- 20.2.5 Interest on Underpayments
- 126.96.36.199 Program Scope and Objectives
- 188.8.131.52.1 Background
- 184.108.40.206.2 Authority
- 220.127.116.11.3 Responsibilities
- 18.104.22.168.4 Program Controls and Review
- 22.214.171.124.5 Terms and Definitions
- 126.96.36.199.6 Related Resources
- 188.8.131.52 Underpayment Interest
- 184.108.40.206.1 Application of Payments
- 220.127.116.11.1.1 Allocation of Payments
- 18.104.22.168.1.2 Availability Dates for Interest Calculation and Offset
- 22.214.171.124.2 Assessment of Interest Accruals
- 126.96.36.199.3 Steps to Compute Interest
- 188.8.131.52.4 Statutory Period for Assessment, Collection, and Refund of Interest
- 184.108.40.206 Interest on Penalties and Additions to Tax
- 220.127.116.11 Notice and Demand and Underpayment Interest
- 18.104.22.168 Application of IRC 7503 for Interest Computations
- 22.214.171.124 Restricted Interest
- 126.96.36.199.1 Reasons to Manually Compute Interest
- 188.8.131.52.2 Manual Computations
- 184.108.40.206.3 Non-Restricting Transaction Code (TC) 340
- 220.127.116.11.3.1 Subsequent Manual Interest Accrual Processing
- 18.104.22.168 Revenue Ruling 99-40 (Modifies and Supersedes Revenue-Ruling 8898) Use of Money
- 22.214.171.124.1 Revenue Ruling 99-40 and Refunds
- 126.96.36.199.2 Revenue Ruling 99-40 and Credit Elects (May/Sequa)
- 188.8.131.52.3 Credit Elects and Employment Tax
- 184.108.40.206.4 Revenue Ruling 99-40 and Carrybacks
- 220.127.116.11 Large Corporate Underpayment (LCU)
- 18.104.22.168.1 Requirement for Application of LCU Rate
- 22.214.171.124.1.1 Definition of "C" Corporation
- 126.96.36.199.1.2 Threshold Underpayment for LCU
- 188.8.131.52.1.3 Consideration of Payments for LCU
- 184.108.40.206.2 Start Date for LCU Interest Rate
- 220.127.116.11.3 Master File and the LCU Interest Rate
- 18.104.22.168.4 Computation of the LCU Interest Rate
- 22.214.171.124.5 Special Application of LCU Interest for Periods Before and After December 31, 1997
- 126.96.36.199 Tax Motivated Transaction (TMT) Interest
- 188.8.131.52.1 Processing TMT Interest
- 184.108.40.206.2 Special Processing Conditions for TMT Interest
- 220.127.116.11.2.1 Reference Numbers for TMT Interest
- 18.104.22.168.3 Negligence and or Fraud Penalty in Conjunction with TMT Interest
- 22.214.171.124.4 Waiver Date Processing regarding TMT Interest and Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
- 126.96.36.199.5 Partial Payment Allocation for Tax Motivated Transactions
- 188.8.131.52.5.1 Computing Interest on non-TMT Tax Underpayment and Penalty
- 184.108.40.206.5.2 TMT Interest Calculation
- 220.127.116.11.5.3 Computing Accruals of TMT
- 18.104.22.168 Corporate Installment Payments - Form 7004 (1982 and Prior)
- 22.214.171.124 Special Rules for Determining Due Date of Payments
- 126.96.36.199 Unidentified Remittance Account Payments
- 188.8.131.52 Underpayment Interest on Liabilities Paid by Credit/Offset
- 184.108.40.206.1 Underpayment Interest on Liabilities Credited from Another Module by a Different Taxpayer
- 220.127.116.11 MFT 31
- 18.104.22.168 Claims for Refund of Overpaid Underpayment Interest
- 22.214.171.124 Types of Deficiencies that do not Receive an IRC 6601(c) Suspension of Interest
- Exhibit 20.2.5-1 Interest on Penalties
- Exhibit 20.2.5-2 Payment Effective Date Decision Chart
- Exhibit 20.2.5-3 Revenue Ruling 99-40 Example
- Exhibit 20.2.5-4 Input Screen for Non-Restricting TC 340 using ADJ54
- Exhibit 20.2.5-5 Two-Part Penalty Computation for Returns Due Prior to 1989
Part 20. Penalty and Interest
Chapter 2. Interest
Section 5. Interest on Underpayments
July 25, 2017
(1) This transmits revised IRM 20.2.5, Interest, Interest on Underpayments.
(1) This IRM is being revised to incorporate Interim Procedural Updates (IPUs). It includes minor editorial changes and citation corrections. Previous references to debit and credit interest have been changed to underpayment and overpayment interest, respectively.
(2) IRM 126.96.36.199 adds internal control information per IRM 1.11.2, Internal Revenue Manual (IRM) Process.
(3) IRM 188.8.131.52 realigns content relating to underpayments, formerly in IRM 184.108.40.206, and moves content previously in IRM 220.127.116.11 to IRM 18.104.22.168.4.
(4) IPU 16U1149 issued 06-28-2016 adds a citation in IRM 22.214.171.124(1)(e).
(5) IPU 16U1616 issued 11-01-2016 adds a paragraph in IRM 126.96.36.199(1)(f) regarding due dates for non-resident aliens and foreign corporations without a U.S. office.
(6) IPU 16U1149 issued 06-28-2016 clarifies in IRM 188.8.131.52(4) the new filing due dates for corporations.
(7) IPU 16U1616 issued 11-01-2016 adds a paragraph in IRM 184.108.40.206.1.1 regarding payments that were previously applied to an expired CSED.
(8) IPU 16U1616 issued 11-01-2016 adds a paragraph in ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
(9) Adds a paragraph in IRM 220.127.116.11.2 regarding accrued interest not posting when input with Hold Code 2, 3, or 4.
(10) Clarifies in the reminder statement in IRM 18.104.22.168.3 to verify all prior interest transactions.
(11) IPU 16U1616 issued 11-01-2016 changes the title of IRM 22.214.171.124.4 to Statutory Period for Assessment, Collection, and Refund of Interest.
(12) Adds a paragraph in IRM 126.96.36.199.4 regarding erroneous refunds of overpayment interest.
(13) Adds in IRM 188.8.131.52(2) penalty start date for related carryback adjustments.
(14) Removes in IRM 184.108.40.206(3) the two-part hybrid computation of interest for the negligence and fraud penalties assessed on returns due prior to 1989 and adds the information as Exhibit 20.2.5-5.
(15) IPU 16U1616 issued 11-01-2016 adds a paragraph in IRM 220.127.116.11(5) regarding penalty reversals.
(16) Adds in IRM 18.104.22.168(5) additional paragraphs on penalty reversals.
(17) IPU 16U1149 issued 06-28-2016 corrects in IRM 22.214.171.124(6)(b) the citation for finding the return due dates.
(18) Changes the title of IRM 126.96.36.199 to Notice and Demand and Underpayment Interest.
(19) Adds citation in IRM 188.8.131.52(4) for collection due process (CDP) notices.
(20) Adds in IRM 184.108.40.206(6) that foreign addresses includes APO, FPO, and DPO.
(21) IPU 16U1149 issued 06-28-2016 corrects in IRM 220.127.116.11.1 the table on reasons to manually compute interest for carryback adjustments with refundable tax credits and adds foreign tax credit adjustments.
(22) IPU 16U1616 issued 11-01-2016 adds to the table in IRM 18.104.22.168.1 expired CSEDs as another reason to manually compute interest and corrects several citations.
(23) Adds in IRM 22.214.171.124.2(11) the specific requirements per IRC 6631. They were previously in IRM 20.2.8, Restricted Interest, revision 4-28-2014.
(24) IPU 16U1616 issued 11-01-2016 adds in IRM 126.96.36.199.3 situations for using a non-restricting TC 340. Clarifies how to input and includes TC 276 in the failure to pay table.
(25) Adds in IRM 188.8.131.52.3 a caution statement regarding the limit to the number of characters when trying to input a non-restricting TC 340.
(26) IPU 16U1616 issued 11-01-2016 clarifies in IRM 184.108.40.206.3.1 when an account needs to be recalculated after a non-restricting TC 340 has posted.
(27) IPU 16U1149 issued 06-28-2016 adds in IRM 220.127.116.11.2(2) a note to consider amended Form 2210 or Form 2220 when computing Rev. Rul. 99-40 for credit elect cases.
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(29) Adds a note in IRM 18.104.22.168.2 regarding the input requirement of Action Code 653 on Form 1041.
(30) IPU 16U1149 issued 06-28-2016 adds in IRM 22.214.171.124.2(8) information on the new return due dates for foreign corporations that don’t have a US office.
(31) Corrects the link in IRM 126.96.36.199.2.1(3).
(32) Adds in IRM 188.8.131.52.2.1(4) a sentence regarding the installment due dates for Form 1120 returns due after 2015.
(33) Clarifies in IRM 184.108.40.206.2.1(4)(f) the if/then table regarding credit elects that include late payments.
(34) Adds a reference in IRM 220.127.116.11.1.1 if the "C" corporation indicator is missing.
(35) Clarifies threshold determination in IRM 18.104.22.168.1.2.
(36) IPU 16U1616 issued 11-01-2016 adds a paragraph in IRM 22.214.171.124.3 regarding how to correct a module that doesn’t reflect a "C" corp indicator, when it should.
