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

Manual Transmittal

October 12, 2012

Purpose

(1) This transmits a revised IRM 8.17.6, Settlement Computations and Statutory Notices of Deficiencies, Interest Issues in Settlement Computations.

Material Changes

(1) Revised IRM to reflect new organizational titles resulting from the Appeals 2012 Alignment Project.

Effect on Other Documents

IRM 8.17.6 dated 7/15/2011 is superseded.

Audience

Appeals employees

Effective Date

(10-12-2012)


Susan L. Latham
Director, Policy, Quality and Case Support

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 the 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 the 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  (11-06-2009)
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. In addition to the items listed on the above referenced exhibit, 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  (10-01-2012)
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 (AO's) and Appeals Team Case Leaders (ATCL's) annotate Form 5402, Appeals Transmittal and Case Memo, to alert Account and Processing Support (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. The employee who prepares the settlement computations is also responsible for completing the Form 5403 Worksheet and will annotate on the form whether restricted interest applies and indicate the applicable code section or sections. The Appeals Officer is responsible for ensuring that the Form 2285 referred to in paragraph (1) above is attached to the Form 5403 worksheet when the case is closed.

  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  (11-06-2009)
Restricted Interest on Cases with No Deficiencies

  1. Appeals considers cases where the taxpayer does not agree even though the prior examination report shows no deficiency or overassessment due to the allowance of carrybacks. These cases are subject to restricted interest provisions.

  2. Normally, restricted interest is assessed 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. However, when an unassessed deficiency that is barred by the statute of limitations is offset by a carryback, the interest on that deficiency will not be assessed, but will be computed and will offset a refund due to the taxpayer. See Rev. Rul. 85-64 and IRM 20.2.8.9.2 .

  3. While these types of cases may contain a zero deficiency, it is recommended that an agreement be secured for the following reasons:

    1. To notify the taxpayer of the adjustment(s) so that such adjustment(s) will be properly reflected in subsequent year returns.

    2. To notify the taxpayer of the applicability of IRC 6601(d) for restricted interest cases.

  4. Whether an agreement is secured or not, there are statutory requirements for calculating interest on underpayments and overpayments under IRC 6601 and 6611. The payment of interest on underpayments and overpayments under these provisions is mandatory unless specifically prohibited by law.

  5. The TCS will complete Form 2285 and the Form 5403 Worksheet and return the case to the requestor.

8.17.6.4.2  (11-06-2009)
Sections I and II of Form 2285

  1. Form 2285 is used 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 would result if separate examinations were 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 Form 2285 or a separate attachment to Form 2285 notate the following:

    • prior assessments and abatements for column (a), line 8.

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

    • prior Form 2285's 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  (11-06-2009)
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, the 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 paid the underpayment within 30 days of the notice date. For letters or notices issued after 12/31/1997, the tax amount must exceed $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 $100,000 or less, then also determine the first applicable date after 12/31/1997 with an amount of more than $100,000 shown on the letter/notice. (See IRM 8.17.6.6.1(6) for more details.) If the letter/notice was issued before 1/1/1998 there may be multiple applicable dates.

  6. When it is determined that the LCU rate applies, the additional 2% interest is computed on the entire balance due, including interest, penalties and additions to tax.

8.17.6.6.1  (11-06-2009)
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. Cash bonds and IRC Section 6603 deposits are not considered payments.

  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 a TCS is preparing the computation and the 30-day letter or protest is not in the file or the TCS does not have the admin file, the Appeals Officer (AO) or Appeals Team Case Leader (ATCL) should provide a copy of the 30-day letter or protest. 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 30 day letter date notated in 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 applicable date is before 1/1/1998 and the amount in the letter/notice is $100,000 or less, the LCU rate stops on 12/31/1997 and resumes at normal underpayment rates.

    2. If other letters/notices determined above are issued after 12/31/1997 for more than $100,000, the second applicable date is 30 days after the date of the first letter/notice that is greater than $100,000.

8.17.6.6.2  (11-06-2009)
Threshold Underpayment Requirement

  1. The underpayment of tax must be greater than $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 $100,000 to meet the threshold underpayment requirement.

8.17.6.6.3  (11-06-2009)
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 1/1/1998, 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 $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 more than $100,000, LCU interest begins 30 days after the letter/notice date and continues until the entire account balance is paid.

