 tax return, which was refunded with interest on September 17, 2008. The taxpayer filed a net rate claim on December 31, 2010.

    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

  4. Interest on the overpayment is computed as follows:

    Since the period of limitations 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-Day back-off period. See IRM 20.2.4.7.1.1 for an explanation of the 9/13/20-Day back-off period.

    Net Rate Interest Computation
    $32,000.00 03152008 to 08032008 (net rate period)
    732.13 Add credit interest at the debit interest rate
    32,732.13 Available credit on 08032008
    95.72 Add accrued credit interest at the prevailing rate to 09082008
    32,572.17 Amount refunded on 09172008 with 9-Day back-off to 09082008
    255.68 Available credit at 09082008
    .16 Add accrued credit interest at the prevailing rate from 09082008 to 09172008.
    255.84 Overpayment available for refund or offset as of 09172008.
    TC 770 is $255.84 Plus credit interest at the prevailing rate to the current 23C minus appropriate back-off period.

    Reminder:

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

20.2.14.6.5  (06-21-2011)
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 on a tax year (in which the benefit of net rate interest netting is taking place) 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 period of limitation remains open for the unused period and amount to allow another net rate adjustment.

  2. For the tax year in which the benefit of net rate interest netting is taking place (i.e., debit interest recomputed at the credit interest rate, or credit interest recomputed at the debit interest rate), if net rate interest netting is not occurring during any part of the overlapping interest computation period, the time frame and amount that is 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. When the net rate is applied to debit interest that has 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.

  4. The time line in Figure 20.2.14-14, illustrates that the credit interest period (from 03152007 to 01012008) was not completely used. Only part of the computation period was used for the net rate adjustment, from 03152007 to 07072007. The part of the overpayment computation period not used for the net rate adjustment runs from 07072007 to 01012008. 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.

    Figure 20.2.14-14

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

    Overlapping Period Time Line

  5. 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.

  6. The time line illustrates that the net rate was not applied on the underpayment from 03152006 to 03152007. Therefore, 03152006 to 03152007 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, and a timely request is filed, the net rate can be applied to the $175,000 from 03152006 to 03152007.

  7. 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 Amount Completely Used.

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

20.2.14.6.6  (06-21-2011)
ACT/DMI "Netting Status" (Open, Closed, Use, Unsettled)

  1. In order for the ACT/DMI software to accurately apply the statute rules to net rate computations, the appropriate "Netting Status" must be determined and entered for the underpayment interest ("Underpay" ) and the overpayment interest ("Overpay" ) on each tax module involved in the computation. The available "Netting Status" designations for "Underpay" (underpayment interest decrease), and "Overpay" (overpayment interest increase) are: "Open," "Closed," "Use," and "Unsettled."

    Figure 20.2.14-15

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

    ACT/DMI Edit Existing Module Screen with "Netting Status"

20.2.14.6.6.1  (06-21-2011)
Determine the "Netting Status" for Credit or Refund of Underpayment Interest

  1. Was the claim filed within 3 years from the filing date of the original tax return?

    • Yes — Underpayment netting status is "OPEN." However, the amount of credit or refund may not exceed the portion of the tax paid within the period immediately preceding the filing of the claim equal to three years plus the period of any extension of time for filing the return.

      Note:

      Pre-paid credits are considered paid on the return due date for this purpose. See IRC 6511(b)(2)(A).

    • No — See Paragraph (2) below.

  2. Are there any payments or credits on the module dated within two years immediately preceding the filing of the claim (i.e., two years from the payment date of a TC 670, 640, 680, etc. or two years from the cycle date of a TC 700, 706, 736, or if a carryback, TC 295, 299, or 309)?

    • Yes — Underpayment netting status is "OPEN." However, the amount of credit or refund may not exceed the portion of the tax that was paid within the two year period immediately preceding the filing of the claim. See IRC 6511(b)(2)(B).

    • No — See Paragraph (3) below.

  3. Was an agreement made between the taxpayer and the Service to extend the period of time for assessment (i.e., Form 872, Consent to Extend the Time to Assess Tax), and has the taxpayer filed his claim within 6 months of the extended ASED?

    • Yes — The Underpayment netting status is "OPEN." However, the amount of credit or refund may not exceed the portion of the tax paid after the execution of the agreement and before the filing of the claim, as well as, the portion of the tax that would have been open under the two or three year period of limitations as described in Paragraphs (1) and (2) shown above, if a claim had been filed on the date the agreement was executed. See IRC 6511(c)(2).

    • No — See Paragraph (4) below.

  4. If the case cannot be designated as "OPEN" based on the criteria found in Paragraphs (1), (2) or (3) above, would the underpayment period of limitations have been "OPEN" as of July 22, 1998?

    • No — Underpayment netting status is "CLOSED." "Write off" any non-refundable credit on ACT/DMI with a TC 388 as of the overpayment date.

    • Yes — Was the claim filed by December 31, 1999?
      (a) If "yes," AND the overpayment period was also open as of July 22, 1998, then the underpayment netting status is "OPEN."
      (b) If "no," then the underpayment netting status is "USE." A credit or refund of underpayment interest may not be made. However, the underpayment period on the tax module may be used to equalize an "OPEN" overpayment period on another tax module. See Rev. Proc. 99-43, section 4.04(2) and Rev. Proc. 2000-26, section 4.03(2).

20.2.14.6.6.2  (06-21-2011)
Determine the "Netting Status" for Credit or Refund of Overpayment Interest

  1. Was the claim received within six-years from the date of scheduling of the overpayment? This is generally the 23C Date of the TC 840/846, and the cycle date of TC 820/826.

    • Yes — Overpayment netting status is "OPEN." Additional interest may be allowed on the overpayment in which the period of limitations is open. See Title 28 U.S.C. sections 2401 and 2501, and IRC 6407.

    • No — Would the overpayment status have been open as of July 22, 1998?
      (a) If "yes," and the claim was filed by December 31, 1999 and the underpayment period was also open as of July 22, 1998, then the overpayment netting status is "OPEN." Allow additional overpayment interest. See Rev. Proc. 99-43, section 4.02(3).
      (b) If "yes," but the claim was not filed by December 31, 1999, the overpayment netting status is "USE." A credit or refund of overpayment interest may not be made. However, the overpayment period on the tax module may be used to equalize an "OPEN" underpayment period on another tax module. See Rev. Proc. 99-43, sections 4.04(1) and (2) and Rev. Proc. 2000-26, sections 4.03(1) and (2).
      (c) If "no," the overpayment status is "CLOSED." Input an overpayment interest suspension (TC 1011) on ACT/DMI to prevent the calculation of any statute barred overpayment interest.

20.2.14.6.6.3  (06-21-2011)
Determine "Unsettled" Netting Status

  1. The ACT/DMI software uses the netting status "UNSETTLED" the same as if the netting status were "OPEN." The "UNSETTLED" status is intended to be selected when there are module balances, either underpayments or overpayments. ACT/DMI will automatically offset overpayments to any outstanding underpayments provided there is a benefit to the taxpayer from offsetting. These offsets are shown on the ACT/DMI reports to suggest how the offsets/credit transfers should be done. The ACT/DMI software does not perform the actual offsets/credit transfers on IDRS/Master File.

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 can 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 September 30, 2009, Garfield Incorporated filed a request to have net rate interest netting applied to Form 1120 for the tax year 200609. On December 23, 2008, Garfield Inc. agreed to, and fully paid, an underpayment of $97,000.00 determined for its 200609 Form 1120. A $27,000.00 overpayment was allowed for Garfield Inc.’s Form 1120 for the tax year 200709, based on an amended return. A refund with interest was issued on October 15, 2008. On April 3, 2009, an audit of the taxpayer’s Form 941 for the fourth quarter of 2007 determined an overpayment of $5,000.00, which was refunded with interest on August 22, 2009. See Figure 20.2.14-16, Overlapping Period Time Line.