(37) IPU 16U1149 issued 06-28-2016 adds a paragraph in IRM 126.96.36.199 that the tax motivated transaction (TMT) interest is only computed on the applicable tax.
(38) IPU 16U1149 issued 06-28-2016 corrects in IRM 188.8.131.52.4 the citation for waiver suspension periods.
(39) IPU 16U1616 issued 11-01-2016 corrects in IRM 184.108.40.206 citations for IRC 7519 payments/refunds and for trust fund recovery penalties.
(40) Changes the title of IRM 220.127.116.11 to Underpayment Interest on Liabilities Paid by Credit/Offset.
(41) Adds a paragraph and caution in IRM 18.104.22.168 to use of the correct transaction code and amount when offsetting overpayments. Also, only misapplied payments should be reversed and reapplied to another module.
(42) Adds a note in IRM 22.214.171.124(4) that misapplied payments are not the same as offsets.
(43) Changes the title of IRM 126.96.36.199.1 to Underpayment Interest on Liabilities Credited from Another Module by a Different Taxpayer.
(44) Corrects examples in IRM 188.8.131.52.1.
(45) IPU 16U1616 issued 11-01-2016 adds IRM 184.108.40.206(2) information on programming changes to returns and agreements after a substitute for return (SFR) has posted.
(46) Clarifies new procedure in IRM 220.127.116.11(2) for assessing delinquent returns when the TC 150 is an SFR.
(47) Adds Exhibit 20.2.5-5 for the interest portion of the two-part hybrid computation of the negligence and fraud penalties assessed on returns due prior to 1989. This was previously in IRM 18.104.22.168(3).
Adina H. Leach
Director, Business Support Office
Small Business/Self Employed
This IRM provides policy guidance for computing underpayment interest on most cases and return types. If not covered here, see IRM 20.2, Interest.
Purpose is to give guidance on computing underpayment interest, including interest on deficiencies.
Audience is for servicewide use by all business operation divisions (BOD) needing to compute underpayment interest. The primary audience is for Restricted Interest tax examiners (TE), who compute interest as part of their job description. However, anyone computing underpayment interest is required to follow these procedures.
Policy Owner is the Small Business/Self Employed Business Support Office Director.
Program Owner is the Office of Servicewide Interest (OSI).
Program Goals are to ensure the accuracy of interest the taxpayer is charged and that the taxpayers are treated as fairly and consistently as possible per the law.
Underpayment interest is sometimes referred to as debit interest or deficiency interest. Office of Servicewide Interest provides policy, training material, interest tools, and some procedures for when interest must be manually computed. The office also requests programming changes when either new legislation requires it or an error is discovered in current programming.
These procedures are covered under the following authority:
IRC 6601, Interest on Underpayment, Nonpayment, or Extension of Time for Payment, of Tax
IRC 6621, Determination of Date of Interest
IRC 6622, Interest Compounded Daily
Rev. Rul. 99-40
Treas. Reg. 1.1502-76(c)
Recent laws not yet codified
Additional authorizations can be found in the table located in IRM 22.214.171.124.1.
The Office of Servicewide Interest is responsible for the content of this IRM, answering related questions, and inputting any work requests.
The program manager of Office of Servicewide Interest is responsible for oversight of the Interest programs.
The Director, Business Support Office is the executive responsible for policy and procedures.
Program Effectiveness: Complex Interest Quality Measurement System (CIQMS), a sub-group within OSI, randomly reviews manual interest computations and enters the data in a database. For procedures and reporting errors, see IRM 20.2.1, Interest Introduction, Standards and Guidelines.
See IRM Exhibit 20.2.1-2, Definition of Terms, for the definitions of interest terms.
Underpayment (debit) interest, at the underpayment rate established under IRC 6621, is charged on an outstanding liability from the due date of the unpaid liability to the date fully paid. Since taxpayers are required to pay the tax due on or before the due date of the return, any interest charged is computed from the return due date. See Document 6209, IRS Processing Codes and Information, Section 2, for the due dates for filing various returns.
Underpayment interest rates are determined quarterly.
Special rules apply for large corporate underpayments (LCU) and tax motivated transactions (TMT). See IRM 126.96.36.199 and IRM 188.8.131.52.
See IRM 20.2.11, Miscellaneous Interest Provisions, for other special interest rules.
Per IRC 7502, timely mailed or electronically transmitted returns are considered timely received. Payments made by the prescribed due date (generally, the unextended return due date) are considered timely.
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See IRM 184.108.40.206 regarding notice and demand dates for payments. See IRM 220.127.116.11 regarding filing returns when the due date is on a weekend or holiday.
U.S. citizens living overseas have an automatic two-month extension to file their tax return. This includes U.S. partnerships and corporations. Payments are still due on the unextended due date. See Treas. Reg. 301.6601-1(c)(1). For individuals, interest on any underpayment starts on April 15th. Failure to pay penalty is not charged if filed and paid by June 15th. See IRM 18.104.22.168.3.3, Taxpayers Abroad, for information concerning the identification of taxpayers meeting this condition. See IRM 22.214.171.124.1, General Information, for a list of places not considered overseas.
Non-resident aliens who do not receive wages subject to U.S. withholding and file Form 1040NR, U.S. Nonresident Alien Income Tax Return, have a return due date of June 15, not April 15. Calendar year foreign corporations without an office in the U.S. have a return due date of June 15. Master File is programmed for both circumstances. Public Law 114-41, described in item 4 below, did not change the return due date for these foreign corporations.
Interest can only be assessed if a return has been filed, IRC 6020(b) procedures have been followed, or penalties have been charged (e.g., civil penalties). IRC 6020(b) authorizes the IRS to prepare a return for a taxpayer, who has not filed a required return. For those modules that show a credit balance with no TC 150, any payments or credits should be moved into Excess Collection. If the return appears to have been filed, but can’t be located and the ASED is imminent, then input a TC 290 for the amount shown as a credit to be assessed as tax, plus input TCs 160, TC 270, and TC 340 for zero. See IRM 25.6.1, Statute of Limitations - Statue of Limitations Processes and Procedures. If the return is later filed or located, then penalties and interest will need to be adjusted to reflect the actual amount.
Interest on consolidated or acquired corporate returns starts from the due date of the parent or acquired return. Due to the e-filing requirement for most corporations, the short-period return will show the wrong return due date on Master File. Since this date cannot be changed, interest and penalties may need to be manually computed and assessed/abated. See IRM 126.96.36.199.4.4, Consolidated Returns, IRM 188.8.131.52.7, Short Years, and Treas. Reg. 1.1502-76(c).
Pursuant to Public Law 114-41, the due date changed for most corporate returns with a tax period beginning date of 201601 and subsequent (i.e., taxable years beginning after December 31, 2015), except those with a fiscal year ending (FYE) in June. The return due date was modified to one month later than the former requirement. For instance, a return for a calendar year corporation due March 15 is now due April 15.
The return of any C corporation with an FYE on June 30 will remain due on September 15 until taxable years beginning after December 31, 2025.
Due to the late legislative change for Public Law 114-41, penalties and interest may need to be manually computed for the short period returns processed in 2016. See IRM 184.108.40.206, 1120 Workaround - Short Period Returns with Tax Period Beginning Date of 201601 and Subsequent (Processing Year 2016 only), for details. Starting in 2017, programming of the IRS computer systems has been updated.
Payments are generally applied to liabilities in effective date order. If undesignated (the taxpayer doesn’t specify in writing how he wants the payment(s) to be applied), then payments should be applied to the outstanding liabilities owed and due as of the payment availability date, historically in the following order:
Tax Motivated Transaction (TMT) tax
Penalties and fees
Undesignated payments may be applied to penalties and interest when their due dates are before the due date of a tax. For example, when a carryback adjustment has a later due date than the penalty and interest.
If a taxpayer makes a full undesignated payment of a proposed liability under Rev. Proc. 2005-18 (section 4.03), the undesignated remittance will be treated as a payment of tax; a notice of deficiency will not be mailed, and the tax is assessed. If a taxpayer makes a partial payment of tax indicating agreement to part of a proposed liability, the IRS may assess that tax up to the amount paid without following deficiency procedures (see IRM 4.4.24, Payments and Remittances).
Interest will accrue on all liabilities until they are paid in full. For interest purposes, an account is considered fully paid when all of the tax, penalties, additions to tax, and interest have been paid.
Payment allocation is a term used to describe the assigning or earmarking of a payment to a specific liability or set of liabilities; while payment reallocation describes the application of a previously applied payment to a different liability or set of liabilities.
Designated payments are identified by their transaction codes: TC 640 for tax, TC 680 for interest, and TC 690 for penalty. However, a remittance is only designated when a written designation accompanies the remittance in compliance with the procedures for making a designated deposit or payment.
The request to designate all or part of the payment to interest is honored if one of the following conditions is met:
The taxpayer agrees to assessment and collection of the liability by executing a waiver of restrictions; or
The taxpayer pays the underlying tax with respect to the amount to be designated as interest and the amount designated does not exceed the amount of interest that has accrued on the tax being paid.
If a payment is not specifically designated, the payment will be allocated to the earliest unpaid and collectible liability owed and due as of the payment availability date, i.e., oldest open Collection Statute Expiration Date (CSED).
If a taxpayer specifically requests allocation of a payment to tax, penalties, or interest, it remains allocated as requested unless the liability for which it was designated is overpaid, then it is considered undesignated.
A payment lawfully applied against an assessment when the CSED was open cannot be reallocated to another assessment after the CSED has expired on the initial assessment. When computing interest, payments and credits that were applied to the expired CSED need to be “excluded” from the computation along with the applicable tax and penalties.