  6. For interest accruing after 12/31/1997, the letter/notice must have a tax underpayment amount that exceeds $100,000 for LCU interest to apply. LCU interest no longer applies if a letter is issued for a proposed tax underpayment greater than $100,000 and the tax underpayment in that letter/notice is later determined not to exceed $100,000.

  7. It is possible to have a second notice for more than $100,000 activate the additional 2% rate for interest after December 31, 1997 after a first notice that did not exceed $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 1/1/1991, IRC 6621(c) applies to balances unpaid 30 days after the letter date or notice date, or 1/1/1991, whichever is later. So if a letter was issued before 1/1/1991, and not paid until after 1/1/1991, LCU interest starts to accrue on 1/1/1991.

    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  (11-06-2009)
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. The 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 a notice for $100,000 or less activated the LCU rate 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 that did not exceed $100,000 was issued before 1/1/1998 and a notice after 12/31/1997 is issued for more than $100,000.

  5. It is helpful to APS if the AO or ATCL attaches a copy of the document showing the letter date to the Form 5403 Worksheet, if it is available. This will be helpful when assisting a taxpayer who may subsequently inquire about the LCU rate. This will also help APS in processing the case accurately.

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  (11-06-2009)
IRC 6404(g) Suspension of Interest

  1. Section 3305 of the IRS Restructuring and Reform Act (RRA) of 1998 added IRC 6404(g) to provide 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  (11-06-2009)
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 (GOZA) 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. AO's or ATCL's 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.

  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 no current penalties or additions to tax suspended by IRC 6404(g). Interest on both the tax and applicable penalties (except as described above) is suspended if the conditions of IRC 6404(g) occur.

  6. If tax has been abated as a result of an amended return or other signed written document filed by the taxpayer and later adjustments are made to those amended items, IRC 6404(g) does not apply to those adjustments. Also, IRC 6404(g) interest suspension does not apply to the deficiency resulting from the disallowance of all or a portion of a tentative carryback (Form 1045 or Form 1139 recapture).

8.17.6.9.2  (11-06-2009)
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 (extended to 36 months as explained in (3) below), 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:

    GOZA 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 AJCA 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).

  3. Section 8242 of the Small Business and Work Opportunity Tax Act (SWOTA) of 2007 extended the notification period from 18 months to 36 months for notices issued on or after November 26, 2007. See Chief Counsel Notice 2007-93. This amendment affects tax years where the 18-month period, starting from the return due date or the return filed date per (1) above, is still open as of November 25, 2007.

    To determine which notification period applies if the notice was provided on or after November 26, 2007, 18 months is added to the return due date (or timely return filed date). Subtract one day from that date to arrive at the 18-month end date. See whether this date falls before or after November 25, 2007. If the 18 months end date falls before November 25, 2007, the Service has 18 months to notify the taxpayer. But if the 18 months end date falls on or after November 25, 2007, the Service has 36 months to notify the taxpayer.

  4. A notice provided within the 18/36 month period prevents the suspension of interest if the notice adequately states the amount of the liability and the basis for the liability.

  5. 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 18/36 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 18/36 month date, interest is suspended beginning on the day after the close of the 18/36 month period. If the close of the 18/36 month period falls on a weekend or holiday, the next business day becomes the close of the 18/36 month period. Interest accrues from the due date of the return to the beginning of the suspension 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  (11-06-2009)
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. An adequate notice should be in a written format which includes 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 inclusive 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 (RAR's)

    4. 30-day letters with accompanying RAR's

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

    6. Amended returns and any other signed written documents with additional taxes.

      Note:

      An amended return (or written notice) which is received on or after 12/21/2005 can serve as both the start of the 18/36 month period and as an adequate notice. In this situation, the increase in the liability due to the adjustments on the amended return will not receive interest suspension. See IRM 8.17.6.9.5 for further information.

  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  (11-06-2009)
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 and the proposed deficiency is equal to or less than the earliest report, there is one IRC 6404(g) notice date. The IRC 6404(g) notice date is the date of the earliest report.

    2. There are separate IRC 6404(g) notice dates for the following subsequent reports issued by Compliance:

      • Those containing new items or adjustments, even if the proposed deficiency is the same as in the previous report.

