AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 8. Appeals

Chapter 17. Settlement Computations and Statutory Notices of Deficiency

Section 6. Interest Issues in Settlement Computations

8.17.6  Interest Issues in Settlement Computations

8.17.6.1  (11-06-2007)
Introduction to Cases With Restricted Interest

  1. Payment of interest is mandatory on underpayments and overpayments of tax unless specifically prohibited by law or mutual agreement.

  2. In general, interest is paid on an overpayment as provided by the Internal Revenue Code or, if not provided by the Internal Revenue Code, for the period the Government has use of taxpayer's money.

  3. Interest is collected as provided by the Internal Revenue Code or, if not provided by the Internal Revenue Code, for the period taxpayer has use of the Government's money.

  4. Any interest computed using dates other than the normal start and stop dates is "restricted" . There are two reasons why interest is restricted -

    1. conditions exist that prevent the computer from generating an accurate amount; and

    2. special provisions in law limit or prohibit interest.

8.17.6.2  (11-06-2007)
Cases Requiring Restricted Interest Worksheets

  1. In certain instances, the Code prohibits or limits interest on deficiencies and overassessments in tax to specific periods. These special interest accrual periods are shorter than the regular interest periods established by provisions of IRC 6601 and IRC 6611. These prohibitions cause regular interest to become restricted interest. See Exhibit 8.17.6-1. This exhibit is a detailed listing of IRC provisions restricting and prohibiting interest in various types of cases.

  2. The following situations require special interest computations:

    1. Certain limited transferee cases.

    2. Estate tax deficiency where installment payments under IRC 6166 are elected. See IRM 8.7.4, Appeals Estate and Gift Tax Cases, for a format to use in the computation of installment payments.

    3. Employer's liability is eliminated due to withholding tax being paid by employee. See IRC 3402(d) and IRM 4.23.16, Employment Tax - Appeals Procedures, for further details.

    4. IRC 6404(g) cases.

    5. Suspended research credit cases.

  3. IRM 20.2, Interest Handbook, contains detailed instructions for computing both normal and restricted interest and may be used to resolve a specific interest problem.

  4. Refer to Rev. Proc. 2005-18 and Rev. Proc. 84-58 for application of payments.

    Note:

    Rev. Proc. 84-58 is superseded by Rev. Proc. 2005-18, effective with respect to remittances made on or after March 28, 2005.

8.17.6.3  (11-06-2007)
Forms Needed for Restricted Interest Cases

  1. When a case involves restricted interest, Form 2285, Concurrent Determinations of Deficiencies (commonly called a Restricted Interest Worksheet), is needed. Generally, Part I of this form is prepared by the Tax Computation Specialist (TCS).

  2. Appeals Officers (AOs) and Appeals Team Case Leaders (ATCLs) annotate Form 5402, Appeals Transmittal Memorandum and Supporting Statement, to alert Appeals Processing Services (APS) the case needs a restricted interest computation. The form is needed whether the case is closed based on a settlement, a defaulted statutory notice of deficiency, or the final decision of the Tax Court.

  3. When the case is transmitted to APS for closing, use Form 3198, Special Handling Notice, to annotate that restricted interest applies.

  4. When APS prepares Form 5403, Appeals Closing Record, they check the "Restricted Interest" block in the Special Handling Instructions section, and enter applicable restricted interest code sections.

8.17.6.4  (11-06-2007)
When to Prepare Form 2285

  1. The best time to prepare Form 2285 is when preparing the settlement computations because information pertaining to the case is more familiar. The top portion of the form (Part 1) is generally prepared by a Tax Computation Specialist (TCS) if a carryback is allowed, disallowed in part or full, or a tentative carryback allowance is ignored in the settlement computations. Schedules detailing the computation of tax before and after carrybacks are needed. See Exhibit 8.17.6-2. for general instructions for completing Form 2285.

  2. A Form 2285 is also needed when there are carrybacks but the settlement results in zero deficiency or overassessment. It is important for APS to have all information regarding carrybacks even if the computation does not change the amount of the carryback.

  3. Attach Form 2285 to the Form 5403 Instructions to APS Spreadsheet, referred to as "Form 5403 Worksheet" , throughout this section. Although APS does not need the schedules detailing the computation of tax, they do need an explanation of "tax as previously adjusted" either on Form 2285 or on a separate schedule.

8.17.6.4.1  (11-06-2007)
Restricted Interest on Cases with No Deficiencies

  1. Appeals considers cases where the taxpayer does not agree even though the proposed in no deficiency or overassessment. These cases are subject to restricted interest provisions.