For purposes of computing underpayment interest, payments and credits are generally available as follows:
Prepaid credits (e.g., withholding) are available on the due date of the return (determined without regard to any extension of time for filing the return).
Subsequent payments made on or after the return due date (determined without regard to any extension of time for filing the return) are available on the received date or transaction date shown on the transcript. See IRM 220.127.116.11 and Exhibit 20.2.5-2 for additional guidance concerning payment availability dates.
Credits transferred from another module (TC 700/706/730/736) are available as of the applicable credit availability date. See IRM 18.104.22.168 for additional information on how to compute underpayment interest on offsets.
Interest will accrue on a liability (tax, penalties, additions to tax and/or interest) until it is fully paid. Interest accruals are not assessed (recorded) on the transcript [Command Code (CC) TXMOD/IMFOL/BMFOL] until one of the following conditions occurs:
Input of an adjustment (e.g., TC 29X or TC 30X), or
Posted payment is in excess of tax and/or penalties, or
Issuance of annual reminder notices (e.g., IMF - CP 71, 71A, 71C, 71D; Spanish versions CP 771, 772, 773, 774; BMF - CP 160, 163, 171, 187)
Input of a TC 290 for zero ($.00) with Priority Code (PC) 5, provided Hold Code 2, 3, or 4 is not also used.
Starting in 2017, any assessment (TC 29X or TC 30X) that includes Hold Code 2, 3, or 4, which prevents a systemic notice to the taxpayer, also prevents the posting of any accrued failure to pay (FTP) penalty and interest for all MFTs. If the hold code is input because a manual notice is required (e.g., quick and prompt assessments, restitution-based assessments, or other non-systemic notices), then the penalty and interest must be manually assessed with a TC 270 and TC 340/190. After the TC 270 and TC 340 have posted, but a module restriction is not otherwise necessary, the restriction can be subsequently removed via TC 272 and TC 342, as applicable.
The input of TC 290 for zero and Priority Code 5, with the appropriate hold code on an unrestricted (not blocked from systemic calculation) tax module, will post any accrual of interest. When adjusting with Document Code 54, use Hold Code 0, so that notices are issued. Refer to Section 8C.2(3) of Document 6209, IRS Processing Codes and Information, for information on hold codes. An on-line version can be found on SERP.
Only use TC 290 - 0, PC 5 to update interest when necessary. This procedure is useful when working with taxpayers on payoffs and offsets. For instance,
• If a module is being moved to Non-Master File or MFT 31, or
• If a module balance shows zero, but interest is accruing and unpaid and significant enough to warrant the posting of interest and penalties.
The input of TC 290 or TC 300 for zero and Priority Code 5 will post unrestricted failure to pay (FTP) penalty accruals.
To stop the accrual of penalty and/or interest (e.g., balance due notice erroneously generated for a tax module that is fully paid), input a TC 290 for zero, accompanied with (as appropriate) TC 340 and/or TC 270 for zero. See IRM 22.214.171.124.8.3, Clearance Tolerances, for further discussion of accounts in Master File Status Code 12.
If a module is restricted or blocked from systemically computing interest, Master File will not automatically assess accrued interest. Refer to Section 8A of Document 6209, IRS Processing Codes and Information, or IRM 126.96.36.199 for an explanation of conditions that restrict or block systemic interest computations.
Do not input a TC 340 for a zero amount:
• to bypass unpostable conditions (the unpostable would be erroneously addressed but the cause of the unpostable would not be corrected)
• to bypass a module restriction (e.g., -I freeze), when an actual manual computation of interest must be made.
For manual interest computations, use the appropriate Field Office Resource Team (FORT) unit found on the SB/SE Centralized Case Processing (CCP) website under the heading "Restricted Interest" . See CCP Website.
The Office of Servicewide Interest website has an additional list of resources.
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To compute interest to a specific date after a tax underpayment and penalties have posted:
If Then the module is not restricted or blocked from systemically computing interest, use CC INTST. the module is restricted or blocked from systemically computing interest, or module conditions exist that prevent systemic calculations, manually compute interest.
Use the following process to determine the net amount of interest to be assessed or abated. This process allows for consideration of any interest-free periods and allows comparison of the adjusted amount to interest already assessed. Use either the ACT/DMI program or CC COMPA.
Using a current TXMOD or Master File transcript, compute a running module balance on the entire tax module.
Enter debits and credits on the appropriate dates.
Suspend and resume interest (on a specific amount if necessary) for waiver/suspension periods. See IRM 188.8.131.52.1, IRC 6601(c) Suspension Period Calculation, for how to compute a suspension amount.
Compare the amount of interest assessed on the module to your interest computation to determine the additional interest to be assessed (TC 340) or abated (TC 341). For a quick or prompt assessment, use TC 190/340 as appropriate. Compare the module balance, then add or subtract your adjustment with the balance of interest and principal on your computation. If the balances are not the same, go through the computation to determine if there is an error in the entries.
Always balance your computation with the tax module balance adding or subtracting your adjustment.
All prior underpayment and overpayment interest transactions, whether systemically or manually computed (e.g., TC 19X, TC 34X, TC 77X), must be verified when recomputing underpayment interest on a tax module. See IRM 184.108.40.206.2, Manual Calculation of Interest. If you are unable to verify the TC 34X or TC 77X amount, secure the adjustment document or case file.
Interest may be assessed and collected at any time during which the tax to which it relates may be collected. See IRC 6601(g).
Generally, taxes assessed after November 5, 1990, must be collected within 10 years after the assessment of the tax [Collection Statute Expiration Date (CSED), IRC 6502(a)(1)]. See IRM 220.127.116.11, Collection Statute Expiration Date (CSED), for additional information on CSED.
Prior to November 6, 1990, the statutory period for collection was six years.
The statutory period of limitations for filing a claim for credit or refund of overpaid underpayment interest is generally the later of: two years from the date of the payment or three years from the date the return was filed. If no return has been filed, then the statutory period is two years from the date of payment. See chart in IRM 18.104.22.168.2.7, Claims for Credit or Refund - General Time Period for Submitting a Claim, for exact time frames to file a claim and receive a refund. Credits (e.g., TC 700/706/730/736) applied via offset have a statute of two years from the cycle date the credit was applied. The cycle date can be found on the transcript after the amount. Payments misapplied due to a clerical error that are subsequently transferred to the correct module are considered effective on the date of payment and not when transferred. See IRM 25.6.1, Statute of Limitations Processes and Procedures, for additional information on the Refund Statute Expiration Date (RSED).
If a consent (Form 872, Consent to Extend the Time to Assess Tax) to extend the Assessment Statute Expiration Date (ASED) is secured, the period for filing a claim for refund of overpaid interest is also extended six months from the new ASED. See IRC 6511(c). Verify that the TC 560 on the module is due to having received Form 872 and not due to some other statute extension reason, e.g., bankruptcy.
When underpayment interest is erroneously abated and refunded, (e.g., from an interest abatement claim), underpayment interest may be reassessed within ten years from the original tax assessment to which the interest relates (assuming the tax was assessed after November 5, 1990). If the erroneous refund is an IRS error, see IRM 22.214.171.124, IRC 6404(e)(2), Erroneous Refunds, for the rules regarding underpayment interest for erroneous refunds due to IRS error.
For an erroneous refund of overpayment interest (an excessive payment of interest on an overpayment), erroneous refund procedures must be followed. See IRM 126.96.36.199.2, Recovery of Excessive Interest Paid, IRM 21.4.5, Erroneous Refunds, IRM 3.17.80, Working and Monitoring Category D, Erroneous Refund Cases in Accounting Operations, and IRM 188.8.131.52.2.3, Remedies for Recovering an Erroneous Refund.
Generally, IRS has two years from the refund date to file a suit to recover the refund. However, if there is fraud or a "misrepresentation of material fact," IRS has five years from the refund date to recover the refund. Coordinate with local Counsel before any action is taken to pursue recovery under the five-year statute.
Erroneously paid overpayment interest may be offset against subsequent refunds for the same taxable year. See Action on Decision (AOD) 2006-02.
If underpayment interest is erroneously abated and the released credit or payment is offset instead of refunded, then it can be corrected, provided the collection statute is still open. See IRM 184.108.40.206.2.2.1, Under-assessed Underpayment Interest. Likewise, if erroneous overpaid overpayment (credit) interest has been offset, then it can also be corrected, if the collection statute is open. See IRM 220.127.116.11.2.2.4, Overpaid Overpayment Interest.
With the exceptions of penalties described in paragraphs (2) and (4) below, assessable penalties, including penalties referred to as "additions to tax," are due on the date of notice and demand [IRC 6601(e)(2)(A)], which is the assessment date or "23C" date. Therefore, interest on these penalties is computed from the assessment date.
Interest on the following penalties starts from the return due date (RDD) of the related return, the extended return due date, or July 18, 1984, whichever is later. For penalties related to a carryback adjustment, use the loss year return due date. Use the appropriate date as the interest start date on Command Code (CC) COMPA or Automated Computation Tool (ACT), also known as Decision Modeling Inc. (DMI) computations. The interest start date on ACT/DMI will need to be corrected when related to a carryback adjustment. This is effective for interest accruing after July 18, 1984, with respect to certain penalties assessed on or after July 18, 1984 [IRC 6601(e)(2)(B)]. If assessed before July 18, 1984, use the 23C date of the assessment as the interest start date.