      • Those involving an increase in the proposed deficiency even if there are no new items or adjustments.

    3. 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  (11-06-2009)
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. The ruling was made retroactive, so it is effective for tax years ending after July 22, 1998.

    Example: For documents filed prior to December 21, 2005, interest is suspended on any additional tax shown on an amended return (or other written notice to the IRS of additional liability not listed on the original return) if filed more than 18 months after the later of the original return due date, or the date on which the return is timely filed under a valid extension. The filing date of the amended return (or other written notice) is considered the IRC 6404(g) notice date with respect to this increase in tax liability. The suspension period would be from the day following the end of the 18 month period to 21 days after the received date of the amended return.

  2. Subsequently, GOZA amended IRC 6404(g) effective for documents provided on or after December 21, 2005. Amended returns received after December 21, 2005 no longer qualify for section 6404(g) interest suspension, because the notification period starts from the amended return received date and the amended return is considered a "notice" for 6404(g) purposes.

  3. 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  (11-06-2009)
Posting Notice Date to Master File

  1. A timely filed Form 1040 or Form 1040X requires posting the IRC 6404(g) notice date to Master File if notification of a liability is not made within the 18/36 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. (MM-DD-YYYY)

8.17.6.9.7  (07-15-2011)
IRC 6404(g) in Settlement Computations

  1. The employee preparing the settlement computations is responsible for determining if IRC 6404(g) applies and for preparing the IRC 6404(g) worksheet. The AO or Counsel Attorney must provide the administrative file or the information necessary to make the determination when requesting that TCS do the settlement computations.

  2. The RGS web site and the Appeals TCS web site contain Excel worksheets to help determine if IRC 6404(g) applies. Use the Appeals TCS web site worksheets when there are multiple IRC 6404(g) notice dates. These worksheets also take into account gross misstatements, and 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) applies, 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 from 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, see attached schedule." .
      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, see attached 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, see attached schedule."

    3. When appropriate, the applicable language from the above table may be shown on Forms 5278 or 4549 instead of on Form 3610. The "schedule" referred to in the table can be the IRC 6404(g) Worksheet, or another computational schedule.

    4. 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.

    5. 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  (11-06-2009)
Determining if May/Sequa Applies

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

  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.

  3. Definitions:

    1. "Net deficiency" - the finally determined tax is greater than the tax on the original return, when considering only general adjustment tax, (i.e. tax liability determined before adjustments to tax for carrybacks).

    2. "Credit elect" - the taxpayer reported an overpayment of tax on the original return and elected to have it credited to the succeeding year's estimated tax.

  4. First, determine if there is a "net deficiency" in tax. If the finally determined tax is greater than the original tax per return, there is a "net deficiency" . If there were carrybacks, only consider the final tax liability in the general adjustment column (Column a) on Form 2285. Note the following:

    1. It is possible for the settlement computation to show a deficiency but not have a "net deficiency" . For example: The taxpayer filed a 1040X for a $1,200 refund which was allowed by the IRS Campus. Subsequently, this was examined and a $700 deficiency was determined. This is not a "net deficiency" since the finally determined tax was $500 less than the tax on the original return.

    2. It is possible for the settlement computation to show an overassessment but have a "net deficiency" . For example: After the Appeals settlement the general adjustment tax deficiency is $2,000 before carrybacks and a carryback allowed from the third succeeding year is $3,000. The net overassessment is $1,000. However, there is a "net deficiency" since the finally determined tax is $2,000 greater than the tax on the original return, when considering only general adjustment tax deficiencies.

    3. If there is no "net deficiency" , May/Sequa procedures do not apply.

  5. Next, determine if the taxpayer elected to apply an overpayment to the succeeding year’s estimated tax from the year in which there is a "net deficiency" in tax. This information is found on the taxpayer’s transcripts of account for the deficiency and succeeding year.

    1. Transaction Codes 830 or 836 identify the "credit elect" amount on the overpaid module, and Transaction Codes 710 or 716 identify the "credit elect" amount on the subsequent year tax module.