  2. Assess restricted interest on potential deficiencies (before allowance of carrybacks) within the period of limitations applicable to the tax even though the deficiency in tax is eliminated by a carryback. If no consent is secured or if the consent secured is not acceptable, complete Form 2285 and Form 5403 Worksheet and forward the case to APS.

8.17.6.4.2  (11-06-2007)
Sections I and II of Form 2285

  1. Use Form 2285 in individual, corporation, and fiduciary income tax cases requiring restricted interest computations.

  2. Section I of Form 2285:

    1. Section I shows various tax adjustments that result if a separate examination is made for the general adjustment and for each of the carryback adjustments. The columns and lines on Section I of Form 2285 are arranged to facilitate the application of adjustments in a predetermined order prescribed for concurrent determinations of tax liability. APS computes a running module working from the left to the right side of the form in column order.

    2. Form 2285 is divided into six columns (a through f) and eleven lines. The general adjustment amount shown in column (a) reflects tax determined without carrybacks. Columns (c), (d) and (e) show the year(s) involving a carryback from the first, second, third, etc. succeeding year.

    3. Line 11 in each column, shows the amount of deficiency and/or overassessment subject to interest. Column (f) shows the net deficiency to assess or net overassessment to abate.

  3. Section II of Form 2285:

    1. In the past, APS computed the interest on Section II of Form 2285. However, since DMI is now used to recompute the module, APS rarely uses this part of the form.

  4. On a separate attachment to Form 2285 notate the following:

    • prior assessments for column (a), line 7.

    • prior assessments for columns (b) through (e), line 10.

    • prior Form 2285s that were in error.

    • any other information that helps APS recompute the module.

    • explanation for tax as previously adjusted.

  5. See Exhibit 8.17.6-3. This exhibit shows a settlement computation containing net operating loss carrybacks. The exhibit includes a Form 5278, a completed Form 2285, and a line-by-line description of the Form 2285.

  6. The Excel version of Form 2285 found on the Appeals TCS web site automatically computes some of the adjustments.

8.17.6.4.3  (11-06-2007)
Additions to Tax/Penalties on Form 2285

  1. Follow these guidelines when computing additions to tax or penalties on cases involving carrybacks:

    1. Generally, compute additions to tax and penalties before applying carrybacks.

    2. Additions to tax and penalties already assessed are generally not decreased because a carryback is applied (with the possible exception of failure to pay when it accrues beyond the effective date of the carryback).

    3. Additions to tax and penalties are due even when all the tax is eliminated as a result of the carryback.

    4. It is not necessary to include information regarding the additions to the tax or penalties on Form 2285.

8.17.6.5  (11-06-2007)
Repeal of Tax Motivated Interest under IRC 6621(c)

  1. IRC 6621(c) was repealed for returns with due dates (determined without regard to extensions) after December 31, 1989. However, some tax motivated transaction (TMT) cases are still active, and/or TMT rates still apply to those in collection status. For detailed information on preparing a settlement computation with IRC 6621(c), refer to the historical IRM 8.17.2 archived on the Publishing web site.

8.17.6.6  (11-06-2007)
Large Corporation Underpayment Interest under IRC 6621(c)

  1. The Revenue Reconciliation Act of 1990 (P.L. 101–508) included a new provision in IRC 6621(c) which increased the interest rate on a large corporate underpayment (LCU) to a rate 2 percentage points higher than the normal underpayment interest rate in IRC 6621(a).

  2. The effective date of this provision is January 1,1991. If the statutory requirements are met, interest accrues at the higher rate beginning on January 1,1991, for all open corporate tax periods.

  3. For the higher rate to apply, the corporate taxpayer must have a total underpayment of over $100,000, for a given period, and must have previously received one of the "trigger" notices for that tax period.

  4. For purposes of IRC 6621(c), an underpayment is any amount owed and unpaid as of the due date of the return. It applies to all types of taxable returns filed by corporations, as long as the underpayment amount is over $100,000 for that period.

    Note:

    Prior to its repeal for returns due after December 31, 1989, the Tax Motivated Interest under IRC 6621(c), provided for a rate of interest equal to 120% of the regular underpayment rate on underpayments attributable to certain "tax motivated transactions." However, because new IRC 6621(c) is effective for all open tax periods, both provisions might apply to the same underpayment. See IRM 8.17.6.5 for additional information on Tax Motivated Interest.

  5. Determine whether the corporation meets the three requirements for the large corporate underpayment (LCU) rate.

    1. First, determine if the taxpayer is a C-Corporation. A C-Corporation is any BMF taxable entity with a significant Form 1120 filing requirement (except Form 1120S), and any BMF taxable entity without a significant Form 1120 filing requirement, but having an Exempt Organization Section present with a corporate indicator. Check the entity portion of the tax module for the literal "C-CORP>1" .