For returns due after December 31, 1989, the following penalties accrue interest from the return due date or the extended return due date (whichever is later):
• IRC 6651(a)(1), Failure to File Penalty (TC 16X)
This includes IRC 6651(f), Fraudulent Failure to File Penalty (PRN 686), which only modifies the percentage under IRC 6651(a)(1).
IRC 6698 and IRC 6699 are Failure to File Penalties for Form 1065, U.S. Return of Partnership Income, and Form 1120S, U.S. Income Tax Return for an S Corporation respectively, but interest does not start until the 23C date, even though the penalty posts with a TC 16X.
• IRC 6653, Failure to Pay Stamp Tax (Penalty Reference Number (PRN) 574)
Effective January 1, 1990, IRC 6653 was revised to be exclusively for the failure to pay stamp taxes penalty.
• IRC 6662, Accuracy-Related Penalty (TC 240, PRN 680, 786 - 792)
• IRC 6662(j), Undisclosed Foreign Financial Asset Understatement Penalty (PRN 683)
• IRC 6662A, Accuracy-Related Penalty with Respect to Reportable Transactions (TC 240, PRN 681)
• IRC 6663, Fraud Penalty (TC 320)
For returns with due dates prior to January 1, 1990, the following penalties accrue interest from the return due date, the extended return due date or July 18, 1984, whichever is later.
• IRC 6651(a)(1), Failure to File Penalty (TC 16X)
• IRC 6659, Gross Valuation Overstatement Penalty (TC 240, Reference Number 680)
• IRC 6660, Valuation Understatement Penalty for purposes of estate or gift taxes (TC 240, Reference Number 682)
• IRC 6661, Substantial Understatement Penalty (TC 240, Reference Number 681)
For returns due after December 31, 1988 and before January 1, 1990, the following penalties accrue interest from the return due date or extended due date:
• IRC 6653(a), Negligence Penalty (TC 350)
• IRC 6653(b), Fraud Penalty (TC 320)
The following penalties are a hybrid, with a two-part penalty computation. The first part of the penalty is the "base" penalty amount determined to be due as a result of negligence or fraud. The second part of the penalty is based on 50% of the interest computed on the tax due to negligence or fraud. Interest on the tax is computed from the return due date to the payment date, assessment date (23C) or waiver plus 30 days date, whichever is earlier. The 50% interest component is then added to the base penalty amount (TC 350 or TC 320) to arrive at the total penalty amount that is assessed. Interest on the penalty amount, accrues from the 23C date until the date paid, if not paid within the notice and demand time frame for payment.
IRC 6653(a), Negligence Penalty (TC 350)
IRC 6653(b), Fraud Penalty (TC 320)
These penalties apply to returns due after December 31, 1981, and before January 1, 1989. When computing or abating interest, the information below must be considered.
The 50% interest component must be adjusted if any portion of the negligent or fraudulent tax is abated.
See Exhibit 20.2.5-5 for an explanation of the interest computation.
If the return due date is prior to January 1, 1990, TC 240 penalties assessed on the civil penalty module (MFT 13 and 55) with Reference Numbers 510–518, 601–603, 606 and 611 are due and payable on April 1 of the year following the calendar year for which the return or statement was made. Interest is charged from April 1 to the date the penalty is paid. See IRC 6676(d)(1)(B) and IRC 6724(c)(3)(B).
Interest is computer generated on penalty assessments according to the above rules. Do NOT manually compute and restrict or block interest on the above penalties unless interest must otherwise be manually computed.
With the exception of the failure to pay (FTP) penalty, when a penalty has been asserted due to the recapture of a carryback allowance, interest on the penalty accrues from the due date of the loss year return, the extended due date of the loss year return, or July 18, 1984, whichever is later. With these penalty adjustments, interest must be manually computed and restricted by input of TC 340.
If a failure to pay (FTP) or failure to deposit (FTD) penalty is reduced, then for interest purposes, the reductions are applied to the earliest assessment first (i.e. first in first out (FIFO) order). (ACT/DMI does this automatically.)
For the estimated tax penalty, Master File first looks for a matching amount. Thus, interest is not necessarily computed in FIFO order when ES tax penalty is reversed. TC 171 and 177 are applied against matching TC 170 or TC 176. If a match is not found, it is first applied against TC 170 and then against TC 176 in FIFO order. The abatement has the same effective date as the assessment against which it is applied. A reversed TC 170 is identified by reversal indicator “R” in BMF (e.g. TC 170R), and by transaction code converted from TC 170 to TC 173 in IMF. (A reversed TC 176 cannot be distinguished from a TC 176 that has not been reversed.)
TC 241 without a matching penalty reference number (PRN) uses the 23C date of the transaction as the effective date. Thus, when reversing a TC 240, use the same PRN as the original, even if the PRNs have now changed definitions. When there is a matching reversed TC 240, it can be identified by reversal indicator “R” in BMF (e.g. TC 240R), and by TC converted from TC 240 to TC 243 in IMF. (A reversed TC 246 cannot be distinguished from a TC 246 that has not been reversed.)
Master File automatically reverses most penalties in FIFO order. For any exceptions, interest will need to be manually computed. See Document 6209, Section 10, Penalties and Interest Provisions, for more information on penalties and penalty reversals.
See Exhibit 20.2.5-1, Interest on Penalties, which shows how the interest rules described above are applied. In the exhibit, since the late filing penalty (TC 166) is one of the penalties upon which interest is computed as of the return due date or extended due date, the TC 166 posts with the 23C date (posting date). The TC 166 is placed in the CC DINCOMP screen just under the TC 150 and for this example, is assigned the date of January 31, 2000, as the interest start date.
For the FTP penalty (TC 276), interest begins on the 23C date of the posting cycle. The CC DINCOMP display shows how the FTP penalty was inserted into the computation according to the May 14, 2001, assessment date.
See Document 6209, Section 2.3, Due Date of Returns.
When preparing a quick or prompt assessment using Form 2859, Request for Quick or Prompt Assessment, on a late filed return, failure to file penalty (TC 160) must be manually computed and assessed with the tax. Also, failure to pay penalty (TC 270) must be manually computed if adjusting the withholding credit. See IRM 18.104.22.168.5, Manual Penalty Adjustments.
Once notice and demand is issued, the taxpayer has a limited time period to pay the amount shown as due before additional interest on that amount is charged, see IRC 6601(e)(3).
For notice and demand issued before January 1, 1997, if the amount shown on the notice is paid within 10 calendar days, additional underpayment interest is not computed.
For notice and demand issued after December 31, 1996:
If the amount shown on the notice And Then is less than $100,000 is paid within 21 calendar days, additional interest is not computed. equals or exceeds $100,000 is paid within 10 business days, additional interest is not computed.
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The notice grace period only applies after a notice and demand for payment has been sent to the taxpayer showing an amount owed (including accruals). It doesn’t apply to payments made before there is an assessment of tax, even if the payment posted as a TC 670.
The issuance of notice and demand are identified on Master File or IDRS by Notice Status Codes 19, 20, 21, 54, 56, and 58. See Exhibit 20.2.5-2, Payment Effective Date Decision Chart.
A Collection due process notice allows 30 days to pay. Per IRC 6330 these are notices delivered to the taxpayer before the property is levied or seized. This condition is identified by Transaction Code (TC) 971, Action Code (AC) 069. Additionally, the Federal Payment Levy Program (FPLP), identified by TC 971 AC 169 allows 30 days to pay. The FPLP attaches federal disbursements due an individual or business, such as, retirement, vendor/contractor payments, and social security.
Offsets from another module of the same or a different taxpayer are to be treated as payments when determining if the notice grace period applies. This applies to offsets of overpayments, as well as offsets of overpayment interest. See IRM 22.214.171.124, Underpayment Interest on Liabilities Paid by Credit/Offset.
U.S. taxpayers living overseas (including Puerto Rico) have 45 days ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to pay any notices. The 45-day grace period is automatically applied by the IRS computer systems when a foreign address is present; this includes APO, FPO, and DPO addresses. When interest is manually computed, the 45-day grace period must be used instead of the normal 10/21 days for U.S. taxpayers who live in a foreign country.
IRC 6603 deposits are remittances made prior to a notice date. They stop interest, but are not considered payments in lieu of an agreement. Thus, they generally don’t receive the notice grace period suspension, unless the remittance was processed incorrectly. For example, the remittance posted as a TC 640, when it should have posted as a TC 670. See IRM 126.96.36.199.2, IRC 6603 Deposits, for more information.
A liability must be paid on or before the due date to avoid underpayment interest charges.
IRC 7503 provides that if the last day prescribed for the performance of any act falls on a Saturday, Sunday or legal holiday, the performance of the act on the next succeeding workday is deemed timely. As it relates to the filing of a return, if the return due date is a Saturday, Sunday, or legal holiday, then the return can be filed on the following workday and will be considered timely filed. If full payment of the liability is made by the following workday, no interest is charged on the liability. However, if not full paid by the first workday, then interest will be charged on the liability from the actual return due date and not from the date authorized by IRC 7503. Likewise, if only a partial payment is made, interest on the remaining liability will accrue from the actual return due date.
Any authorized extension of time to file via Form 4668Employment Tax Examination Changes Report, must be postmarked by the IRC 7503 due date.