    2. If there is no "credit elect" , May/Sequa procedures do not apply.

8.17.6.10.2  (11-06-2009)
Completing the May/Sequa Worksheets

  1. If May/Sequa applies, the TCS is responsible for preparing the Sequa Worksheets. If the AO prepared the settlement computations and determines that May/Sequa applies, the AO should submit a work request to TCS for preparation of the Sequa Worksheets.

    1. See Exhibit 8.17.6-4 for a sample of a completed Form 2220 Sequa Worksheet.

    2. Excel versions of the Sequa Worksheet are available on the Appeals Tax Computation Specialist web site.

    3. Use the Form 2210 Sequa Worksheet for individuals and the Form 2220 Sequa Worksheet for corporations.

    4. It is very important to use the correct worksheet for the year involved. Instructions for completing the Form 2220/2210 Sequa Worksheets are contained within the Excel workbook.

  2. Use the Sequa Worksheet to help determine the following:

    • Amount and due date of each required installment of estimated tax for the succeeding year.

    • Amount of overpayment required to satisfy the unpaid installments of estimated tax due so that an estimated tax penalty does not apply.

  3. When completing this worksheet, use IRC 6654 and IRC 6655 to determine the required installments and installment dates. Use Chief Counsel Notice N(35)000-168 to determine the overpayment needed to avoid the estimated tax penalty.

  4. The following information is needed to complete the worksheet:

    1. When tax became overpaid. (Sequa Worksheets assume tax became overpaid on the due date of the return and was available to apply to required estimated tax installments for the succeeding taxable year.)

    2. The dates and amounts of estimated tax payments made, if any, for the succeeding taxable year.

      Caution:

      All credits (other than the credit elect) and payments dated no later than the last installment due date need to be considered.

    3. Tax reported for the succeeding year.

    4. Method used to determine the amount of required installments of estimated tax for purposes of IRC 6654 or IRC 6655.

    5. This information is found on the taxpayer’s transcripts of account for the deficiency and succeeding year, and the taxpayer’s return for the succeeding year, including Form 2220, Underpayment of Estimated Tax by Corporations; Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts; or Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman.

8.17.6.10.3  (11-06-2009)
Credit for Increasing Research Activities

  1. If the taxpayer claimed research credits which are subject to the suspension periods required by Section 502(d) of the Tax Relief Act of 1999 (see IRM 8.7.1.4 for a full discussion), the suspended credits may not be taken into account in the May/Sequa computation before the expiration of their respective suspension periods. Thus:

    1. The research credit attributable to the period beginning on July 1, 1999 and ending on September 30, 2000 may not be taken into account before October 1, 2000.

    2. The research credit attributable to the period beginning on October 1, 2000 and ending on September 30, 2001 may not be taken into account before October 1, 2001.

  2. The research credit suspension may have multiple effects on the May/Sequa computations, as follows:

    1. The current year tax may not include the suspended research credit.

    2. The prior year tax liability may not include the suspended research credit.

    3. The estimated tax payments may be adjusted after the suspension period where either the taxpayer files a claim for a credit elect with respect to the suspended research credit, or the taxpayer files an amended return and indicates that the suspended research credit is to be applied to its estimated tax for the succeeding taxable year.

      Note:

      If the taxpayer files a claim to apply the overpayment credit created by the suspended research credit to an estimated tax payment due after the suspension period has expired, the transaction may appear on the transcript as a TC 830/710.

    4. The required estimated payment may be reduced after the suspension period for the suspended research credit that relates to the current year tax liability.

      Example:

      • Assume that the taxpayer, a calendar year corporation, had $800 of research credit for 1999 and $1,000 of research credit for 2000 (before taking into account any suspended credits). The amount of research credit from tax year 1999 attributable to the first suspension period (July 1 through December 31) is $400 (6/12 of $800) and the amount of research credit from tax year 2000 attributable to the 1st suspension period (January 1 through September 30) is $750 (9/12 of $1,000). The amount of the research credit from tax year 2000 attributable to the second suspension period (October 1 through December 31, 2000) is $250 (3/12 of $1,000).

      • Estimated tax payment based on current year tax liability – If the taxpayer makes an estimated tax payment for its 2000 taxes based on its current year tax liability, whether or not that liability is annualized, that liability must be determined without regard to the $750 of research credit attributable to the period January 1 through September 30, 2000 and the $250 of research credit attributable to the second research suspension period (October 1 through December 31, 2000).