    Figure 20.2.14-16

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

    Overlapping Period Time Line

    • 200609 Form 1120 underpayment period is from 12152006 to 12232008 (normal corporate rate).

    • 200709 Form 1120 overpayment period is from 12152007 to 10062008 (normal and GATT rate).

    • 200712 Form 941 overpayment period is 01312008 to 06292009 (Refund date minus 54-Day back-off period at the corporate overpayment rate).

    • First overlapping period is 12152007 to 10062008.

    • Second overlapping period is 01312008 to 12232008.

    • Unused overpayment period remains from 12232008 to 06292009 based on the 200712 Form 941 overpayment.

    • Unnetted debit period remains from 12152006 to 12152007 based on the 200609 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 IRM 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. See 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.

    Example:

    A TC 640 is posted to a 200612 Form 1120 underpayment module on 08262009 (the payment could also be posted with other transaction codes (TC), such as 670, 680, 706, etc.), but does not full pay the liability. An overpayment of timely credit from 200812 later becomes available, and is for an amount greater than the remaining balance due on 200612. Only offset an amount from 200812 to 200612 to fully satisfy the outstanding portion of the 200612 liability. Do not offset excess credit on 03152009 that will cause a refund of all or part of the TC 640 dated 08262009. The remaining 200812 overpayment will then be refunded with interest from 200812.

    Note:

    The limitation on the amount offset creates an overlapping period between 03152009 and 08262009. There is no authority to increase the offset amount to avoid the interest rate differential.

20.2.14.6.9  (06-21-2011)
Identifying Modules Involved in Net Rate Adjustments

  1. The following information is available on IDRS to identify a module affected by net rate interest 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 (CC) ADJ54. It is not input with CC ADJ47.

    • A control base closed with the activity code "netrate" and/or Control Category INTC

    • Transaction Code 971, Action Code 355 (BMF modules only).

    • Accounts Management Services (AMS) [previously Desktop Integration (DI)] can be used to determine if netting occurred and identify the tax periods involved.

    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 must be included with the work papers for each tax period involved with the net rate request. The relevant ACT/DMI computation reports and the information they contain that is specific to net rate interest netting are described as follows:

    1. ACT/DMI Report 020 - Principal and Interest Adj. Summary - The "Computed Individual Modules" section of the ACT/DMI Report 020 summarizes the results of all modules without net rate interest 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 post-netting Reports 490. The "Netting Benefit" that appears in the lower right hand corner of the ACT/DMI Report 020 is the difference between the "Total" columns in the top and bottom sections of the report.

    2. ACT/DMI 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 interest 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 a result of the netting adjustment(s). The netting transactions, numbered in the 1500 and 1600 series, are unique numbers to the ACT/DMI 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 used in the net rate computation. The transaction numbers themselves will not be displayed in the second section, but their effect 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/DMI Report 530 Adjustments/Positions - This report is used to show the Net Rate information (see Exhibit 20.2.14-6, and Exhibit 20.2.14-7). The Report 530 shows:

    • "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, the "N-Per" is the return that caused the net rate adjustment to be made. For the return that caused the net rate adjustment to be made, the "N-Per" is the return to which the net rate was applied.

    • "Unused and Unnetted" - Provides the tax periods and amounts that are "Unused" and "Unnetted."

      Note:

      Because the attachment of the ACT/DMI Report 530 to net rate adjustment documents replaced the need for the "N-Information" fields on lines 30 through 34 of CC ADJ54, those fields have been removed.

20.2.14.6.10  (06-21-2011)
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:

    CC REQ54

    • BLK – Use BLK 00 if the original return/controlling DLN is included with the adjustment document. If the original/controlling DLN is NOT included but needs to be pulled and added to the adjustment, use BLK 18. If the module has an open AIMS base and the documents do not need to be retained, use BLK 05 for IMF cases or BLK 15 for BMF cases.

    • 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 the date debit interest is computed to (RDD is used if no debit interest exists on that year).

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

    • Credit-Int-To-DT – The 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 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 that the module was not used for a net rate adjustment.

  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 if the original return/controlling DLN is included with the adjustment document. If the original/controlling DLN is NOT included but needs to be pulled and added to the adjustment, use BLK 18. If the module has an open AIMS base and the documents do not need to be retained, use BLK 05 for IMF cases or BLK 15 for BMF cases.

      • 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 the date debit interest is computed to (RDD if no debit interest exists on that year).

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

      • Credit-Int-To-DT – The 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.

        Note:

        A notice may need to be issued for purposes of triggering the 2%/LCU interest rate.

      • 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 debit 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 that the module was not used.

    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,Examination Closing Record or Form 5403,Appeals Closing Record, 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 the date debit interest is computed to (RDD is used if no debit 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 module will be in a balance due status after posting. If the module will be overpaid after the TC 772 posts, consider IRM 20.2.14.6.10 (4).

    • Credit-Int-To-DT – The date credit interest is computed to (input will not be accepted 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.

      Note:

      A notice may need to be issued for purposes of triggering the 2%/LCU interest rate.

    • Any and all other pertinent or required entries per IRM 4.4.1, AIMS/Processing Handbook, Introduction and IRM 2.8.7, Audit Information Management System (AIMS) - AIMS Command Code AMCLS, 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 for IMF or 15 for BMF.

    • TC 340 for "zero" .

    • Debit-Int-To-DT – Input the same debit interest date used in Step 1 above (RDD is used if no debit 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 that the module was not used.

  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 credit 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 interest 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 the current total computation of credit interest and generally 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 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 AC 355 to cross-reference each module for every 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 filed with all but the last tax year involved with the net rate adjustment. (see Exhibit 20.2.14-17, Net Rate Claim Processing, which provides additional documentation requirements).
    (a) The latest tax period adjusted should be cross-referenced with TC 971 AC 355. (See the TC 971 AC 355 procedures above in IRM 20.2.14.6.10 (5) 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 adjustment)

    • ACT/DMI Report 490 (post-netting). (Only for 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 the ACT/DMI Reports 020, 490, and 530 for all tax periods involved).

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


    (b) In addition to the attachments described above, the last year of adjustment must have the following information attached:

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

    • ACT/DMI 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 two types of tax, for example, both Form 941 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 941. (e.g., a net rate claim is filed that results in adjustments to Form 1120 accounts for tax periods ending December 31, 2003, through December 31, 2006, and a Form 941 account for the period that ends March 31, 2009. 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, 2006).

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), a determination of the available overpayment/underpayment amount at the beginning of the subsequent/new overlapping period(s) must be made. This information will reflect how much of an underpayment or overpayment that can be netted during this time frame. See Exhibit 20.2.14-5 for examples illustrating the special computations required in this situation.

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

  3. See Exhibit 20.2.14-8 for non-corporate computations before and after the 01/01/1999 rate equalization provided by section 3302 of the Restructuring and Reform ACT (RRA) of 1998. The exhibit also explains how to verify unused amounts and the accuracy of a net rate computation.

  4. See 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/DMI InterestNet computation tool.

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

  6. See 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.

20.2.14.6.12  (06-21-2011)
Coordination with IRM 4.10.26

  1. IRM 4.10.26, Net Rate Netting Procedures for LMSB Cases, provides background information on net rate interest netting and procedures to process taxpayer requests. The procedures therein apply to campus processing tax examiners and other similar technicians.

  2. The procedures in IRM 4.10.26, Net Rate Netting Procedures for LMSB Cases apply only to examination personnel in LMSB and Revenue Agents who receive a taxpayer's net rate request before the case is closed. To the extent that inconsistencies are found, follow IRM 20.2.14.