The following table outlines how payments are considered when the due date falls on a Saturday, Sunday, or legal holiday:
If Then payment of the entire tax liability is received by the following FIRST WORKDAY, NO interest is charged. partial payment is received by the following FIRST WORKDAY, charge interest on the remaining unpaid tax liability:
FROM: actual return due date
TO: date of full payment.
no payment is received by the following FIRST WORKDAY, charge interest on the entire tax liability:
FROM: actual return due date
TO: date of full payment.
See IRM 188.8.131.52.18, List of Legal Holidays, for the list of legal holidays.
Interest may be limited to specific time periods or rates, or it may be statutorily prohibited, which gives rise to the term restricted interest. Restricted interest is subject to the same variables (time, rate, amount) as normal interest calculated by the IRS.
The primary difference between normal and restricted interest is that the IRS computer systems may not be able to identify all the conditions involved in a restricted interest situation. When IRS computer systems are incapable of calculating interest, it must be manually computed and input.
The IRC contains provisions by which interest is either restricted or prohibited. See IRM Exhibit 20.2.1-1, Provisions Restricting Interest. This exhibit lists the section of the Code and certain provisions having the effect of law, which govern adjustments resulting in underpayments or overpayments on which interest is restricted. It also lists an identifying title and the related provisions which govern the computation of interest.
Some of the reasons for manually computing underpayment interest on a tax module are listed in the table below (the list is not all inclusive):
Description Reference Carryback and general adjustments using Form 2285, Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments (Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal Revenue Code IRM 20.2.9, Interest on Carryback of Net Operating Loss Carryback adjustments with related penalties, such as the accuracy-related penalty (Master File uses the carryback year due date as the effective date for the penalty, instead of the loss year return due date) IRM 184.108.40.206(5) Note, Interest on Penalties and Additions to Tax Carryback adjustments posted with refundable tax credits prior to 2016. (Master File used the carryback (gain) year due date as the effective date for the credits, instead of the loss year return due date. Starting January 2016, Master File is using the Interest Comp Date (INT-CMPTN-DT) of the carryback adjustment as the effective date of associated credits.) Exception: For carryback adjustments containing refundable credits received and processed prior to the loss year return due date, but the current date is used as the INT-CMPTN-DT, interest must still be manually computed. IRM 220.127.116.11.15, Carryback Net Operating Loss (NOL) Effect on Refundable Credits Combat zone with multiple in/out tours within a 6-month period IRM 18.104.22.168, IRC 7508, Combat Zone Credits reversals with interest suspension periods prior to July 2015, such as fuel credits, withholding credits, education credits, or credits from Form 8839, Qualified Adoption Expenses, Form 8801, Credit for Prior Year Minimum Tax-Individuals, Estates, and Trusts, Form 8885, Health Coverage Tax Credit, Form 8827, Credit for Prior Year Minimum Tax—Corporations, Form 3800, General Business Credit, etc., with interest suspension periods IRM 22.214.171.124.1, IRC 6601(c)Suspension Period Calculation Dividend Deficiencies IRM 126.96.36.199.2, Criteria to Claim a Deficiency Dividend Deduction Disaster areas IRM 188.8.131.52, IRC 7508A, Presidentially Declared Disaster or Terroristic or Military Actions Employment Tax ascertained date under IRC 6205 IRM 184.108.40.206, Employment Taxes Estate tax returns IRM 220.127.116.11, Interest on Estate Tax Returns Expired CSED - accounts with one or more expired CSEDs. IRM 18.104.22.168.1.1, Allocation of Payments Foreign tax credit adjustments IRM 22.214.171.124, Foreign Tax credits IRC 6404(g) with previously posted TC 29X/30X adjustments including TC 29X/30X for zero when TC 971 AC 064 is pending or posted and the input adjustment results in an increase in liability (tax, penalties, or decrease in refundable credits). IRM 126.96.36.199.6, IRC 6404(g) Interest Computation Large corporate underpayment (LCU) IRM 188.8.131.52, Large Corporate Underpayment (LCU) Introduction Ministerial or managerial acts causing errors or delays IRM 184.108.40.206, IRC 6404(e)(1), Unreasonable Error or Delay in Performing a Ministerial or Managerial Act Multiple waiver dates IRM 220.127.116.11, IRC 6601(c), Suspension of Interest on Deficiencies MultipleIRC 6404(g) notice dates IRM 18.104.22.168.5.1, Multiple IRC 6404(g) Notices Net rate interest netting IRM 20.2.14, Netting of Overpayment and Underpayment Interest Non-Master File assessments IRM 21.7.12, Business Tax Returns and Non-Master File Accounts, Non-Master File (NMF) Adjustments Non-Mirrored MFT 31 modules IRM 22.214.171.124, MFT 31 Offers in compromise (OIC) IRM 126.96.36.199, Offers in Compromise (OIC) Personal holding company tax IRM 188.8.131.52.4, Decreases in PHC Tax, and IRM 184.108.40.206.5, Underpayment (Debit) Interest on PHC Tax Adjustments Reinstated from retention IRM 220.127.116.11.3, Non-restricting Transaction Code (TC) 340 Restitution-based Assessments when related to a BMF module IRM 18.104.22.168, Restitution-based Assessments (RBA) Rev. Proc. 2002-18 IRM 22.214.171.124, Change in Accounting Practice or Method, and IRM 4.11.6, Changes in Accounting Methods Rev. Rul. 99-40 IRM 126.96.36.199, Revenue Ruling 99-40 (Modifies and Supersedes Revenue-Ruling 88–98) Use of Money Section 3082(a), Public Law 110-289 of the Housing and Economic Recovery Act of 2008 IRM 188.8.131.52.2, Amended Returns for Hurricane Related Casualty Losses With Subsequent Grant Reimbursement Tax motivated transactions IRM 184.108.40.206, Tax Motivated Transaction (TMT) Interest
When a manual underpayment or overpayment interest adjustment is required, all personnel should review their own interest computation for accuracy. Additionally, when the interest computation exceeds $100,000 per tax module, it is recommended that the computation be reviewed by another technician with expertise in calculating interest. Local management may use their discretion as to the method of achieving the interest computation review and may lower the recommended dollar threshold.
All manual interest computations are also subject to random quality reviews, regardless of the adjustment amount. Managers (or their delegates) are required to randomly review manual computations to verify that interest is restricted and computed correctly.
When manually computing interest address the following:
Always attach the computation and the reason for the action taken to the adjustment source document. See IRM 220.127.116.11.2.1, Manual Calculation of Interest - Documentation, for a description of what documents to send to files.
Correspondence Imaging System (CIS) interest adjustments are done as non-source documents (NSD). The CIS image is the source document. A CIS-IND<1 will be present on TXMOD indicating the source document is available in CIS. Use ESTABDO to request a hard copy of the pdf interest computation (document) from files if unable to access CIS. For additional information see IRM 18.104.22.168.3, CIS Source Documentation.
Provide the reason on the adjustment source document when interest is abated.
Provide the reason on the adjustment source document when a TC 340 for zero amount is input.
Do not unnecessarily block (restrict) the systemic calculation of interest on a tax module. Use TC 19X or non-restricting TC 340 whenever possible. See IRM 22.214.171.124.3, Non-Restricting Transaction Code (TC) 340. Ensure that TC 190, TC 191, TC 340, TC 341, TC 770, and TC 772 are used appropriately.
It is not necessary, when inputting manual underpayment interest restriction transaction codes (TC 34X) in ADJ54 or AMCLS, to use a blocking series that will create a refile DLN, if sufficient documentation is attached to the adjustment source document.
Electronically document the reason for the action taken when Accounts Management Services (AMS) is available to the function inputting the adjustment.
If the case is located on AMS, notate the following in the case history:
• Reason interest has been manually computed.
• Relevant interest computation dates and amounts for the adjustment.
• Any specific information that would be helpful to someone in reconstructing the posted restricted interest adjustment.
All manual underpayment interest transactions input through CC ADJ54 or CC AMCLS must have an interest-to-date in the "DB-INT-TO-DT" field (MMDDYYYY format). Interest is generally computed to the full paid date, 30 days from the agreement date, or the 23C date of the assessment, whichever is the earliest. The "DB-INT-TO-DT" field posts to the module and identifies to which date the manual underpayment interest was computed. Accurate entry of this field assists employees who are responsible for performing subsequent interest computations, account updates, and account inquiries.
The following are exceptions to using a date other than the date interest was computed to in the "DB-INT-TO-DT" field:
(1) If a TC 340 for zero is input to stop erroneous accruals, then the 23C date of the assessment can be used.
(2) If no interest is due on the module, then use the return due date (RDD).
(3) When non-restricting TC 340 is used, enter the 23C date of the non-restricting TC 340 adjustment. See IRM 126.96.36.199.3, Non-Restricting Transaction Code (TC) 340.
Use TC 190 to post manually computed underpayment interest on quick and prompt assessment documents when the tax module is not restricted and does not require interest to be restricted. Do not post a TC 190 for zero unless no interest is due. If interest needs to be restricted, then whenever possible, input a non-restricting TC 340 after a quick or prompt assessment has posted with a restricting TC 340 to allow Master File to update interest. See IRM 188.8.131.52.3, Non-Restricting Transaction Code (TC) 340, for input details.