      • Estimated tax payment based on prior year tax liability – The prior year tax liability must be determined without regard to the $400 of research credit attributable to the period July 1 through December 31, 1999.

      • Adjustment to estimated tax payments – If the taxpayer indicates on its amended return for 1999 (filed on or after October 1, 2000) that all or part of the $400 of research credit attributable to the period July 1 through December 31, 1999, and available on October 1, 2000, is to be applied to its estimated tax for the succeeding taxable year (in lieu of a refund), then the amount requested will be applied to the taxpayer’s estimated tax payment due on or after December 15, 2000 since this is the first estimated tax payment due on or after October 1, 2000.

      • Reduction to required estimated payments – The taxpayer may use its $750 suspended 2000 year research credit that is attributable to the period January 1 through September 30, 2000 (and available on October 1, 2000) to reduce the amount of estimated tax payments otherwise required to be paid on December 15, 2000 since this is the first estimated tax payment due on or after October 1, 2000.

      • The $250 suspended 2000 year research credit attributable to the second suspension period from October 1 through December 31, 2000 does not enter into the May/Sequa computation since it is not available until October 1, 2001.

  3. See Notice 2001-2 and IRM 21.7.4.4.8.3.4.1, for additional information. Also, refer to the Form 2210 and Form 2220 instructions in the IRS forms catalog for the applicable year.

8.17.6.10.4  (11-06-2007)
Documenting Case File for May/Sequa

  1. Indicate if May/Sequa applies on the Form 5403 Worksheet. An Excel version of the form is available on the Appeals TCS web site.

  2. Attach the Form 2210/2220 Sequa Worksheet to the Form 5403 Worksheet.

  3. Also it is helpful to APS if the Forms 2210/2220 filed with the original returns (if any) are attached to the Form 5403 Worksheet.

  4. Attach all the documents to the inside left flap of the administrative file folder.

Exhibit 8.17.6-1 
Internal Revenue Code Provisions Restricting and Prohibiting Interest

Restricted InterestIRC Provisions
 The Internal Revenue Code defines, in some instances generally and in others in specific terms, the conditions under which interest is either restricted or prohibited on Internal Revenue taxes. The table below lists the sections of the Internal Revenue Code and certain provisions having the effect of law, which govern adjustments resulting in deficiencies or overassessments on which interest is restricted. It also lists an identifying title and the related provision which governs the computation of interest.
Code Section Subject Interest Restricted on Underpayments Overpayments
INCOME TAX      
172(b) Net Operating Loss Carryback 6601(d) 6611(f)
39 Unused Credit Carryback 6601(d) 6611(f)
1212(a) Capital Loss Carrybacks 6601(d) 6611(f)
6411(b) Tentative Carryback Allowance 6601(d) 6611(f)
6601(d) as amended by P.L. 105-34 Sec. 1055(a) 6611(f) as amended by P.L. 105-34 Sec. 1055(b)(1) Carryback of Foreign Tax Credit 6601(d)(2) 6611(f)(2)
901 Foreign Tax Credit 905(c) Not Restricted
547(a) Deficiency Dividend Deduction
Personal Holding Co. Tax 		547(f)(2) 547(b)(2)
1341(b)(2) as amended by P.L. 94-455 Sec. 1901(a)(146) Renegotiation of Certain Subcontracts   Sec. 60(e) P.L. 85-866
1341(a) Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right   1341(b)
7508 Time for Performing Certain Acts Postponed by Reason of War 7508(a) 7508(a) and (b)
1402(e) Self-Employment Income Social Security Coverage by Ministers, etc. Sec. 101(d) of P.L. 86-778 9-13-60 Sec. 101(d) of P.L. 86-778, 9-13-60
1383(a) Tax Treatment of Cooperatives and Patrons   1383(b)
7405 Erroneous Refunds   6404(e)(2)
EMPLOYMENT TAXES See IRM 4.23.16 for additional information on employment tax cases in Appeals.
3101, 3111 FICA 6205(a) 6413(a)
3201, 3221 RRTA 6205(a) 6413(a)
3402 Income Tax Collected at Source 6205(a) 6413(a)
3121(l) Foreign Subsidiaries of Domestic Corporations 3121(l)(5)(A) 3121(l)(5)(A)
*3121(k)(1) Nonprofit Organizations Waiver Certificates 3121(k)(1)  
3302(a), 3302(b) Federal Unemployment Tax Credit Against Tax Imposed by Sec. 3301   6413(d)
7405 Erroneous Refunds   6404(e)(2)
       
*3121(k)(1) was repealed with respect to service performed after 12/31/83.