20.2.14.6.13  (06-21-2011)
Request for Abatement vs. Claim for Refund

  1. A request for abatement is a request for abatement of unpaid tax, penalty or interest. See IRC 6404(b).

  2. A claim for refund is a request for abatement and refund of tax, penalty or interest that has been paid .

  3. One of the exceptions to IRC 6404(b) is the application of the net rate on overlapping tax underpayments and overpayments under Rev. Proc. 2000-26, 2000-1 C.B. 1257, and IRC 6621(d), which allows for submission of a net rate request without the "tax" being paid. For more information, see IRM 25.6.1.10.2.2, Taxpayer Requests.

  4. Claims for refund must be filed before the last applicable period of limitations expires.

  5. Refer to Exhibit 20.2.14-15 and Exhibit 20.2.14-16 for specific claim processing procedures.

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

T /C POSTED TRANS-AMOUNT CYC DLN
150 05262008 2,500,000.00 200822 00311-302-00002-8
660 06152007 5,000,000.00- 200726 00397-101-00000-7
776 "05262008" 16,231.85- 200822 00311-302-00002-8
846 05262008 2,516,231.85 200822 00311-302-00002-8
420 09192009 0.00 200944 00977-000-00000-9
  PBC>000 SBC>00000 EGC>00  
300 12072009 729,890.00 200950 00347-532-00000-9
336 12072009 55,806.10 200950 00347-532-00000-9
777 "05262008" 4,731.39 200950 00311-"999" -00002-8
TC 776 and 777 contain the same date Julian Date "999" denotes netted interest

Exhibit 20.2.14-2 
Manually Computed Within Module (Annual) Netting
IRM Reference 20.2.14.4.3

T /C POSTED TRANS-AMOUNT CYC DLN
150 05262008 2,500,000.00 200822 00311-302-00002-8
660 06152007 5,000,000.00- 200726 00397-101-00000-7
776 05262008 16,231.85- 200822 00311-302-00002-8
846 05262008 2,516,231.85 200822 00311-302-00002-8
420 09192009 0.00 200944 00977-000-00000-9
  PBC>000 SBC>00000 EGC>00  
300 12072009 729,890.00 200950 00347-532-00000-9
772 05262008 4,731.39 200950 00347-532-00000-9
340 12072009 55,806.10 200950 00347-532-00000-9

Exhibit 20.2.14-3 
Offset Methodology Examples
IRM Reference 20.2.14.6.8

Example:

1. Chase Manufacturing's 2004 and 2005 corporate income tax returns are examined and an overpayment of $50,000.00 is determined on its 2004 return. Chase agreed to an underpayment of $30,000.00 on its 2005 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 2004 return to the due date of the 2005 underpayment. Overpayment interest is allowed on the remaining overpayment from the date the liability is paid (2005 return due date) to the refund schedule date. Since the 2005 liability is paid in full 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 2008, Dunn Dental agrees to an underpayment of $33,000.00 on its 200612 Form 1120 and files a Form 1120X claiming an overpayment of $65,000.00 on the 200712 return. The Form 1120X is reviewed, allowed, and processed at the same time as the 2006 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 2006 return to the availability date of the 2007 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.
Greene Corporation previously agreed to, but did not pay, an underpayment of $45,000.00 determined on its 200508 corporate return. The tax 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 timely files a Form 1120X claiming an overpayment of taxes in the amount of $24,000.00 on its 200608 return. The Form 1120X is accepted and processed. When the overpayment is posted, it will offset to the 200508 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 200508 module is reduced. No overlapping period of underpayment and overpayment interest exists.

Note:

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.

Example:

4.
On September 19, 2008, an overpayment of $527,000.00 is determined for Morgan Corporation's 2005 Form 1120. A tax increase of $200,000.00 on Morgan Corporation's 2003 Form 1120 is also determined. The 2005 overpayment is offset to pay the $200,000.00 tax increase. An overlapping interest period does not occur (between 2003 and 2005) 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 2005 overpayment is refunded with interest. Before Morgan Corporation's offset is made, the taxpayer advises the examining officer of the previously paid $50,000.00 tax underpayment on its 2004 Form 1120 on November 30, 2007. Morgan Corporation requests that the net rate be applied to the 2004 underpayment based on the overlapping interest period caused by the 2005 overpayment that refunded after offsetting the $200,000.00 to 2003.

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The time line determines that an overlapping interest period exists from March 15, 2006, (the availability date of the 2005 overpayment), to November 30, 2007 (the date the 2004 underpayment was paid). The previously paid debit interest that was due during the overlapping period will be partially abated after applying the net rate to the underpayment period. The amount abated represents the interest differential paid by the taxpayer.

Note:

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.

Exhibit 20.2.14-4 
Net Rate Computations - More than One Taxpayer Identification Number

  1. The examiner must review the net rate request to determine whether the request includes more than one taxpayer identification number (TIN). A net rate adjustment cannot be made between different taxpayers. If the request involves more than one TIN, a determination must be made to indicate whether the different TINs can be treated as the "same taxpayer" for purposes of net rate interest netting.

    Caution:

    Revenue Agent or Counsel advice must be requested if this issue is unclear.

  2. The examiner must ascertain the facts surrounding the relationships between TIN holders and analyze the facts in terms of applicable law.

    Note:

    Pursuant to IRC 1504(b)(3), a foreign corporation is excepted from being included in an affiliated group with its related domestic corporation. Accordingly, net rate interest netting between such entities is not allowed because they are not considered to be the "same taxpayer."

  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. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. LMSB and Revenue Agents should follow instructions found in IRM 4.10.26.8.3,Specific Instructions for Letter 4128, Return of Net Rate Netting Request Involving More than One TIN.

    Note:

    Netting may be applicable under each TIN separately even though the Service cannot allow cross-TIN netting.

  4. The following example may assist in making determinations in the taxpayer relationship:

    Example:


    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, if the IRS determines that Corporation A can file a net rate request for its own underpayment and its own overpayment, IRS will advise Parent Corporation A (the entity that filed the net rate request) that its request will not be approved, but that Corporation A must refile its request using only its own overlapping periods.

  5. If the taxpayers (multi TINs) cannot be determined to be the same taxpayer, the request must be forwarded to Counsel or a Revenue Agent, whichever is applicable to make the appropriate determination.

Exhibit 20.2.14-5 
Special Net Rate Interest Computations

When a net rate adjustment has previously been made and only part of the overpayment period was used, an assessment must be made 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), a determination must be made of the available overpayment amount at the beginning of the subsequent/new overlapping period(s).

Example:

On May 4, 2008, Norlem's Notions paid a previously agreed to underpayment of tax for $73,000.00 and interest of $18,686.35 on its 200412 Form 1120. On August 25, 2008, the taxpayer filed a Form 1120X on its 200612 Form 1120. A refund was issued on November 30, 2008, for $45,000.00 plus overpayment interest of $3,780.76 (computed to the refund date, less the 9-Day back-off period). On January 6, 2009, the taxpayer filed a Form 843 and requested a net rate adjustment based on the overlapping period on the 200612 overpayment and the 200412 underpayment interest. The Service complied and issued the taxpayer a refund of overpaid underpayment interest on March 15, 2009. 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 6, 2009 (the refund date, less the 9-Day back-off period). Subsequently, on April 2, 2009, the taxpayer signed an agreement for an underpayment of $60,000.00 on its 200512 return. The taxpayer has requested that the net rate be applied based on the 200612 unused overpayment period (05042008 to 11212008) and the 200412 overpayment period that resulted from the previous net rate adjustment TC 341 (05042008 to 03062009).

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In reviewing the time line, the entire overpayment interest computation period that caused the original net rate adjustment, runs from 03152007 to 11212008. However, only part of the overpayment period was used to make the original net rate adjustment: from 03152007 to 05042008. The unused part of the overpayment period runs from 05042008 to 11212008.