Anytime underpayment interest is manually computed, it is necessary to recompute the entire tax module to ensure an accurate computation is made. When a tax module is recomputed, all prior interest transactions (e.g., TC 19X, TC 33X, TC 34X, TC 770, TC 772) must be verified, including systemic transactions, even if the module was imported into ACT/DMI. If needed, CC INTSTD can help with the prior systemic underpayment interest. If you are unable to match the manually computed interest transaction amount(s), secure the appropriate document(s) or the case file. If unable to secure the documents after several attempts, then try to contact the employee or area that computed the restricted interest. Also, the taxpayer or Power of Attorney (POA) may have a copy of the interest computation. When all attempts to verify the prior computations have been exhausted, then use the interest to date of the last manually computed interest as the starting point, unless there is an interest-free suspension period, then use the 23C date of the posted transaction as the interest start date. Compute interest to the appropriate "DB-INT-TO-DT" considering any payments, credits, waivers, or notices posted after the last interest transaction. Ensure that your interest computation and notes related to searches for the prior interest computation are associated with the adjustment document.
A reversal of some tax credits (e.g., fuel tax), will require a manual computation and restriction of underpayment interest if the taxpayer signed an agreement form with a waiver of restrictions under IRC 6213(d), such as, Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment prior to programming change in July 2015. Tax credit reversals are entitled to the same waiver suspension period as tax. Prior to July 2015 Master File did not recognize all of them. Also, additional credits, payments, or both should be included in this suspension amount. See IRM 184.108.40.206.1, IRC 6601(c) Suspension Period Calculation.
Master File does not recognize TC 772 as a total consideration of all overpayment interest (e.g., an overpayment interest combination adjustment which may include netted or additional overpayment interest, etc.). As a result, if the tax period has an overpayment at the time of posting, it will recalculate overpayment interest, post an erroneous TC 776 amount, and issue a refund with excessive overpayment interest. To avoid this, it is necessary to cycle the adjustment by performing the following processing steps.
Calculate interest to the 23C date of the following cycle.
Post the necessary adjustments, including the TC 772 to the current cycle, using a hold code to prevent Master File from posting a TC 776, and releasing the credit.
Input a TC 340 for zero and TC 770 for zero to release the credit for refund with a one week cycle delay (to match the interest to date).
Post a hold code that only holds the notice.
TC 342 removes the interest restriction previously set by either a TC 340 or TC 341. Input TC 342 with a Priority Code (PC) 5 to allow Master File to post accrued interest when applicable. Master File considers all posted TC 19X, TC 34X, and TC 33X amounts when assessing or abating additional interest as a result of a recomputation.
Master File will not post accrued interest unless PC 5 is posted with the input of a TC 342. See IRM 220.127.116.11.2, Assessment of Interest Accruals, for additional information.
TC 342 may NOT be input without first securing the source document for the TC 340/341 that created the interest freeze.
If manually abating the failure to pay penalty (TC 271), and/or there is a prior TC 271 on the module, posting of a concurrent or subsequent TC 342 may not permit Master File to compute interest correctly. Continue to manually update the interest or monitor to make sure Master File computed correctly.
A TC 340 for zero may indicate a net rate interest netting adjustment. DO NOT INPUT TC 342 in this instance. One way to identify these modules is to see if there is a TC 971 AC 355 posted. See IRM 18.104.22.168.9, Identifying Modules Involved in Net Rate Adjustments, for more information.
Listed below are additional reasons why a TC 340 for zero may be input. The adjustments listed below should not be released by the input of TC 342. This list is not all inclusive.
• Combat zone indicator
• Prevent the posting of de minimis interest accruals
• Innocent spouse adjustments
• Erroneous refund due to IRS error
• Systemic interest problems causing erroneous notices to be sent out
• Interest abatement under IRC 6404(e) due to unreasonable delay by IRS
When inputting TC 342, it is not necessary to use a blocking series that will create a refile DLN if sufficient documentation is attached to the adjustment source document.
Attach a copy of the source document for the TC 340/341 to the TC 342 adjustment document. If the source document is not available, notate on the TC 342 adjustment document why a TC 340 for zero was originally input (if known).
A source document would not be available for the TC 340 for zero adjustment. Notate on the TC 342 adjustment document "Source document not available - combat zone indicator - TC 340 for zero systemically generated on original filed return."
When a notice is issued to an individual taxpayer that includes interest to be paid, the notice must include a computation of the interest. See IRC 6631 and IRM 22.214.171.124.2, Notice Requirements. Because a sole proprietor is an individual taxpayer, the requirements of IRC 6631 also apply to employment and excise tax liabilities of a sole proprietor. Master File programming will systemically include an explanation of the interest calculation with notices sent to taxpayers when interest has been systemically generated.
If interest is manually computed or restricted, send a copy of the interest computation report. Users of command code (CC) COMPA may only send COMPAD prints to taxpayers as an explanation of the manual interest computation.
Use Letter 3447, Cover Letter for Manual Interest Computations With COMPAD, or Letter 3535, Interest Computation Cover Letter, as a cover letter when providing an interest computation report to the taxpayer as required by IRC 6631. Use Letter 3447 as a cover letter for CC COMPAD printouts, and Letter 3535 to accompany interest computations generated by the ACT/DMI interest software.
The requirements of IRC 6631only apply to notices which “include an amount of interest required to be paid” by the taxpayer.
All manual interest computations must include documentation supporting the interest computations and attached with the input document that is either sent to Files or CIS. Documentation is required even if a copy of such documentation is retained in the area. See IRM 126.96.36.199.2.1, Manual Calculation of Interest - Documentation, for more information.
The non-restricting TC 340 is an enhancement to Master File programming to allow a systemic interest update on a tax module after interest has been manually computed, and it should be used whenever possible. This is especially useful for, but not limited to, the following situations:
Multiple waiver dates
Combination adjustments involving carrybacks (Form 2285)
Disaster area adjustments
Abatements due to a delay or error in a ministerial or managerial act
Combat zone participants
Multiple IRC 6404(g) notice dates
Rev. Rul. 99-40
Removing the large corporate underpayment (LCU) applicable date (i.e., 2% trigger date) for a tax module in which the LCU rate doesn’t apply
The total balance, including accruals, is entered in the "COMP-INT-AMT" field with the TC 340 adjustment. This causes Master File to resume normal interest computation on that amount from the date entered in the "DB-INT-TO-DT" field. See Exhibit 20.2.5-4, Input Screen of Non-Restricting TC 340.
The module balance includes any unpaid tax, penalty, and interest as of the "DB-INT-TO-DT," including accrued failure to pay penalty (TC 270/276). Refer to the If/Then Table below that provides the rules for handling TC 27X when determining the "COMP-INT-AMT" for the non-restricting TC 340.
If the 23C (posting) date of the TC 270/276 Then the TC 270/276 amount is the same as the "INT-TO-DATE," should be included in the "COMP-INT-AMT." is after the "INT-TO-DATE," should not be included in the "COMP-INT-AMT."
When the non-restricting TC 340 is used, the interest accruals are updated systemically. Master File uses the "DB-INT-TO-DT" as the start date for subsequent computations. Therefore, compute interest to the posting date (23C date) and input this date in the "DB-INT-TO-DT" field. See IRM 188.8.131.52.2 (5) for the date to use in this field when computing a manual TC 340.
For Exam and Appeals tax assessments with a signed IRC 6601(c) waiver, the "DB-INT-TO-DT" input is the 23C date of the assessment, not 30 days past the agreement date, even though interest is computed to 30 days past the agreement date.
Use a non-restricting TC 340 whenever possible.
When feasible, input a non-restricting TC 340 after a prompt or quick assessment has posted with a TC 340 to allow Master File to update interest.
The non-restricting TC 340 should not be used in situations where normal programming cannot correctly update the interest. Some examples are as follows:
Tax motivated transaction interest (TMT) (120% interest)
Complex large corporate underpayment (LCU) interest (2% interest)
Modules reactivated from retention (TC 370 with Document Code 52 sets a permanent underpayment interest restriction, unless the TC 370 contains a Julian date of "999," in which case the module is not restricted)
Net rate interest netting cases
After the posting of a non-restricting TC 340, any subsequent adjustment with an interest effective date earlier than the last posted DB-INT-TO-DT requires the account to be recalculated and input with a new non-restricting TC 340. Examples are adjustments to tax (including TC 290 for zero), penalties, and credits.
The -I freeze will not be present on the module after the non-restricting TC 340 posts. Any adjustment with an earlier effective date, such as a credit transfer from another module, will set a new -I freeze, unless the TC 340 is identified and addressed with a manual interest update.
In Avon Products, Inc. v. United States: 588 F.2d 342 (2d Cir. 1978), the court interpreted IRC 6601(a) to mean that interest on an underpayment can only be charged when the tax is both due and unpaid. This impacts interest computations when a subsequent underpayment is determined after the following conditions occur:
A refund without overpayment interest is issued; or
An overpayment is applied to a succeeding tax period as a credit elect. Because of the court cases of May Department Stores Co. v. U.S., 36 Fed. Cl. 680 (1996) and Sequa Corp. v. United States, 99-1 USTC (CCH) ¶ 50,379 (1998), this condition is often referred to as May/Sequa.
Rev. Rul. 99-40 addresses both situations.
If a refund was issued without interest, compute interest on a subsequent underpayment using a current TXMOD or Master File transcript as follows:
Compute a running module balance (which includes the subsequent underpayment), from the return due date to the date the overpayment was refunded. This date is usually the assessment date (23C date) on the transcript. For manual refunds (TC 840), it is the date the check is mailed or wire transferred, not the date the taxpayer received the check. Look at the Julian date of the document locator number (DLN) to verify the date. The Julian date will be the sixth, seventh, and eighth digits. If the adjustment was closed through Exam, 400 may need to be subtracted from the total of these digits to obtain the correct Julian date, e.g., if 645 is shown, subtract 400 to get 245.