Exhibit 8.17.6-2 
General Instructions for Completing Form 2285

Form 2285Instructions

Note:

The instructions below describe the line items on Form 2285 and how to complete them when using the Excel version of the form found on the Appeals TCS web site. The items marked with an asterisk (*) must be manually entered on the form when applicable. The remaining items are computed automatically in Excel.

*Taxpayer identification information section: Enter the information in the taxpayer identification section. The year to enter in the upper right hand corner of the Form 2285 is the year the carryback is absorbed.
General adjustments: Column (a) contains the total of the general adjustments and the resulting deficiency or overassessment determined only on those adjustments. The general adjustment column is for the tax determined without any carrybacks. This is the tax for the year the carryback is absorbed. Instructions for Lines 1 through 11 in column (a) are discussed below:
* Line 1 *Enter the taxable income from the taxpayer’s original return. The taxable income from any amended returns and/or prior examination reports may need to be entered instead of the taxable income from the original return if the deficiency or overassessment reflected in the amended return and/or prior examination report has been assessed. This line is normally the starting taxable income amount from Form 5278
* Line 2 *Enter the sum of the general adjustments, including all such adjustments that have not previously been considered in determining the tax liability, whether they are current adjustments or are taken from an unassessed amended return or a prior examination report. Any change in the allowable amount of deductions for statutory items resulting from a change in adjusted gross income attributable to general adjustments (such as exemptions, itemized deductions, etc.) should also be included in the amount entered on this line. Also, include any adjustments to the amount of any net operating loss carryover. (Do not include carrybacks.)
Line 3 Sum of line 1 and line 2. This should equal the taxable income computed by the TCS before allowing any carrybacks.
* Line 5 *Enter the total credits allowed before carrybacks as a positive number. Add up all the credits allowable before considering any carrybacks.
* Line 7 *Enter the correct tax liability. This is the corrected tax liability before any carrybacks.
* Line 8 *Enter the net tax assessed after making adjustments for previous assessments and overassessments. Do not reflect any previous carrybacks allowed, prior changes to the carryback allowances, or any portion of a prior tax assessment or abatement resulting from a carryback on this line.

Note:

This is the sum of any Transaction Code (TC) 150, TC 290, TC 291, TC 300, or TC 301 amounts listed on the transcript. Be careful since sometimes a carryback may have been included in the TC 300 or TC 301 amounts. (Include a footnote on Form 2285 if the tax was previously adjusted, and show the computation.)