      Note:

      If the taxpayer is not a C-Corporation LCU rate does not apply.

    2. Second, determine whether there is a $100,000 threshold underpayment. The taxpayer must have received a 30-day or 90-day letter, or notice and demand for payment under non-deficiency procedures, and must not have not paid the underpayment within the last 30 days. For letters or notices issued after 12/31/1997, the tax amount must be for at least $100,000.

      Note:

      If the threshold underpayment requirement is not met the LCU rate does not apply

    3. Third, review current transcripts and the administrative file to determine the first "applicable date" . The LCU rate only applies to time periods after the "applicable date" . The first applicable date is usually 30 days after an unpaid notice date. If the letter/notice was issued before 1/1/1998 and the amount shown is less than $100,000 then also determine the first applicable date after 12/31/1997 with an amount shown on the letter/notice of $100,000 or more. If the letter/notice was issued before 1/1/1998 there may be multiple applicable dates.

8.17.6.6.1  (11-06-2007)
Letter or Notice Requirement (Trigger Notice)

  1. The letter or notice requirement is sometimes referred to as a "trigger notice" . The letter or notice requirement is met when the IRS issues one of the following:

    1. A 30-day letter (or any first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals).

    2. A 90-day letter (Statutory Notice of Deficiency).

    3. In non-deficiency matters, any IRS notice or letter which notifies the taxpayer of an assessment or proposed assessment of an underpayment.

  2. The amount in the letter/notice received by the taxpayer must not have been paid within 30 days of the letter/notice issue date.

    1. The amount shown as due in any letter or notice means the total amount of tax, as well as any interest, penalties, additional amounts, and additions to tax set forth in the letter or notice.

    2. A deposit in the nature of a cash bond is not considered a payment.

  3. The first applicable date is usually 30 days after an unpaid notice date.

    1. First review BMFOLT for the "2% Trigger Date" . If one appears, verify it is 30 days after the letter/notice date. If one does not appear, check the transcript for any assessment that has been unpaid for more than 30 days after the notice date. This includes the return, amended returns and assessments due to examinations.

  4. Next look for an applicable date set because of prior deficiency procedures.

    1. Review the transcript for prior Appeals assessments or assessments resulting from issuance of a statutory notice of deficiency. If any exist, look for the prior 30-day letter or statutory notice of deficiency in the administrative file.

      Note:

      If the taxpayer agreed to the Revenue Agent's Report (RAR), the LCU interest rate does not apply to that portion of tax unless there is an earlier LCU date activated in that tax period or if the agreed RAR tax is not paid within 30 days after the assessment notice date as described in paragraph (1) above.

  5. If no prior assessments activated the LCU rate, determine the date the first unassessed 30-day letter or statutory notice of deficiency was issued:

    1. Search the administrative file to locate the first 30-day letter or 90-day letter mailed or hand delivered to the taxpayer.

    2. If the 30-day letter or protest is not in the file, ask for a copy from the Appeals Officer (AO) or Appeals Team Case Leader (ATCL). On large cases, the AO and/or ATCL may have the 30-day letter or protest with their files.

    3. If the letter is not located, use the date of the taxpayer’s protest.

    4. Alternatively, search the case activity record to determine when the letter was mailed/issued to the taxpayer.

      Note:

      The date found on the RAR may or may not coincide with the 30-day letter date.

  6. The applicable date is 30 days after the date of the first letter/notice determined above.

    1. If the date is before 1/01/1998 and the amount is less than $100,000, the LCU rate stops on 12/31/1997 and resumes at normal underpayment rates.

    2. If there are other letters/notices determined above issued after 12/31/1997 for $100,000 or more, the first letters/notices is the second applicable date that restarts the LCU rate.

8.17.6.6.2  (11-06-2007)
Threshold Underpayment Requirement

  1. The underpayment of tax must be greater than or equal to $100,000 to meet the threshold underpayment requirement. Underpayment refers to the correct tax liability for a single tax period less payments made by the due date of the return without considering extensions. However, see paragraph 3 below with regards to carrybacks.

  2. Do not include interest, penalties, or additions to tax to determine the threshold.

  3. Do not consider net operating loss carrybacks, capital loss carrybacks or credit carrybacks when determining whether the underpayment meets the $100,000 threshold amount.

    1. Treat carryback loss credits from a subsequent year as payments for LCU purposes. Carrybacks are not considered to be abating the tax amount in the letter.

    2. If a general adjustment meets the threshold, the LCU rate applies from the letter date plus 30 days on any unpaid balance after the carryback.