Suspend underpayment interest on the amount of the refund or the module balance, whichever is less, from the interest start date to the date of the refund.
When a module is downloaded to ACT/DMI, the program automatically includes the suspension period on original return refunds. However, there are situations that may require manipulation of the program (e.g., avoidance of erroneous within module netting). See IRM 184.108.40.206.4, Revenue Ruling 99–40 and Carrybacks.
Always verify the suspension dates when using the import function on ACT/DMI. After 2011, the back-off period for individuals changed due to CADE 2 programming. The dates can altered, if necessary. See IRM 220.127.116.11.1.1, Systemic Refund Dates for IMF and BMF, for the different scenarios that can determine how many back-off days to use.
Resume underpayment interest from the refund date on the full module balance including the amount suspended for the refund.
Before refunding or crediting an overpayment, be sure that the applicable statute of limitations is open. If a credit or refund cannot be allowed in full or in part, see IRM 25.6.1, Statute of Limitations Processes and Procedures.
When there is a subsequent underpayment of tax on a module containing a credit elect posting to a succeeding tax period, under Rev. Rul. 99-40 the interest start may be different. In order to determine when interest starts per Rev. Rul. 99-40, a computation is needed for the subsequent tax period. A spreadsheet using the same information as found on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman, or Form 2220, Underpayment of Estimated Tax by Corporations, can be used. See IRM 18.104.22.168.2.1 on how to compute the interest.
When a taxpayer elects to apply an overpayment to the succeeding year's estimated taxes (credit elect), the credit elect is applied to unpaid estimated tax payments in order to avoid the failure to pay estimated income tax penalty under IRC 6654 or IRC 6655 for that year. Since the estimated tax penalty computation is based on the original return filing information of tax and payments due each quarter, the original filing information is used for completing the spreadsheet. (Amended returns and claims are not considered in the penalty computation.) See IRM 20.1.3, Estimated Tax Penalties, for additional information.
Once the taxpayer elects to have the overpayment applied to the succeeding year, it cannot be revoked.
Transaction Codes (TC) 830/836 identify the credit elect amount on the overpaid module and TC 710/716 identify the credit elect amount posted on the tax module for the immediately succeeding taxable year. Page 2 of CC AMDISA will now indicate if the module contains a TC 836.
When a revised Form 2210 or Form 2220 is submitted after the original return has already been filed and processed, it needs to be considered, especially if it results in a decrease of a posted estimated tax penalty. This is provided the penalty abatement wasn’t due to reasonable cause. For example, the taxpayer wishes to have the penalty reduced using an annualized computation.
If a tax module being processed by an IRS employee contains a TC 830 or TC 836, a determination should be made whether Rev. Rul. 99-40 applies. If Rev. Rul. 99-40 applies, interest should be computed according to the provision. Since a taxpayer is entitled to this interest provision, a taxpayer request is not needed. To assist the case closing units, an examiner should annotate Form 3198, Special Handling Notice for Examination Case Processing, and provide any needed documents. This prevents the taxpayer from having to file a claim later.
Starting with 2016 returns, the return due date will be the same as the due date of the first quarter for estimated tax payments. The only exception are fiscal year ending (FYE) June returns; they will keep the 9/15 due date until 2025.
If Rev. Rul. 99-40 has been considered, even if it is determined that Rev. Rul. 99-40 does not apply, Transaction Code (TC) 971 Action Code (AC) 653 is now required to be input on IDRS. This action code became available January 2015, and can be input on any year Rev. Rul. 99-40 was considered, even if this was in the past. AC 653 is to benefit other employees. This requirement doesn’t apply to cases when the tax is being reduced or abated.
If the TC 150 indicates a substitute for return and the first assessment represents tax shown on an original return, then Rev. Rul. 99-40 does not apply, because this is not a subsequent underpayment.
If a corporation is acquired or merged with another corporation, the due dates for the estimated tax payments will be the same as the acquired or parent return, if the income is reported on the parent return. For these types of cases, use caution in posting the correct amounts and due dates. Form 2220, Underpayment of Estimated Tax by Corporations, for the parent corporation must be obtained to determine how much of the TC 710 or TC 716 is to be applied for that tax period.
The estimated tax payments for foreign corporations have the same due dates as the domestic corporations. If the foreign corporation does not have a US office, then the return is due two months later (e.g., June 15 instead of April 15). For returns with a tax period beginning date prior to 2016, the return was due three months later (June 15 instead of March 15). See IRM 22.214.171.124.3, Payment of Tax Due - Form 1120-F, and IRM 126.96.36.199.1.1.4, Foreign Corporations. If the credit elect is not needed, the corporation still receives one year interest-free.
When reviewing a filed claim requesting Rev. Rul. 99-40, check for the following:
If the claim also requests an adjustment to tax, existing claim procedures will be followed.
If the taxpayer already has an open/active account on AIMS or IDRS, the claim will be routed for association.
Claims/requests involving restricted interest are only sent to Appeals when the claim/request has been disallowed and the taxpayer requests the case be sent for Appeals consideration.
If the taxpayer used the annualized installment method, Form 2210 or Form 2220, the subsequent year’s original tax return should be secured before an adjustment is made. On BMF modules, computer condition code (CCC) 8 is an indicator that the annualized installment method was used. If unable to secure the return, then a remark should be added on AMS or in the history items, "Form 2210/2220 not available."
If there is an underpayment of tax in a year the taxpayer made a credit elect, determine whether the credit elect was needed to avoid or reduce the failure to pay estimated tax penalty for the immediately succeeding tax period.
The Rev. Rul. 99-40 benefit is allowed even if there is a penalty for failure to make timely estimated tax payments on the succeeding tax period.
There is a $10,000 estimated tax payment due for each quarter. The taxpayer only paid $2,000 for each installment and had a credit elect for $15,000. The estimated tax penalty would be based on a shortfall for the second, third, and fourth installments. $8,000 would be applied to the first quarter and the taxpayer would receive Rev. Rul. 99-40 of $7,000 for an interest-free consideration in the second quarter when calculating underpayment interest.
Using the information found on TXMOD, IMFOL/BMFOL, or the taxpayer’s returns, the following information is needed to make this determination:
For individuals, the adjusted gross income for the underpayment tax period.
The amount of overpaid tax that was credited to the succeeding tax period.
Any payments of estimated tax made for the succeeding tax period.
Any refundable credits (e.g., fuel tax credit), shown on the succeeding tax year.
Estimated tax liability for each installment period based on the taxpayer's required installments of estimated tax for purposes of IRC 6654 or IRC 6655.
With the information in paragraph (2) above, a determination can then be made regarding how much of the credit elect is needed for each quarter for the succeeding year. Refundable credits are subtracted from the tax owed prior to computing the required installments, except for withholding and TETR credits, which are treated as payments. See IRC 6654(d), IRC 6655(d) or IRC 6655(e). For internal use, the Appeals TCS SharePoint website has spreadsheets available for this purpose. See Appeals TCS Spreadsheets for the TCS spreadsheets.
When using the spreadsheet for an individual, the Adjusted Gross Income (AGI) is required in order to determine the required installment amounts. The AGI is per the original return filing. If the original return or a copy isn’t available, then use the AGI amount shown on TXMOD/IMFOLR and subtract (or add if this shows a minus) the amount shown with reference number 888 located below the tax assessment or on IMFOLA to arrive at the original AGI amount.
Compute interest on the subsequent underpayment as follows:
Using current TXMOD or Master File information, compute a running module balance.
Using the spreadsheet, suspend underpayment interest from return due date to the installment date for the amount needed on the subsequent year. For corporations, a one month suspension will apply for prior to 2016 returns. Starting with 201601 returns, most Form 1120 return due dates will have the same due date as the first installment. See IRM Exhibit 3.11.16-2, Due Date Charts, for more information.
Include all other payments, assessments, and any other required suspensions.
The maximum interest suspension for Rev. Rul. 99-40 is one year.
Make sure that erroneous "within module netting" does not occur. Although IRS procedures are to apply Rev. Rul. 99-40before within module (annual) netting, the ACT/DMI software may do the opposite. In certain circumstances, ACT/DMI must be manipulated to avoid the application of annual netting when the use of money principle under Rev. Rul. 99-40 would apply instead. This problem surfaces when a refund or offset is allowed credit interest, but an interest-free period for an overpayment (a refund, offset or credit elect) runs during this same time period.
John Smith files Form 1040, Federal Income Tax Return, for the 200612 tax year reflecting an overpayment of $65,000. The taxpayer requests that $45,000 of the overpayment be applied as a credit elect to the 200712 tax period. The remaining overpayment of $20,000 is refunded with interest. Overpayment interest on the refund is allowed from the April 15, 2007 return due date to the refund schedule date of July 22, 2007. Later, the taxpayer files an amended return reporting tax of $30,000, and requests application of Rev. Rul. 99-40. The amended return was processed and the credit elect was applied to the fourth quarter estimated tax installment due January 15, 2008. Thus, underpayment interest on the $30,000 tax will begin from January 15, 2008. To prevent the ACT/DMI program from applying annual netting during the period of time interest was allowed on the original $20,000 refund, the tax assessment (up to the amount of the $45,000 credit elect), is assigned an effective date of January 15, 2008. This prevents the program from computing interest (annual netting) during the interest-free period allowed by Rev. Rul. 99-40.
See Exhibit 20.2.5-3 for a Rev. Rul. 99-40 example.