Line 9 Equals line 7 minus line 8.
Line 11 Equals the potential deficiency or overassessment from line 9. This is the amount of change in tax liability that would have been determined if the examination had been completed without applying any restricted interest adjustment. The Service has held consistently that the regular interest provisions of IRC 6601 and 6611 should be invoked on such amounts.
Other adjustments on which interest is restricted — Column (b) of Form 2285:
  *Column (b) may be used for cases where there are carryback adjustments involving more than three years. For example, some net operating losses attributable to specified liability losses are carried back to the tenth preceding year.
  Column (b) may also be used for the suspended research credit.
  To activate the formulas in column (b) on the Excel spreadsheet, the year end date must be entered in cell F13.
Carryback adjustment from first succeeding taxable year — Column (c) of Form 2285:
  *Column (c) reflects the loss or credit carryback adjustment from generally the first succeeding taxable year. Since there are also 5 and 10 year carrybacks possible in certain circumstances, column (c) may originate from a later year.
  To activate the formulas in column (c) on the Excel spreadsheet, the year end date must be entered in cell G13. (This is usually the year end date of the first succeeding taxable year.)
  However, if a credit is released due to a loss carryback, enter the taxable year ended date for the loss year in cell G13. Put a note on the bottom of the Form 2285 identifying the year of the credit similar to: "The GBC carryback from the tax year ended MM/DD/YYYY was released by a NOL carryback from the tax year ended MM/DD/YYYY " .
Instructions for Lines 1 through 11 in column (c) are discussed below.
Line 1 Equals line 3 of the previous column used.
* Line 2 *Prepare separate computations taking into consideration each carryback adjustment. Use column (c) for the carryback from the first succeeding year, column (d) for the carryback from the second succeeding year, and column (e) for the carryback from the third succeeding year. Include in the amount entered on this line any change in the allowable amount of deductions for statutory items (such as exemptions, itemized deductions, etc.) resulting from a change in adjusted gross income due to a loss carryback .
Line 3 Equals the sum of line 1 and line 2.
* Line 4 *Enter the tax computed on income shown on line 3. This is the tax after adjustments including other taxes, but not current year credits or carrybacks.
Line 5 Enter (as a positive number) the current year credits allowed after loss carryback from the first succeeding taxable year.
* Line 6 *Enter the total of all credit carrybacks (general business, foreign tax credit, etc.) from the first succeeding taxable year as a positive number.
Line 7 Equals line 4 minus the sum of line 5 and line 6.
Line 8 Equals the amount shown in the last preceding column in which there is an entry on line 7.
Line 9 Equals line 7 minus line 8.
* Line 10 *Enter any carryback previously allowed from this year as a positive number. (The amount must be shown on the transcript to be entered on line 10.) Adjust this amount by any previous changes to the carryback due to partial agreements or other assessments or overassessments due to a change in the carryback allowed.

Note:

Line 10 equals the sum of the following transaction code amounts for the carryback year with respect to this column: TC 294, TC 295, TC 298, TC 299, TC 308, and TC 309. Include a note in Section II of Form 2285 if the carryback was previously adjusted, and also include a computation showing the tax adjustments. For example:

  Tentative Allowance 5/16/2004 4,000.00
  Prior recapture 6/15/2006 1,000.00
  Net carryback previously allowed 3,000.00
Line 11 Equals line 10 plus line 9. For example if the taxpayer had a tentative allowance of $1,000 and you are recapturing it, you would see the following on the Form 2285:
  Line 9 – Increase (decrease) in tax 0.00
  Line 10 – tentative allowance 1,000.00
  Line 11 – Net increase (decrease) in tax 1,000.00
Carryback adjustment from second succeeding taxable year — Column (d) of Form 2285:
  Column (d) reflects the net operating loss, capital loss or credit carryback adjustment from generally the second succeeding taxable year. (Since there are also 5 and 10 year carrybacks possible in certain circumstances, column (d) may originate from a later year.)
  Line-by-line instructions are the same as for column (c).
Carryback adjustment from third succeeding year — Column (e) of Form 2285:
  Column (e) reflects the net operating loss, capital loss or credit carryback adjustment from generally the third succeeding taxable year. (Since there are also 5 and 10 year carrybacks possible in certain circumstances, column (e) may originate from a later year.)
  Line-by-line instructions are the same as for column (c).
After all adjustments — Column (f) of Form 2285: Column (f) contains a summary of all adjustments and carrybacks reflected in the preceding columns. This should look similar to the Form 5278 after all carrybacks. Instructions for Lines 1 through 11 in column (f) are discussed below:
Line 1 Equals the amount appearing on this line in column (a).
Line 2 Equals the net of all adjustments shown on this line in columns (a), (b), (c), (d) and (e) including the current adjustments.
Line 3 Equals the adjusted income shown on this line from the last column completed.
Line 5 Equals the amount appearing on this line in column (a) to the extent it is still allowed after the carrybacks.
Line 7 Equals the adjusted tax liability appearing on this line from the last column completed.
Line 8 Equals the amount appearing on this line in column (a).
Line 9 Equals the amount on line 7 minus the amount on line 8. The result will represent the deficiency or overassessment in cases where there are no tentative allowances involved or no other prior carryback allowances.
Line 10 Equals the total of the amounts shown on this line in columns (b), (c), (d) and (e).
Line 11 Equals the amount on line 10 plus the amount on line 9. This should equal the sum of the amounts on line 11 in columns (a), (b), (c), (d) and (e). The Excel worksheet will show an "error" if the two amounts are not equal. This must also equal the tax deficiency/overassessment on the Form 5278.
After Form 2285 is completed, fill in the appropriate IRC on Form 2285, in the column to the left of column (a).
  IRC 6601(d) is the authority for interest when a carryback reduces a liability for tax whereas IRC 6611(f) is the authority for overpayments of tax.