  4. Use the following formula to compute the underpayment of tax:

    Correct tax liability (general adjustment before carrybacks)  
    Less: Tax paid by due date of return without extensions  
    Equals underpayment of tax  

    Note:This underpayment of tax must be greater than or equal to $100,000 to meet the threshold underpayment requirement.

8.17.6.6.3  (11-06-2007)
Start Date for the Large Corporate Underpayment Rate

  1. The Large Corporate Underpayment (LCU) rate may apply only to time periods after the "applicable date" . The applicable date is 30 days after the earlier of the issuance date of one of the letters/notices which remain unpaid for 30 days after the issuance date.

    1. Exception: For letters/notices issued before 1/1/1991, an unpaid notice for any amount activates the increased rate for LCU if other criteria is met.

      Example: A math error was made on an original 1995 Form 1120, which resulted in a bill for $50 that remains unpaid. One year later, an audit assessment results in a deficiency of $99,951. The additional 2% interest rate applies to interest accruing for the underpayment period ending on or before December 31, 1997.

  2. A letter or notice relating to a particular type of tax (income tax, FUTA tax, etc.) creates an applicable date only for that type of tax.

  3. Once the LCU rate is activated for time periods after the applicable date, the higher rate of interest is effective for all subsequent underpayments determined for that year.

  4. The LCU rate applies to the full amount due, including interest, penalties or other additions to tax.

  5. For interest accruing after 1997 on letters/notices issued before 1/1/1998, where no single letter or notice was issued for a tax amount greater than or equal to $100,000, the additional 2% interest rate (LCU interest) stops on 12/31/1997 and begins to accrue at the normal underpayment rate. If the letter/notice is for $100,000 or more, LCU interest begins 30 days after the letter/notice date and continues until the entire account balance is paid.

  6. Letters/notices issued after 12/31/1997 must have an amount of $100,000 or greater for LCU interest to apply. LCU interest no longer applies if a letter is issued for a proposed tax amount of $100,000 or greater and the tax in that letter/notice is later determined to be less than $100,000.

  7. It is possible to have a second notice for $100,000 or more activate the additional 2% rate after December 31, 1997 after a first notice of less than $100,000 activated the increased rate before 1/1/1998. In this case, there are two "applicable" dates for the start of the increased rate.

    • One prior to 1/1/1998 with the increased rate ending on 12/31/1997.

    • Another one after 12/31/1997 with the increased rate resuming on the new "applicable date" .

  8. For the transition period regarding letters issued before 01/01/1991, IRC 6621(c) applies to balances unpaid 30 days after the letter date or notice date, or 01/01/1991, whichever is later. So if a letter was issued before 01/01/1991, and not paid until after 01/01/1991, LCU interest starts to accrue on 01/01/1991.

    1. Exception: LCU interest does not apply if the total amount due is paid by January 31, 1991.

8.17.6.6.4  (11-06-2007)
Annotating Form 3610 for Large Corporate Underpayment Rate

  1. When the LCU rate applies, annotate Form 3610 using a paragraph similar to below:

    "It is determined the deficiency for the taxable year 1999 is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax is two percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code."

8.17.6.6.5  (11-06-2007)
Information to include on the Form 5403 Worksheet

  1. Enter the "Notice Date" on the Form 5403 Worksheet.

    1. The "Notice Date" is the date of the letter/notice that activates the LCU rate.

    2. Form 5403 Worksheet is available on the Appeals TCS web site.

  2. APS determines the applicable date by adding 30 days to the "notice date."

  3. If there is a notice that is less than $100,000 and is dated prior to 1/1/1998 let APS know the LCU rate ends on 12/31/1997. Modify the Form 5403 Worksheet for this purpose.

  4. If there is more than one notice date, modify the Form 5403 Worksheet to include all letter/notice dates. This may occur when a notice was issued before 1/1/1998 for less than $100,000 and a notice after 12/31/1997 is issued for $100,000 or more.

  5. To help APS, attach a copy of the document showing the letter date to the Form 5403 Worksheet. This also helps if the taxpayer subsequently inquires about the LCU rate.

8.17.6.7  (11-06-2007)
Interest on Underpayments Satisfied with Foreign Tax Credits

  1. See IRM 20.2.10, Interest on Estate Tax, Foreign Tax and Excise Tax, for information about tax underpayments satisfied with a foreign tax credit carryback.