Because only part of an overpayment period was used, the date that the original net rate computation ended (05042008), 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 05042008, the beginning of the subsequent/new overpayment period.

In this example, the overlapping period for the current adjustment runs from 05042008 to 11212008. (This former "unused" overpayment period is now being "used " to apply the net rate to the current adjustment). When computing underpayment interest on the current adjustment, compute debit interest from the 03152006 start date to the beginning of the current overlapping period (05042008). At the beginning of the overlapping period, the amount of underpayment equal to the overpayment on 05042008 will accrue debit interest at the credit rate to the end of the "overlapping" period (11212008). To determine the amount of underpayment subject to the net rate, the available overpayment amount as of 05042008 (the beginning of the overlapping period) must be computed. This amount can be determined 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 (03152007) to the beginning of the new/subsequent overlapping period (05042008).

In the previous underpayment interest computation (200412), debit interest at the credit rate was computed from 03152007 to 05042008 on the amount of underpayment equal to the overpayment on 03152007 ($45,000.00), resulting in netted interest of $2,883.37. The overpayment principal amount ($45,000.00) added to the accrued interest ($2,883.37) to 05042008 (the end of the overlapping period) now becomes the overpayment available ($47,883.37) as of 05042008 (the beginning of the new overlapping period). The accrued interest during the unused part of the overpayment period from 05042008 to 11212008 is $897.39. The netted and accrued interest amounts ($2,883.37 + $897.39) total $3,780.76, which is the amount of interest that was originally allowed on the $45,000.00 overpayment.

Therefore, debit interest computed at the credit rate on the current adjustment would run from 05042008 to 11212008 (the end of the current overlapping period) on $47,883.37 (the amount of underpayment equal to the overpayment on 05042008), for a netted interest amount of $897.39. The entire 200612 overpayment period has now been completely used.

In addition to the original overpayment used for netting purposes, there is also an overpayment created by the first netting refund. So there is now an additional overlapping period from 05042008 to 03062009 available to be netted. The amount available at the beginning of the overlapping period is the amount of the TC 341 ($1,194.70) entered on tax period 200412. Interest will be charged at the credit rate from 05042008 to 11212008 on $47,883.37 and from 05042008 to 03062009 on $1,194.70. The netting periods and amounts on the 200412 and 200612 tax periods are now completely "used. "

Note:

Whenever interest is computed, a complete module recomputation is required. However, with the intent on brevity for this IRM, these examples are shown using additional tax adjustments only.

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Exhibit 20.2.14-6 
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 200112 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, 2008. A 30-Day letter is issued on August 21, 2006 (LCU applicable date is September 20, 2006). The Siena Corporation filed a 200712 carryback claim for $2,500,000.00 to be applied to its 200412 tax year, which is allowed and a manual refund issued with interest on December 30, 2008. In addition, an examination of its 200212 Form 1120 return results in a $1,000,000.00 manual refund, which is issued with interest on May 21, 2009. Siena Corporation now files a Form 843 to request that the interest computed on the underpayment be recomputed using the net rate. The period of limitation for all of the years involved are open, so the interest previously assessed and paid must be recomputed. The refund is scheduled to be issued on September 30, 2009.

Interest Computations Prior to Application of the Net Rate
Year Form Amount Comments
200112 1120 $5,000,000.00 Large Corp. Underpayment (LCU) rate applicable date is 09202006.
    $2,651,930.25 Interest 03152002 to 07122008 (full paid date).
200212 1120 ($1,000,000.00) Overpayment refund with interest 05212009.
    ($245,863.81) Interest 03152003 to 04062009 (manual refund/IRS initiated).
200412 1120 ($2,500,000.00) Overpayment refunded with interest 12302008.
    ($65,088.86) Interest 03152008 to 12302008 (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
Amount Comments
$5,000,000.00 03152002 to 03152003 (normal corp. rate) = 298,405.31 (computed at the normal rate since LCU applicable date has not yet been reached)
298,405.31 Add accrued interest
5,298,405.31 Balance due 03152003
(1,000,000.00) Subtract underpayment amount equal to the overpayment amount on 03152003
4,298,405.31 03152003 to 09202006 (normal corp. rate) and 09202006 to 03152006 (LCU rate) = 1,749,299.32
1,749,299.32 Add accrued interest
6,047,704.63 Balance due 03152008
(2,500,000.00) Subtract underpayment amount equal to the overpayment amount on 03152008
3,547,704.63 03152008 to 07122008 (LCU rate) = 93,877.19
93,877.19 Add accrued interest
3,641,581.82 Balance due 07122008

Net Rate Interest Computation
Amount Comments
$1,000.000.00 03152003 to 07122008 (normal and GATT rate) = 220,227.18
220,227.18 Add accrued interest
1,220,227.18 Balance due 07122008
2,500,000.00 03152008 to 07122008 (normal and GATT rate) = 28,936.33
28,936.33 Add accrued interest
$2,528,936.33 Balance due 07122008

Application of Net Rate to Previously Paid Underpayment
Amount Comments
$298,405.31
1,749,299.32
93,877.19
220,227.18
28,936.33
$2,390,745.33
Total Revised Interest
$2,651,930.25 Posted Interest
$2,390,745.33 Revised Interest
(261,184.92) Netting Benefit/Interest to be abated (TC 341)
(7,591.66) Add: Accrued interest at the prevailing rate to 09302009
$268,776.58 Total Refund (manual refund/TP initiated)

Note:

Ensure statutory 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.

Adjustment Document Transaction Information
2001 2002 and 2004
TC 341 - ($261,184.92) TC 340 - (.00) to indicate that the net rate has been applied
Db-Int-To-Dt - 07122008 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

Always include the ACT/DMI 530 Report with the following information as part of the workpapers.

IDRS "N" Information
200112:
N-AMT - 1,000,000.00
N-BEG = 03152003
N-PER = 200212
N-END = 07122008
N-MFT = 02
200112:
N-AMT - 2,500,000.00
N-BEG = 03152008
N-PER = 200412
N-END = 07122008
N-MFT = 02
200212:
N-AMT - 1,000,000.00
N-BEG = 03152003
N-PER = 200112
N-END = 07122008
N-MFT = 02
200412:
N-AMT - 1,000,000.00
N-BEG = 03152008
N-PER = 200212
N-END = 07122008
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/DMI 530 Report must be used for this purpose.

For 200212, there is an unused credit interest period from 07132008 to 04062009. The amount of overpayment on 07122008 is $1,220,227.18 (overpayment plus interest accrued through 07122008).

For 200412, there is an unused credit interest period from 07132008 to 12302008. The amount of overpayment on 07122008 is $2,528,936.33 (overpayment plus interest accrued through 07122008).

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 03152002 to 03152003, from 03152003 to 03152008, and from 03152008 to 07122008.

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Amount of unused overpayment at the beginning of the unused credit period 07122008 to 04062009 is $1,220,227.18.

Amount of unused overpayment at the beginning of the unused credit period 07122008 to 12302008 is $2,528,936.33.

Unnetted underpayment periods still exist from 03152002 to 03152003; from 03152003 to 03152008; and from 03152008 to 07122008.

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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/DMI. However, it is not required because the verification process is automated within that program.