Exhibit 8.17.6-3 
Example of Restricted Interest Case: Forms 5278 and 2285

Preparing Form 5278Form 2285
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Exhibit 8.17.6-4 
May/Sequa Computation - Form 2220 Worksheet

May/SequaForm 2220 Worksheet

Exhibit 8.17.6-4 is a completed Form 2220 Sequa worksheet based on the facts in Chief Counsel Notice N(35)000-68. The following are the facts of the case.

1) Pursuant to a six month extension, Corporation X, a calendar year taxpayer, timely files its 1995 return on September 15, 1996. On its 1995 return, Corporation X reported a tax liability of $80,000 and total payments of $100,000, all of which were made on or before March 15, 1996. Corporation X has elected to have its entire overpayment of $20,000 applied to its estimated tax for 1996. In April, 1998, it is determined that Corporation X’s correct tax liability for 1995 is $100,000, and Corporation X pays the deficiency of $20,000. For its 1996 tax year, Corporation X reported total tax of $90,000 and that, by annualizing its income, as it was permitted to do, its required installments of estimated tax were $10,000, $25,000, $25,000, and $30,000, respectively. Corporation X also made a timely payment of each of its installments of estimated tax for 1996, not including the overpayment credited from 1995, in the amounts of $15,000, $15,000, $15,000, and $25,000, respectively.

2) Corporation X’s required first installment of estimated tax for 1996, ($10,000) was less than the payments of estimated tax it made prior to the installment due date ($15,000), not including the overpayment credited from 1995. Corporation X, therefore, did not need to use the overpayment to avoid an addition to tax with respect to that installment. For interest purposes, the 1995 overpayment of $20,000 is considered a payment of 1995 tax through the first installment of estimated tax for 1996, and Corporation X’s payment of tax for 1995 through the first installment of estimated tax for 1996 is equal to its correct tax liability for 1995. Interest, therefore, does not begin to accrue on the 1995 deficiency before the due date of the second installment of estimated tax for 1996.

3) With respect to the second installment of estimated tax for 1996, Corporation X did not make sufficient cash payments ($15,000 + $15,000 = $30,000) to satisfy the amount required to be paid ($10,000 + $25,000 = $35,000). To avoid an estimated tax penalty, Corporation X, therefore, is required to use $5,000 of the 1995 overpayment as a payment of estimated tax for 1996 as of the due date for the second installment. For interest purposes, only $15,000 of the 1995 overpayment is still considered a payment of tax for 1995, and Corporation X's correct tax liability for 1995 now exceeds its payment of tax for 1995 by $5,000. Interest on the $5,000 therefore begins to accrue on $5,000 of the deficiency as of the due date of the second installment of estimated tax for 1996.

4) By the due date for the third installment, Corporation X’s estimated tax liability for 1996 ($10,000 + $25,000 + $25,000 = $60,000) exceeded its payments ($45,000 (cash) + $5,000 (overpayment previously credit) = $50,000) by an additional $10,000. Corporation X avoids an estimated tax penalty because it uses an additional $10,000 of the 1995 overpayment as of the due date for the third installment of estimated tax for 1996. Corporation X’s correct tax liability for 1995 now exceeds its payment of tax for 1995 by $15,000 and interest accrues on $15,000 of the 1995 deficiency as of the due date for the third installment of estimated tax for 1996.

5) Corporation X’s estimated tax liability for the fourth installment ($10,000 + $25,000 + $25,000 + $30,000 = $90,000) exceeded its payments ($70,000 (cash) + $15,000 (overpayment previously credited) = $85,000) by $5,000. Corporation X avoids an estimated tax penalty because it has $5,000 of additional 1995 overpayment, which is credited against the 1996 estimated tax liability as of the due date for the fourth installment. Corporation X’s correct tax liability for 1995 now exceeds its payment for that year by the full amount of the deficiency ($20,000), and interest accrues on the $20,000 as of the due date for the fourth installment of estimated tax for 1996.

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