8.17.6.8  (11-06-2007)
GATT Interest for Large Corporate Overpayments

  1. The Uruguay Round Agreements Act, (commonly referred to as the General Agreement on Tariffs and Trade, or GATT), amended IRC 6621(a)(1) for corporate refunds of tax in excess of $10,000. Interest on the first $10,000 of tax overpayment runs at the normal refund rate. Interest on the excess tax amount runs at a special rate that is 1.5 points less than the normal rate.

  2. The reduced rate of interest under GATT applies not only to the excess portion of a corporate overpayment exceeding $10,000, but also to the interest that accrued on the excess portion prior to January 1, 1995.

  3. The reduced rate of overpayment interest is effective for interest accruing after December 31, 1994.

  4. The rate is determined under IRC 6621(b) on a calendar quarter basis.

  5. See IRM 20.2.4.9, Special Credit Interest Rules for Corporations, for more information on GATT interest.

8.17.6.9  (11-06-2007)
IRC 6404(g) Suspension of Interest

  1. IRC 6404(g) provides for the suspension of interest, penalties and additions to tax when the IRS fails to provide timely and adequate notice of a tax liability. The intent of Congress was to prevent interest from accruing excessively before the taxpayer was aware that a problem existed.

  2. See IRM 20.2.7 for a detailed discussion of IRC 6404(g).

8.17.6.9.1  (11-06-2007)
Liabilities Subject to IRC 6404(g) Suspension

  1. IRC 6404(g) applies to increases in liabilities on timely filed individual income tax returns for taxable years ending after July 22, 1998. This also includes the liabilities shown below:

    • Increases in liabilities for FICA tax, excise tax, or household employee taxes reported on a Schedule H, reportable on a Form 1040.

    • Increases in an individual’s additional liability which results from a pass-through entity. (IRC 6404(g) may apply to liabilities based on notices issued for TEFRA or flow-through entity adjustments that are reported on Form 1040.)

  2. Per IRC 6404(g)(2), the IRC 6404(g)(1) suspension rules do not apply for:

    1. Any penalty imposed under IRC 6651.

    2. Any interest, penalty, addition to tax, or additional amount for any of the following:

      • Fraud Case

      • Tax Liability Shown on a Return

      • Gross Misstatement (applicable to tax years beginning after 12/31/2003)

      • Reportable Transaction with respect to which the requirement of IRC 6664(d)(2)(A) is not met and any listed transaction as defined in IRC 6707A

      • Any Criminal Penalty

  3. The American Jobs Creation Act (AJCA) of 2004 added IRC 6404(g)(2)(E). This section denies interest suspension for listed transactions and reportable transactions having a significant tax avoidance purpose not disclosed on the tax return, applicable for interest accruing after October 3, 2004. The Gulf Opportunity Zone Act of 2005 amended IRC 6404(g) so that there is no interest suspension allowed on or before October 3, 2004 for listed transactions and undisclosed reportable transactions, except for the following:

    1. Participants in settlement agreements: If, as of January 23, 2006, the taxpayer is participating in a settlement initiative described in IRS Announcement 2005-80 with respect to a transaction, or the taxpayer has entered into a settlement pursuant to such an initiative. (This exception does not apply to any taxpayer who withdraws from or terminates participation in the initiative. It also does not apply to any taxpayer if the Service determines that a settlement will not be reached within a reasonable period of time.)

    2. Closed transactions: If as of December 14, 2005, the year is barred by the statute of limitations or a closing agreement was entered into with respect to the transaction.

    3. Taxpayers acting in good faith: Any transaction in which the taxpayer acted reasonably and in good faith, as determined by the Secretary of the Treasury.

  4. AOs or ATCLs must identify gross misstatements, and listed transactions and undisclosed reportable transactions not eligible for interest suspension and provide this information on the TCS Work Request if requesting TCS to do the settlement computations. If the taxpayer is a participant in the settlement initiative, the AO or ATCL identifies the transactions and specifies the interest suspension period allowable if timely and adequate notice was not provided. They

  5. IRC 6404(g) refers to the suspension of interest, penalties, and additions to tax. However, its practical effect is only on the suspension of underpayment interest since there are not any current penalties or additions to tax suspended by IRC 6404(g). Interest on the tax and penalties (except as described above) is suspended if the conditions of IRC 6404(g) occur.

8.17.6.9.2  (11-06-2007)
Determining Adequate Notice Period

  1. For taxable years ending after July 22, 1998, the IRS must provide adequate notice of a liability before the close of the 18 month period which begins on the later of the following:

    1. the due date of the return, if filed on or before the return due date, or

    2. the filing date of the return, if filed timely under a valid extension.