Exhibit 20.2.14-7 
Special Net Rate Interest Computations - Overlapping Amount Completely Used
IRM Reference 20.2.14.6.5

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

Orleans Corporation receives a manual refund of $117,858.64 on August 29, 2008 due to a tax decrease of $100,000.00 based on a Form 1120X for its 200412 tax year that was filed on March 10, 2008. Interest in the amount of $17,858.64 is paid for the period from March 15, 2005 (return due date) to August 29, 2008. Due to an examination of the 2003 Form 1120, the amount of $350,000.00 is assessed and a notice is issued. The taxpayer pays the balance of $507,024.14 on February 15, 2009. The balance includes interest of $157,024.14, from March 15, 2004 (return due date) to February 15, 2009. The large corporate interest rate (LCU) is charged on the underpayment based on a 30-Day letter dated June 2, 2006 (applicable date of July 02, 2006).

On July 30, 2009, the Orleans Corporation files a claim to request that the net rate be applied to its 2003 Form 1120, based on the 2004 overpayment that was manually refunded on August 29, 2008. The period of limitations applicable to both the underpayment and overpayment are open on July 22, 1998, and are still open as of July 30, 2009, the date the claim was filed. Interest on the underpayment must be recomputed to allow the net rate adjustment.

Interest Computations Prior to Application of the Net Rate
Year Form Amount Comments
200312 1120 $350,000.00 LCU rate applicable date is 07022006
    157,024.14 Interest from 03152004 to 02152009 (full paid date)
200412 1120 ($100,000.00) Overpayment refunded with interest on 08292008
    (17,858.64) Interest from 03152005 to 08292008 (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 03152004 to 03152005 (normal Corp. rate) = $16,819.67
16,819.67 Add accrued interest
366,819.67 Balance due 03152005
(100,000.00) Subtract the underpayment amount equal to the overpayment amount on 03152005
266,819.67 03152005 to 07022006 (normal corp. rate) 07022006 02152009 (LCU rate ) = $101,982.83
101,982.83 Add accrued interest
$368,802.50 Balance due 02152009
Net Rate Interest Computation
$100,000.00 03152005 to 08292008 (normal and GATT rate) = 17,858.64
17,858.64 Add accrued interest
117,858.64 08292008 to 02152009 (LCU rate) = 4,203.92
4,203.92 Add accrued interest
$122,062.56 Balance due 02152009
$16,819.67
101,982.83
17,858.64
4,203.92
$140,865.06
Total Revised Interest
$157,024.14 Posted Interest
$140,865.06 Revised Interest
($16,159.08) Netting Benefit/Interest to be abated (TC 341)

Note:

Compute statutory 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:

Adjustment Document Transaction Information
2003 2004
TC 341 – ($16,159.08) TC 340 – ($.00) to indicate that the net rate has been applied
Db-Int-To-Dt – 02152009 Db-Int-To-Dt – 03152005
Correspondence Dt – 07221998 Correspondence Dt - 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – 07/30/2009 Amd-Clms-Dt – 07/30/2009

Always include the ACT/DMI 530 Report with the following information as part of the work papers.

IDRS "N" Information
200312:  
N-AMT = 100,000.00
N-BEG = 03152005
N-PER = 200412
N-END = 08292008
N-MFT = 02
200412:  
N-AMT = 100,000.00
N-BEG = 03152005
N-PER = 200312
N-END = 08292008
N-MFT = 02
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No unused overpayment period or unused amount remains.

An unnetted debit period exists from 03152004 to 03152005 on $350,000.00, from 03152005 to 08292008 on $266,819.67, and from 08292008 to 02152009 on $117,858.64.

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Exhibit 20.2.14-8 
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 $286.44 interest on February 5, 1999, on Pete and Petunia Flower’s 1996 Form 1040, U.S. Individual Income Tax Return. On May 10, 1999, a $5,000.00 tax underpayment and $432.74 in interest 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 for non-corporate taxpayers.

Interest Computations Prior to Application of Net Rate Interest Netting
Year Form Amount Comments
199612 1040 ($2,000.00) Overpayment refunded with interest on 02051999
    (286.44) Interest from 04151997 to 01231999 (13-Day back-off)
199712 1040 $5,000.00 Underpayment as of 04151998
    432.74 Interest from 04151998 to 05101999 (full pay date)

Application of the Net Rate to the Previously Paid Underpayment

Note:

The Net Rate Interest netting is computed on the underpayment up to January 1, 1999, at which time non-corporate interest rates were equalized.

Overpayment Interest Computation
($2,000.00) 04151997 to 04151998 (non-corporate overpayment rate) = $165.67
(2,165.67) Add accrued interest
Underpayment Interest Computation
5,000.00 Balance due 04151998
(2,165.67) Subtract the underpayment amount equal to the overpayment amount on 04151998
2,834.33 04151998 to 12311998 (normal non-corp. underpayment rate) = $166.19
166.19 Add accrued interest
$3,000.52 Balance due 12311998
Net Rate Interest Computation
$2,165.67 04151998 to 12311998 (overpayment interest rate) = 110.71
110.71 Add accrued interest
2,276.38 Balance due 12311998
3,000.52 Add Underpayment rate total
$5,276.90 TOTAL Balance due 123119998


139.14

110.71
166.19
$ 416.04
Regular Non-Corporate Interest Rate from 12311998 to 05101999
$ 432.74 Posted Interest
$416.04 Revised Interest
($16.70) Netting Benefit/Interest to be abated (TC 341)

Note:

Ensure statutory credit interest is computed on the amount of abatement from 05101999 to refund 23C Date minus any applicable back-off days.

Exhibit 20.2.14-9 
Special Net Rate Interest Computations - Later Assessment Interest Period Overlaps a Previously Unused Overpayment Amount
IRM Reference 20.2.14.6.5

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, 2008, to Athens Corporation which agreed to a 200412 Form 1120 tax increase of $150,000.00. The tax, plus interest computed from March 15, 2005 to February 20, 2009, was paid in full on February 20, 2009. A claim was filed on January 22, 2009, and a manual refund of $79,000.00, plus interest, was allowed March 23, 2009, on the 200712 Form 1120. Interest on the refunded overpayment consisted of normal and GATT rates allowed on the overpayment. On August 1, 2009, Athens Corporation filed a claim to request that the net rate be applied on the 200412 underpayment as a result of the 200712 overpayment. The period 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 manual refund for $3,406.12 ($3,348.94 plus $57.18) was issued on September 1, 2009. During the overlapping period(s), interest on the underpayment is computed at the normal and GATT rate because interest on the 200712 overpayment was allowed at the normal and GATT rates. The recomputation of underpayment interest results in a decrease to the interest assessed and a 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 Net Rate Interest Netting
Year Form Amount Comments
200412 1120 $150,000.00 Large Corporate Underpayment (LCU) rate applicable date is 04-09-2007.
    54,361.17 Interest from 03152005-02202009 payment date
    204,361.17 Payment
200712 1120 ($ 79,000.00)

$2,676.25)
Overpayment manual refund dated 03232009
Interest 03152005 to 03232009
    ($81,676.25) Manual refund taxpayer initiated.

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Application of the Net Rate to the Previously Paid Underpayment

Underpayment Interest Computation
$ 150,000.00 03152005 to 04092007 = 23,691.09
04092007 to 03152008 (LCU) = 16,605.81
40,296.90 Add accrued interest
190,296.90 Balance due 03152008
(79,000.00) Subtract the underpayment amount equal to the overpayment amount on 03152008
111,296.90 03152008 to 02202009 (LCU rate) = 8,225.62
8,225.62 Add accrued interest
119,522.52 Balance due 02202009
Net Rate Interest Computation
$ 79,000.00 03152008 to 02202009 (normal and GATT rate) = 2,489.71
2,489.71 Add accrued interest
81,489.71 Balance due 02202009
Underpayment Interest Computation continued
$ 40,296.90
8,225.62
2,489.71
$ 51,012.23
Total Revised Interest
$ 54,361.17 Posted Interest
51,012.23 Revised Interest
( 3,348.94) 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.