    Note:

    The Gulf Opportunity Zone Act of 2005 amended IRC 6404(g) so that if, after the taxable year return is filed, the taxpayer provides the IRS with one or more signed written documents showing they owe an additional amount of tax for the taxable year, clause (a) above is applied by substituting the date the last of the documents was provided for the date on which the return is filed. This is effective for documents provided on or after December 21, 2005. (This is referred to subsequently as the "taxpayer document" .)

  2. Section 903 of the American Jobs Creation Act of 2004 contains several amendments to the interest suspension rules of IRC 6404(g). The 18 month period when the IRS must notify a taxpayer of a tax liability will not change to a 12 month period for tax years beginning on or after January 1, 2004, as previously provided by IRC 6404(g). The 18 month period continues to be used in determining whether the IRC 6404(g) interest suspension applies.

  3. A notice provided within the 18 month period prevents the suspension of interest if the notice adequately states the amount of the liability and the basis for the liability.

  4. The date when adequate notice is provided is referred to as the IRC 6404(g) notice date.

    1. No IRC 6404(g) suspension is allowable if the IRC 6404(g) notice date is PRIOR TO 18 months from the later of the original return due date, the date the return was filed (if filed under a valid extension) or a signed taxpayer document asserting an increase in tax liability.

    2. If the IRC 6404(g) notice date is AFTER the 18 month date, suspend the interest beginning on the day after the close of the 18 month period. If the close of the 18 month period falls on a weekend or holiday, the next business day becomes the close of the 18 month period. Interest accrues during this period for IRC 6404(g) purposes.

    3. The suspension period ends on the 21st day after the notice is sent to the taxpayer. Interest resumes on the 22nd day after the IRC 6404(g) notice date.

8.17.6.9.3  (11-06-2007)
Adequate Notices in an IRC 6404(g) Case

  1. The notice requirement applies separately to each item or adjustment. An adequate notice provided within the prescribed time period prevents the suspension of interest only on those items or adjustments described in that notice.

  2. Write a notice and include the amount of the liability, the basis for that liability, and sufficient information or explanation regarding the adjustment to enable the taxpayer to challenge the adjustment.

  3. The following items are considered sufficient notice:

    Note:

    The list is not exclusive and notice may be provided by letter or other written statement satisfying the statutory requirements.

    1. math error notices

    2. Underreporter Program (URP) notices

    3. revenue agent reports (RARs)

    4. 30-day letters with accompanying RARs

    5. statutory notices of deficiency with accompanying explanations of adjustments.

  4. Examination reports such as Form 4549 and Form 1902-B are sufficient notice if they contain an explanation of each item of adjustment.

  5. For TEFRA cases, the notice requirements of IRC 6404(g) are met if notice is provided to the taxpayer as a partner under the TEFRA provisions. Generally, the following TEFRA related items meet the notice requirements of IRC 6404(g) or are referred to as IRC 6404(g) notices:

    • Form 5701, Notice of Proposed Adjustment

    • TEFRA entity Summary Report

    • 60-day letter (The 60-day letter for TEFRA cases is the equivalent of a 30-day letter in deficiency proceedings. It gives the investors the opportunity to appeal the findings of the examiner.)

    • Appeals settlement letter

    • FPAA, Final Partnership Administrative Adjustment

  6. In the case of an adjustment resulting in an increased deficiency in a Tax Court proceeding, consult with the Counsel Attorney to determine when notice was provided to the taxpayer. See CC Notice N(35)000-172 for further information.

8.17.6.9.4  (11-06-2007)
IRC 6404(g) and Multiple Notice Dates

  1. There may be more than one notice for the same return and more than one IRC 6404(g) notice date.

    1. For example, Compliance may issue more than one report for a tax return during the course of an examination. If a subsequent report contains no new items or adjustments, there is one IRC 6404(g) notice date. If the subsequent report does contain new items or adjustments, there are separate IRC 6404(g) notice dates, even if the net balance due is the same as in the previous report.

    2. See IRM 20.2.7.6.5, Multiple Section 6404(g) Notices, for examples of multiple notice dates.

  2. New issues raised in Appeals can result in multiple notice dates. Since the IRC 6404(g) notice requirement applies separately to each item or adjustment, a new issue raised in Appeals and included in the settlement computation causes there to be more than one IRC 6404(g) notice date. The settlement computation containing the new issue has a separate IRC 6404(g) notice date.

    1. The settlement computation must contain an explanation of adjustment for each new issue or it is not considered a notice.

  3. An amended return can cause more than one notice date. See IRM 8.17.6.9.5.

  4. If there is more than one IRC 6404(g) notice date, compute the portion of the liability attributable to each notice date and include the computation in the settlement computation. Clearly indicate the portion of the liability attributable to each notice date on the IRC 6404(g) Worksheet and attach it to the Form 5403 Worksheet.

8.17.6.9.5  (11-06-2007)
IRC 6404(g) and Amended Returns

  1. Rev. Rul. 2005-4 extends the scope of the IRC 6404(g) suspension rules to additional taxes voluntarily reported by taxpayers on amended returns. The IRC 6404(g) interest suspension also applies to liability increases based on any other written notice submitted by the taxpayer to the IRS.

  2. The ruling was made retroactive, so it is effective for tax years ending after July 22, 1998. Subsequently, the Gulf Opportunity Zone Act of 2005 amended IRC 6404(g) effective for documents provided on or after December 21, 2005.

  3. If a taxpayer files an amended return or other signed written document showing they owe an additional amount of tax for the tax year, measure the relevant 18 month period under the interest and penalty suspension rule from the latest date those documents were provided.

  4. Suspend the interest on any additional tax when an amended return (or other written notice to the IRS of additional liability not listed on the original return) is filed more than 18 months after the later of the original return due date (with extensions), or the date on which the return is timely filed. The date the amended return (or other written notice) is filed is considered the IRC 6404(g) notice date with respect to this increase in tax liability.

  5. The following are examples of IRC 6404(g) and amended returns under Rev. Rul. 2005-4.

    Example 1: An individual filed an income tax return for the 2002 tax year on the due date of April 15, 2003. On October 4, 2004, within 18 months after the due date, the individual reported (but didn’t pay) additional tax due for 2002 on an amended return. The IRS hadn’t notified the individual of the amount or the basis for any additional tax that was reported on the amended return. Because the amended return was filed within the applicable 18 month notification period, interest wasn’t suspended on the additional tax reported on the amended return. The IRS didn’t have to notify the taxpayer of the amount and basis of the additional tax reported on the amended return.

    Example 2: The facts are the same as in Example 1, except that the individual files the amended return on November 26, 2004, more than 18 months after the due date of the individual’s return, and remits payment with the amended return. Here, because the IRS didn’t provide the individual with the required notice before October 14, 2004, the date on which the applicable 18 month notification period expired, interest was suspended starting on October 15, 2004 and ending November 26, 2004, the date on which the additional tax was paid.

    Example 3: The facts are the same as in Example 2, except that the individual didn’t remit payment with the amended return. Here, interest was suspended starting on October 15, 2004, and ending on December 17, 2004, which is the date that is 21 days after November 26, 2004, the date that the individual filed an amended return.

8.17.6.9.6  (11-06-2007)
Posting Notice Date to Master File

  1. A timely filed Form 1040 or Form 1040X requires posting IRC 6404(g) notice date to Master File if notification of a liability is not made within the 18 month period. Campus inputs TC 971 with Action Code 64 on Master File to record the notice date. Master File automatically computes the interest with only one notice date. Cases with additional notice dates require manually computed restricted interest (TC 340).

  2. Effective January 1, 2004, the liability amount shown on the notice or amended return must also be input along with the IRC 6404(g) notice date.

8.17.6.9.7  (11-06-2007)
IRC 6404(g) in Settlement Computations

  1. The administrative file is needed to determine if IRC 6404(g) applies. Therefore, the AO or Counsel Attorney must provide the file or provide the information necessary to make the determination when requesting that TCS do the settlement computations.

  2. The Appeals TCS web site contains Excel worksheets to help determine if IRC 6404(g) applies. Use the worksheets when there are multiple IRC 6404(g) notice dates. The worksheets take into account listed and reportable transactions.

    Note:

    The AO or ATCL is responsible for notifying the TCS if their case involves gross misstatements, listed transactions or undisclosed reportable transactions, and identifying interest suspension periods allowable under any settlement initiatives.

  3. When IRC 6404(g) does not apply, annotate this on the Form 5403 Worksheet and explain why by using language from the following table:

    If ... Then ...
    it does not apply because the return was filed late - use "IRC 6404(g) does not apply. The return was not timely filed."
    if it does not apply because the notice was timely provided - use "IRC 6404(g) does not apply. Timely notice was provided on (enter date)."