Adjustment Document Transaction Information
200412 200712
TC 341 – ( 3,348.94) TC 340 – To indicate that the net rate has been applied.
Db-Int-To-Dt – 02202009 Db-Int-To-Dt = Applicable date
Correspondence Dt – 07221998 Correspondence Dt – 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – Claim received date 08012009 Amd-Clms-Dt – Claim received date 08012009

Always include the ACT/DMI 530 Report with the following information as part of the workpapers.

IDRS "N" Information
200412:
N-AMT – 79,000.00
N-BEG = 03152008
N-PER = 200712
N-END = 02202009
N-MFT = 02
200712:
N-AMT – 79,000.00
N-BEG = 03152008
N-PER = 200412
N-END = 02202009
N-MFT = 02

The $3,348.94 creates a potential new overpayment period for another net rate adjustment. For 200712, there is an unused credit interest period that exists from 02212009 to 03232009 for the $79,000.00, plus accrued interest of $2,489.71 as of the end of the current overlapping period. For 200412, an unnetted debit period exists from 03152005 to 03152008.

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, the amount of interest accruing at the "HIGH" (non-GATT) rate as of the end of the previous overlapping period must be determined. 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 will be 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 was used as of 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 02202009 to 03232009 is $81,489.71.
Unnetted debit interest period exists from 03152005 to 03152008. A net rate adjustment can be made if another overpayment period overlaps this time frame.

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Exhibit 20.2.14-10 
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 200512 Form 1120 return, which resulted in a tax assessment of $200,000.00. A 30-Day letter was issued on August 8, 2007 (applicable LCU date is September 7, 2007). The taxpayer paid both the tax and interest on December 17, 2008. The current examination of the 200712 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, 2009. (Because this is an IRS initiated adjustment, there is a 54-Day (45 + 9 days) back-off period)

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

Overpayment interest currently being allowed:
200712 1120 ($725,000.00) Tax decrease
    28,776.43 Interest from 03152008 to 09102009 (refund schedule date of 10252009 less the 45-day back-off period)

Underpayment interest computed prior to the application of net rate:
200512 1120 $200,000.00
50,223.73
Tax increase
Interest from 03152006 (LCU rate applicable date is 09072007) to 12172008 (full paid date)

Since the 200712 overpayment is greater than the 200512 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 03152006 to 09072007 (normal corp. rate) and 09072007 to 03152008 (LCU) rate = 36,014.13
36,014.13 Add accrued interest
$236,014.13 Balance due 03152008
Net Rate Interest Computation
$236,014.13 03152008 to 12172009 (GATT rate) = 5,832.35
5,832.35 Add accrued interest
$241,846.48 Balance due 12172009
Underpayment Interest Computation continued
$ 36,014.13
5,832.35
$ 41,846.48
Total Revised Interest
$ 50,223.73 Posted Interest
41,846.48 Revised Interest
(8,377.25) Netting Benefit/Interest to be abated (TC 341)
(213.55) Add: Accrued interest at the prevailing rate to 09102009
$8,590.79 Manual refund to 23C Date 10252009 minus the 54-Day back-off period (Total is $.01 off due to rounding)

Note:

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

Input the following transaction information using the appropriate adjustment documents.

Adjustment Document Transaction Information
200512 200712 (A two-step process is required)
TC 341 – ($8,377.25)
Db-Int-To-Dt – 12172008
Correspondence date - 07221998
Activity Code - netrate
Step 1: (CC 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 – 03152008

Step 2: (CC ADJ54)
TC 340 - $.00 (Hold Code 4, Posting Delay Code 1)
Db-Int-To-Dt - 03152008
Correspondence date - 07221998
Activity Code - netrate

Reminder:

Also remember to input TC 971 AC 355 on both tax modules using IDRS CC REQ77. See IRM 20.2.14.6.10 (5).

Always include the ACT/DMI 530 Report with the following information as part of the work papers.

IDRS "N" Information
200512:  
N-AMT = 236,014.13
N-BEG = 03152008
N-PER = 200712
N-END = 12172008
N-MFT = 02
200712:  
N-AMT = 236,014.13
N-BEG = 03152008
N-PER = 200512
N-END = 12172008
N-MFT = 02

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

Computation to Verify Unused Amounts and Determine the Accuracy of Net Rate Computation

Refer to the time line in Exhibit 20.2.14-10.

There is an unused overpayment period in 200712 from 03152008 to 12172008. The overpayment amount on 03162008 is $488,985.87. The amount of credit available at the beginning of the unused overpayment period from 12172008 to 09102009 is $742,916.10. There is an unnetted debit period from 03152006 to 03152008 on the $200,000.00 underpayment.

Verification of Accuracy and Unused Net Rate Amount
03152008 The unused overpayment amount at the beginning of the overlapping period is $488,985.87 (original $725,000.00 overpayment minus $236,014.13; the amount to which the net rate was applied).
12172008 The amount of the available overpayment at the beginning of the unused overpayment period from 12172008 to 09102009 is $743,033.08. This amount is obtained by taking the principal of $725,000.00 and adding the accrued overpayment interest from 03152008 to 12172008 of $18,033.08.
  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 (03152008) is $488,985.87.

Amount of available overpayment at the beginning of the unused overpayment period from 12172008 to 09102009 is $743,033.08.

An unnetted underpayment period still exists from 03152006 to 03152008.

The amount of underpayment that the net rate can still be applied to at the beginning of the unnetted debit period from 03152006 to 03152008, is $200,000.00.

Exhibit 20.2.14-11 
Special Net Rate Interest Computations - Net Rate Computation when a Form 2285 is Used
IRM Reference 20.2.14.6.11

On December 31, 2009, Freemont Foundations filed a Form 843 requesting the application of the net rate on its 200612 Form 1120. An overpayment from its 200712 Form 1120 creates an overlapping interest period. The 2006 and 2007 adjustments were a combination of a general adjustment and a carryback adjustment. The account transaction information for the 2006 and 2007 tax periods is shown below.

Interest Computations Prior to Application of the Net Rate
200612: General Adjustment Underpayment
200812 Partial Carryback Recapture
$35,000.00
$27,000.00
The taxpayer previously received a refund on 06082009 of $37,000.00 without interest, based on a carryback to 200612 from its 200812 loss year return. The taxpayer paid the balance due of $68,709.05, which includes interest of $6,709.05 on 12132009.
200712: General Adjustment Overpayment


200812 Carryback Recapture
($58,000.00) Original return was timely filed and paid.
$16, 000.00

The taxpayer previously received a refund on 06082009 of $16,000.00 without interest, based on a carryback applied to 200712 from its 200812 loss year return.

On 11302009, an IRS initiated refund is issued for $44,368.08, which included interest of $2,368.08 based on the general adjustment overpayment and its 200812 carryback recapture.