    1. Attach the Form 5403 Worksheet to the inside left flap of the administrative file folder.

  4. When IRC 6404(g) does apply, use the following procedures:

    1. Annotate it applies on the Form 5403 Worksheet.

    2. Include a statement on Form 3610 in both docketed and non-docketed cases, and on the Rule 155 face sheet using language form the following table:

      If ... Then ...
      the entire deficiency has the same notice date - use "IRC 6404(g) applies, and notice was provided on (enter date)."
      there is more than one IRC 6404(g) notice date - use "IRC 6404(g) applies and there are two different notice dates. The first notice was provided on (enter date) for $(enter amount of liability) and the second notice was provided on (enter date) for $(enter amount of liability)." .
      any portion of the tax liability involves adjustments that are based on gross misstatements for which no interest suspension is allowed (for returns due after 12/31/2003) - use the statement: "IRC 6404(g) applies to $(enter amount of liability not attributable to gross misstatements), and notice was provided on (enter date). IRC 6404(g) does not apply to the portion of the liability attributable to gross misstatements. That portion of the liability is $____, as shown in the attached exhibit (or schedule)."
      interest suspension is not allowed because a portion of the tax liability involves adjustments that are based on undisclosed reportable or listed transactions - use the statement: "IRC 6404(g) applies to $(enter amount of liability NOT attributable to reportable or listed transactions), and notice was provided on (enter date). IRC 6404(g) does not apply to the portion of the liability attributable to reportable or listed transactions. That portion of the liability is $____, as shown in the attached exhibit (or schedule)."

    3. Any computations used to determine the portion of deficiency attributable to gross misstatements, and undisclosed reportable or listed transactions must be attached to the IRC 6404(g) Worksheet as a separate schedule or exhibit.

    4. Attach the IRC 6404(g) Worksheet to the Form 5403 Worksheet, then attach both documents to the inside left flap of the administrative file folder.

8.17.6.10  (11-06-2007)
Rev. Rul. 99-40 and Credit Elects (May/Sequa)

  1. The purpose of "May/Sequa" computations is to determine when interest begins to accrue on a deficiency in tax when the taxpayer does the following two things:

    1. Initially overpays tax; and

    2. Elects to credit this overpayment to the subsequent year's estimated tax.

  2. "May/Sequa" refers to the Service’s procedures developed after the decisions were entered in the May Department Stores Co. v. United States, 36 Fed. Cl. 680 (1996) and Sequa Corp. v. U.S. 99-1 USTC cases.

    Note:

    May Department Stores Co., acquiesced AOD CC-1997-008 (Aug. 4, 1997)

    .

  3. As a result of the court decisions in these two cases, the IRS issued Counsel Notice N(35)000-168 and Rev. Rul. 99-40, setting forth the Service's litigating position and its position regarding the manner in which interest on a subsequently determined deficiency is computed when the taxpayer makes an election to apply an overpayment to the succeeding year’s estimated taxes.

  4. Rev. Rul. 99-40 states that when a taxpayer files a return on or before the due date or the extended due date, and elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose in the order required to avoid an estimated tax penalty with respect to that year. Interest on a subsequently determined deficiency is assessed for the overpayment return year in an amount less than or equal to the overpayment as of the date the overpayment is applied to the succeeding year’s estimated taxes.

  5. Counsel Notice N(35)000-168 announces the change in the Service's litigating position, and provides procedures for determining whether the overpayment of tax - which the taxpayer elected to apply to the subsequent year - is needed to avoid an estimated tax penalty:

    1. Determine the amount of each of the taxpayer’s required installments of estimated tax for the succeeding year.

    2. Required installments less than or equal to payments of estimated tax – If the amount of the taxpayer’s required first installment is equal to or less than the amount of any payments of estimated tax made on or before the due date for the first installment, not including the credited overpayment, the taxpayer does not need the overpayment to avoid a penalty for failure to pay the first installment of estimated taxes. For the second required installment, all payments made on or before the due date for that installment, not including the credited overpayment, are added together and, if the total payments exceed the sum of the first two installments, the taxpayer does not need the overpayment to avoid the penalty. Similar calculations are made with respect to third and fourth installments.

    3. Required installments greater than payments of estimated tax – If the amount of any of the taxpayer’s required installments exceeds the amount of all payments of estimated tax made on or before the due date for that installment, not including the credited overpayment, the taxpayer needs the overpayment (or a portion thereof) to avoid a penalty for failure to pay an installment of estimated tax. The overpayment is reduced by the amount that the required installment exceeds the amount of all other payments made on or before the installment due date. If the remaining overpayment is less than the determined deficiency, underpayment interest accrues on the difference from the due date of the installment until the date the deficiency is paid.

    Note:

    Counsel Notices are located on the Chief Counsel web site under CCDM Notices, along with the current status of the Notice.

8.17.6.10.1  (11-06-2007)
Determining if May/Sequa Applies

  1. The employee preparing the settlement computations is responsible for determining if May/Sequa applies and for preparing the worksheets.

  2. Two criteria must exist for May/Sequa to apply:

    1. a "net deficiency" in the tax year, and

    2. a "credit elect" applied to the succeeding year which originated from the deficiency year.