Freemont Foundations Tax Account Transaction Information

200612 Module Information
TC 150 50,000.00  
TC 806 50,000.00-  
TC 309 37,000.00- 200812 carryback allowed
TC 846 37,000.00 Refunded 06082009
TC 300 35,000.00 General adjustment
TC 308 27,000.00 200812 carryback recapture
TC 190/340 21,712.26  
TC 670 83,712.26 Payment received
200712 Module Information
TC 150 60,000.00  
TC 660 60,000.00-  
TC 309 16,000,00- 200812 Carryback allowed
TC 846 16,000.00 C/B Refunded 06082009
TC 301 58,000.00- General Adjustment
TC 308 16,000.00 200812 Carryback recapture
TC 776 2,368.08 23C 11302009 (54-day back-off to 10072009)
TC 846 44,368.08 23C 11302009

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Application of the Net Rate to the General and Carryback Adjustment (200612)

Underpayment Interest Computation
$ 35,000.00 03152007 to 03152008 (debit rate) = 2,843.71
2,843.71 Add accrued interest
37,843.71 Balance due 03152008
03152008 to 03152009 (credit rate) = 1,184.44
1,184.44 Add accrued interest
39,028.15 Balance Due 03152009
(10,000.00) Subtract carryback amount not subject to recapture 03152009 (Use of money)
29,028.15 03152009 to 06082009 (credit rate) = 114.35
114.35 Add accrued interest
10,000.00 Add carryback previously used for the interest-free period on the refund date 06082009
27,000.00 Add the carryback recapture underpayment
66,142.50 Balance Due 06082009
(44,145.66) Subtract the amount on 06082009 that is subject to the net rate (see (Cont. 6) section of Exhibit 20.2.14-11 for the Time Line Breakdown)
21,996.84 06082009 to 12132009 (debit rate) = 457.87
457.87 Add accrued interest
$ 22,454.71 Balance due 12132009
Net Rate Interest Computation
$ 44,145.66 06082009 to 10072009 (credit rate) = 222.43
222.43 Add accrued interest
44,368.09 10072009 to 12132009 ( debit rate) = 326.95
326.95 Add accrued interest
$ 44,695.04 Balance due 12132009
$ 2,843.71
1,184.44
114.35
457.87
222.43
326.95
$ 20,447.11
Total Revised Interest
$6,709.05 Posted Interest
5,149.75 Revised Interest
(1,559.30) Netting Benefit/Interest to be abated (TC 341)

Note:

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

Input the following transaction information using the appropriate adjustment documents.

Adjustment Document Transaction Information
200612 200712
TC 341 - ($1,559.30) TC 340 – ($.00) to indicate that the net rate has been applied
Db-Int-To-Dt – 12132009 Db-Int-To-Dt – 03152008
Correspondence Dt – 07221998 Correspondence Dt – 07221998
Activity Code – netrate Activity Code – netrate
Amd-Clms-Dt – 12312009 Amd-Clms-Dt – 12312009

Always include the ACT/DMI 530 Report with the following information as part of the workpapers.

IDRS "N" Information
200612:
N-AMT = 37,843.71
N-BEG = 03152008
N-PER = 200712


N-END = 10072009
N-MFT = 02
200712:
N-AMT = 37,843.71
N-BEG = 03152008
N-PER = 200612


N-END = 10072009
N-MFT = 02

Always include the "unused" and "unnetted" periods in the attached workpapers. The ACT/DMI 530 Report must 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.

Verification of Unused Amount, Unnetted Period(s) and Net Rate Adjustment
Unused Overpayment Period 1
Overpayment Available 03152008
03152008-03152009
20,156.29 (58,000.00 overpayment less the 37,843.71 net rate amount)
Unused Overpayment Period 2
Overpayment Available 03152009
03152009-06082009
14,942.66 (58,000.00 overpayment plus 1,970.81 interest accrued from 03152008 to 03152009 (59,970.81) less the 29,028.15 that the net rate was applied to as of 03152009, and less the overpayment interest suspension of 16,000.00)
Unnetted Debit Interest Periods:
1. 03152007 to 03152008 on $35,000.00
2. 06082009 to 10072009 on $21,996.84
3. 10072009 to 12132009 on $66,658.54

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Exhibit 20.2.14-12 
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 netting one-time for each overlapping period/amount. 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 and the applicable periods of limitations are still open.

Example:

On June 15, 2009, a refund of $78,000.00 (plus interest) was issued for Armstrong Corporation’s Form 1120X (filed on April 23, 2009) for its 200708 return. On July 16, 2009, Armstrong Corporation agrees to and pays an underpayment of $113,000.00 (plus interest), for its 200808 Form 1120. A 30-Day letter dated March 10, 2009, was sent to the taxpayer. On August 19, 2009, Armstrong filed a claim requesting the net rate on its 200808 Form 1120.

Interest Computations Prior to Application of the Net Rate:
1120 200708 ($78,000.00)

(4,314.82)
Overpayment refunded with interest
Interest 11152007–06062009 (back-off date)
1120 200808 $113,000.00

4,254.95
Underpayment 30-Day letter dated 03102009
Interest 11152008–07162009 (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, a determination must be made of the overpayment amount available at the beginning of the overlapping period (11152008).

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

Input the following transaction information using the appropriate adjustment documents.

Adjustment Document Transaction Information
200708 200808
TC 340 — ($00) to prevent annual netting on future underpayment computations TC 341 — $1,335.12
Db-Int-To-Dt — Applicable date Db-Int-To-Dt – 07162009
Correspondence Dt – 07221998 Correspondence Dt – 07221998
Amd-Clms-Dt — 08192009 Amd-Clms-Dt – 08192009



Unused Overpayment Period and Amount – 11152007 -11152008 — $78,000.00
Unnetted Period – 06062009 to 07162009

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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 200608 Form 1120 and on October 10, 2009, an agreement was signed for an $85,000.00 underpayment. Armstrong advises the examiner that a net rate period still exists based on the overpayment issued on its 200708 Form 1120. An unused overpayment period remains from 11152007 to 11152008 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.

Note:

Prior to adding tax period 200608 to your netting computation, be sure to "post" the previous netting computations for tax years 200708 and 200808. This is done by clicking on the "Post" button located at the bottom of the Netting Analysis screen of the ACT/DMI program.

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Exhibit 20.2.14-13 
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 returns for the 200612 and 200812 tax years. For the 200812 tax year, Hesston Corporation was entitled to a refund of $30,000.00. The Service initiated refund was made on September 21, 2009, with interest computed from March 15, 2009, to July 29, 2009, which is the 45-Day plus 9-Day back-off date. For the 200612 tax year, a tax underpayment of $80,000.00 was determined.
The Service sent a notice and demand for payment dated May 3, 2010, which Hesston Corporation paid on March 12, 2010, with interest computed from March 15, 2009, to March 3, 2010. On April 27, 2011, Hesston Corporation filed a Form 843 claim requesting the net rate during the overlapping interest period from March 15, 2009, to July 29, 2009.
On July 22, 1998, both the 6-year period of limitations (09/21/2015) for claiming additional overpayment interest on Hesston Corporation’s 2009 refund and the 2-year period of limitations (03/12/2012) for claiming a refund of underpayment interest paid in 2010 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, 2009, to July 29, 2009, and the overpayment interest computed and paid on $30,000.00 for that period.

Example:

2 - Only One Period of Limitations Open on July 22, 1998
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 Expire on or Before 12/31/1999
The Service examined Sheeling Incorporated’s Form 1120 for the 199012 and 199212 tax years. For 199012, 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 199212 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 200312 and 200512 tax years were examined. For the 200312 tax year, the taxpayer was entitled to a refund of $80,000.00. The IRS-initiated refund was made on November 21, 2006, with interest computed from March 15, 2004, to September 28, 2006. For the 200512 year, a tax underpayment of $97,240.00 was determined. A notice and demand for payment dated October 3, 2008, was sent and the tax was paid on October 12, 2008. On July 22, 1998, the 6-year period of limitations for claiming additional overpayment interest was open, as well the 2-year period for claiming a refund of underpayment interest paid in 2008. A claim was filed on December 15, 2010, after the underpayment interest period of limitations was no longer open. However, the 6-year period of limitations (11/21/2016) for claiming additional overpayment interest was open. Because this is a post-enactment claim, only one period of limitations must be open. A net rate adjustment for the overlapping interest period from March 15, 2006, to September 28, 2006 is allowed on the overpayment tax module.

Exhibit 20.2.14-14 
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 the claim is filed timely by checking the postmark/received date. If the taxpayer filed a 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 IRM 20.2.14.6.2.

Exhibit 20.2.14-15 
Procedures for Processing Net Rate Claims or Claims for Abatement - Claim Reject

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

(1) Form 843 must be filed to request Net Rate Interest Netting for both pre-enactment interest periods and post-enactment interest periods. 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 under IRC 6621(d).
g. Signature.

Note:

The IRS cannot assume the taxpayer's intent, so only include overlapping periods that are 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,Net Rate Netting Procedures for LMSB Cases), 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 Paragraph (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 period 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."

Exhibit 20.2.14-16 
Procedures for Processing Net Rate Claims or Claims for Abatement - 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 period 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 period of limitations (IRC 6511 or sections 2401 and 2501 of Title 28 of the United States Code).
b. The underpayment and overpayment period 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. 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 IRC 6621(d). Counsel or Revenue Agent advice must be requested if this determination cannot be made.
e. Underpayment interest overlaps a period when no overpayment interest was allowed on an amount refunded or offset.
f. Claim not timely filed.

(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 that the application of the net rate differs from the taxpayer’s request and the discrepancy is attributable to an issue that is not allowable based on law or regulation (e.g., "Open" ACT/DMI 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 (L-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 period of limitations for filing suit for the recovery of additional overpayment interest provided for in sections 2401 and 2501 of Title 28 of the United States Code."
b. Input a TC 290 for zero, Blocking Series 98/99 (this is a claim disallowance blocking series; 98 without return, 99 with return), Reason Code 74 (interest).
c. Attach a copy of the full disallowance letter to your adjustment document (TC 290 for zero from Paragraph 3(b) above). Close case. Add history to AMS (Accounts Management Services), 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 period of limitations for filing suit for the recovery of additional overpayment 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) or 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 partial disallowance letter, claim, interest computations (such as ACT/DMI Report Numbers 490, 530, 020) and other pertinent information to the adjustment document (TC 290 for zero from Paragraph 4(b) above). Refer to IRM 20.2.14.6.10 for more detailed information. Add history to AMS (Accounts Management Services), screen if available.

(5) Taxpayer Appeal Processing. The taxpayer responds and wants to appeal the administrative 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., C 01, Appeals, DO 86, C). Send the appropriate transfer letter (86C or local letter).
d. Send the case to the appropriate Appeals Office with a Form 3210,Document Transmittal, and recharge any documents to Appeals.
e. Add history to AMS (Accounts Management Services) screen if available.

Exhibit 20.2.14-17 
Net Rate Claim Processing
IRM Reference 20.2.14.6.10

Identifying Overlapping Interest Periods

IRC 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 the ACT/DMI 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/DMI 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, disallow 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.

CC 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 for IMF or 15 for BMF.
b. TC 34X – Debit Interest Adjustment (TC 340 for "zero" is required on those tax modules where no decrease/increase is applicable). See note below.
c. Debit-Int-To-DT – Input the 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 module will be in balance due after posting. If the module 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. Attach the ACT/DMI 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 tax module(s).

3. When any net rate adjustment is being made, use IDRS CC REQ77 to input TC 971 with AC 355 to identify all modules involved in the net rate adjustment.

4. 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/DMI Reports 490 and 530 (these reports must be attached to the adjustment document of the tax period they are for).
c. ACT/DMI 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/DMI 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 
Preparing a Time Line and Creating ACT/DMI Report 530
IRM Reference 20.2.14.6.4

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



Case Scenario: The Delphinium Corporation timely filed a 200712 return with a balance due. In 2008, the taxpayer paid the balance due and the interest that accrued from 3/15/2008 to 10/20/2008. An examination of the taxpayer’s 200612 return resulted in an overpayment of $27,000.00. The refund has not yet been processed. The refund date is 02/14/2009. The overlapping interest period runs from 03/15/2008 to 10/20/2008. The overlapping period involves an underpayment that was previously paid. Therefore, when the 200612 overpayment is processed, netting will apply. This case scenario will be used in preparing a time line and creating ACT/DMI Report Number 530.

The Delphinium Corporation Tax Account Transaction Information

200612 Module Information
TC 150 03152007 71,660.00
TC 660 04152006 25,000.00-
TC 660 06152006 25,000.00-
TC 660 12152006 25,000.00-
TC 846 03302007 3,340.00
TC 301 03152007 27,000.00-
200712 Module Information
TC 150 03152008 75,000.00
TC 660 09152007 50,000.00-
TC 196 04092008 113.64
TC 670 10202008 25,860.02-
TC 196 10202008 746.38

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The overlapping period occurs between 03/15/2008 and 10/20/2008.

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During the overlapping period, debit interest on the underpayment for the 2007 tax year is charged at the same rate interest was paid on the 2006 tax year.

$25,000.00 03/15/2008 (Balance due at the start of the overlapping period.)
132.77 Debit Interest at the Overpay Rate (03/15/2008 to 10/20/2008)
668.88 Debit Interest at the GATT rate (03/15/2008 to 10/20/2008)
25,801.65 Due as of 10/20/2008
26,160.25- Underpayment as Originally Assessed
$(358.60) Debit Interest to be abated (TC 341)

USED 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. Always attach the ACT/DMI 530 Report to the adjustment document to indicate these amounts.

IDRS "N" Information
200612 200712
N-AMT $25,000.00 N-AMT $25,000.00
N-BEG 03-15-08 N-BEG 03-15-08
N-TXPD 200612 N-TXPD 200712
N-MFT 02 N-MFT 02
N-END 10-20-08 N-END 10-20-08

UNUSED amounts are what has not been used and are still available to be netted with another overlapping period. Since the credit balance on the 200612 year was not entirely used in netting the 2007 tax year, there is a remaining balance that may still be netted. This unused credit is shown below.

Breakdown of Unused Overpayment Amounts
Unused overpayment @ GATT rate $20,340.00 From 03/16/07 to 03/30/07
Unused overpayment @ Overpay rate $6,660.00 From 03/16/07 to 03/30/07
Available Suspended Overpay $3,340.00 From 03/16/07 to 03/30/07
Unused overpayment @ GATT rate $20,385.90 From 03/31/07 to 03/15/08
Unused overpayment @ Overpay rate $6,679.13 From 03/31/07 to 03/15/08
Unused overpayment @ Overpay rate $3,903.55 From 03/16/07 to 10/20/08

The following screens illustrate the input of the 200612 and 200712 account data (before netting) and the resulting 530 reports generated (after netting) for each year.

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Exhibit 20.2.14-19 
Checking the Statute for Credit or Refund of Underpayment Interest

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Exhibit 20.2.14-20 
Checking the Statute for Credit or Refund of Overpayment Interest

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Exhibit 20.2.14-21 
Statute Highlights for Net Rate Claims
IRM Reference 20.2.14.6.2

Claims for Credit or Refund of Underpayment Interest

IRC 6511(a) 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 return 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. See IRC 6511(b) for a full explanation of the limitations on amount of credit or refund.

Apply IRC 6621(d) to Such Periods

A senate amendment to section 3301(c)(2) of RRA 1998, added that IRC 6621(d) applies in the case of interest for periods beginning before July 22, 1998, provided the period of limitations have not expired on either the applicable underpayment or overpayment. The Senate amendment language was not included in IRC 6621(d) 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 period of limitations must be open for both the underpayment and overpayment tax periods involved with the net rate request. If the period of limitations is closed for either the underpayment or overpayment, a net rate interest adjustment is not allowed.

Determine if the Period of Limitations 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 an IRC 6603 deposit, 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.

Note:

The 2 years from the cycle date applies only to true offsets. If it is a misapplied payment, the period of limitations is 2 years from the date of the misapplied payment.

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

a. If the TC 300 audit adjustment was posted within 6 months of the enactment date (July 22, 1998), the period of limitations is open on the amount of the audit adjustment. A TC 341 may be input. 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, 1998 or later, the period of limitations would be open up to the amount of the TC 77X.


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