If Then the required installments are equal to or less than the amount of timely estimated tax payments, the credit elect amount is not needed and the taxpayer is not liable for underpayment interest (up to the amount of the credit elect). the required installments are more than the amount of all timely estimated tax payments, the credit elect (or a portion thereof) is needed and underpayment interest begins from the due date of the installment on the lesser of the underpayment, the installment amount, or portion of the installment that is more than the estimated tax payments. the tax on the return is equal to or less than the amount of estimated tax payments, the credit elect amount is not needed and the taxpayer is not liable for interest on the amount of underpayment equal to the credit elect for the time period that is prior to the return due date for the succeeding tax period (maximum of one year underpayment interest-free period). the estimated tax payments were not timely, but made before filing the return, the credit elect is applied to the quarter(s) it is needed, even if the installment due date is earlier than the payment date. That is, credit elects are considered first; the payment date of the credit elect (TC 71X) is not important. the taxpayer receives a refund of some or all of the estimated tax payments prior to the unextended return due date, the underpayment interest suspension will stop on the date of the refund up to the amount of the refund that is more than the estimated payments needed to avoid the estimated tax penalty.
Rev. Rul. 99-40, as it relates to unpaid installments of estimated income tax, does not apply to employment tax returns (e.g., Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return) or to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, because filers of such returns are not required to make estimated tax payments. Federal tax deposits are not considered estimated tax payments.
When a subsequent assessment (general adjustment), including penalties, is made and a carryback has previously been allowed and refunded for the same year without interest, underpayment interest on the subsequent assessment for that year (up to the amount of the carryback) is not computed for the period between the carryback availability date and the carryback refund date.
Compute underpayment interest on the subsequent assessment as follows:
Using a current TXMOD or Master File transcript, compute a running module balance on the subsequent assessment from the due date of the tax to the date the carryback is available.
Suspend interest on the lesser of the module balance or the carryback amount on the carryback availability date.
Resume underpayment interest on the suspended amount from the carryback refund date to the applicable ending date; waiver date plus 30 days (if applicable), payment date or 23C date, whichever is earlier.
When importing data from TXMOD using ACT/DMI, the software will automatically populate an overpayment interest suspension period for carryback overpayments issued without overpayment interest. Use the loss year return due date as the effective date of the carryback recapture. When using the import feature, always ensure the original dates on TXMOD are correct.
Make sure that erroneous annual netting does not occur. Erroneous annual netting occurs when underpayment interest is computed at the overpayment rate during a period of time where no underpayment interest is due. ACT/DMI will attempt to net interest.
A claim is filed for a refund and is not processed in 45 days, so the taxpayer receives overpayment interest. Later, the taxpayer has a carryback that is refunded without interest. There is a subsequent audit and part of the carryback previously allowed is recaptured. Since the carryback was originally issued without interest, there is an underpayment interest-free period, so annual netting cannot occur.
See IRM 20.2.9, Interest on Carryback of Net Operating Loss, for rules concerning carrybacks.
Effective for adjustments posting in cycle 198909 and later, underpayment interest is systemically computed in refund situations under the above rules if the module is not restricted. Do not unnecessarily restrict a tax module.
The Omnibus Budget Reconciliation Act of 1990, Public Law (PL) 101-508, added IRC 6621(c) which increased the interest rate for amounts deemed to be "large corporate underpayments" (LCU) in certain circumstances. Interest on large corporate underpayments is charged at a rate that is two percentage points higher than the normal underpayment interest rate. The LCU interest rate cannot be charged prior to the January 1, 1991 legislative effective date. Large corporate underpayment interest may also be referred to as "2% interest" , "corporate interest" , or "hot interest" .
The Taxpayer Relief Act (TRA) of 1997 amended IRC 6621(c) enacting Public Law 105-34. TRA 1997 retained prior statutory requirements and created an exception for letters and notices of $100,000 or less for determining the existence of a large corporate underpayment and when the 2% additional underpayment rate applies.
Depending on when a letter or notice was issued, the method for computing LCU interest can involve the rules effective January 1991 (pre-98), January 1998 (post-97), or be a combination of both, where the rules effective January 1991 and January 1998 must both be considered.
LCU interest is also described in Treasury Regulation 301.6621-3.
All of the following conditions must be present in order for the LCU rate to apply:
The taxpayer must be a "C" corporation.
A threshold underpayment of tax must exist. IRM 188.8.131.52.1.2.
A 30-day letter, Statutory Notice of Deficiency (90-day letter), or notice and demand for payment (under non-deficiency procedures) must have been issued, and the liability not fully paid within 30 days from the letter or notice date. In this context, "notice" refers to a bill for payment of tax, penalties, and interest.
There must be a start date or "applicable date" determined for a single module subject to the LCU rate.
A "C" Corporation is any BMF taxable entity with a Form 1120, U.S. Corporation Income Tax Return, filing requirement (except Form 1120S, U.S. Income Tax Return for an S Corporation). Usually, the literal "C-CORP<1" is shown at the top of a TXMOD print if the taxpayer is a C-corporation.
A C-corporation indicator will also be set for any BMF taxable entity without a Form 1120 filing requirement, but having an exempt organization section present with a corporate indicator.
BMF taxable entities that have a C-corporation filing requirement include corporate, employment tax, and excise tax returns.
See IRM 184.108.40.206.3 if the module doesn’t have a C-Corp indicator, but should.
A large corporate underpayment is any underpayment of tax by a C-corporation for any taxable period where the amount of the threshold underpayment for that taxable period "exceeds" $100,000.
The rules for determining if the threshold underpayment has been met are different depending on when a letter or notice was issued. See IRM 220.127.116.11.2 for the LCU interest start date.
For letters or notices issued prior to January 1, 1998 (pre-98), the threshold underpayment is the "aggregate" of unpaid tax (excluding interest, penalties, additional amounts, or additions to tax) as of the last date prescribed for payment (typically, the unextended return due date, or if a carryback recapture, the due date of the loss year return).
For letters or notices issued after 12/31/1997 (post-97), the threshold underpayment is based on the "amount" shown on a single letter or notice for more than $100,000. Separate notices may not be combined to meet the threshold underpayment. Any letter or notice in which the amount shown is not greater than $100,000 shall be disregarded for purposes of the LCU rate.
For post-97 rules, while a threshold underpayment is determined based on a letter or notice exceeding $100,000 in tax and not paid within 30 days, the LCU rate will not apply if the amount ultimately assessed is less than $100,000. See IRM 18.104.22.168.2(4).
In determining whether there is a threshold underpayment, different types of tax (such as income tax and FICA tax) and amounts that relate to different taxable periods are not added together.
The determination of a threshold underpayment does not include interest, penalties, additions to tax, and additional amounts.
While a threshold underpayment consists only of tax, the amount on which the LCU rate is charged includes tax, penalties, interest, additional amounts, and additions to tax.
Once a threshold underpayment exists, an "applicable date" determines the "starting date" for when the LCU rate begins.
In determining a threshold underpayment, the IRS is not following Med James, Inc. v. Commissioner, 121 T.C. 147,155-57 (2003). A net operating loss carryback cannot be used to reduce tax that has a liability date (i.e., prescribed date for payment) that is earlier than the availability date of the carryback credit. A net operating loss carryback is treated like a payment, and is not available to reduce tax until the due date of the loss year return (determined without regard to any extension of time for filing the loss year return). However, in the case of a carryback recapture and carryback allowance with the same effective dates, the carryback allowance is used to reduce the carryback recapture (only if the carryback has not already been refunded). If the Med James, Inc. v. Commissioner, 121 T.C. 147,151 (2003) position was previously considered and allowed, do not change that result.
Do NOT apply or consider the LCU interest rate if the entire liability is paid within 30 days of the earlier of the 30-day letter date, 90-day letter date, or notice and demand date. In a situation where a taxpayer partially agrees to a tax liability and pays the amount shown in the audit report, to avoid being charged the LCU rate, the amount shown in the 30-day or 90-day letter must be fully paid within 30 days from the earlier of the issuance of the 30-day letter, 90-day letter, or assessment of the agreed report. If the liability amount cannot be determined, obtain a copy of the 30-day or 90-day letter. The unagreed liability amounts will be shown on CC BMFOLA as "EXAM UNAGREED AMT" .
Cash bonds and deposits made under IRC 6603 are not considered for purposes of determining whether the underpayment (amount shown in the letter or notice) is paid within 30 days.
Taxpayer, XYZ Inc., is issued a 30-day letter on June 15, 2010 for $125,000. In response to the letter, an IRC 6603 deposit of $125,000 is submitted on July 1, 2010. Because a "6603 deposit" is not a payment of tax for LCU purposes, the amount shown in the 30-day letter was not paid on time and the taxpayer would be subject to the LCU rate. The "6603 deposit" is, however, used to stop the accrual of interest for the underpayment amount equal to the deposit, as of the remittance date.
The posting of a TC 700 or TC 706 credit is considered when determining if "payment" is made within 30 days. When a TC 700 or TC 706 credit is offset into a module subject to the LCU rate, use the cycle date to determine if payment was made within 30 days of the letter or notice date. Payments and credits that have already been refunded or offset should not be considered when determining if the amount shown in a letter or notice is paid within 30 days.
Once an applicable date is set, the LCU interest rate continues to apply on any unpaid balances until full paid.
Smith, Inc. owed $250,000 on the original return. The notice and demand was mailed on 5/3/2010, the date the return was processed. The taxpayer full paid the notice amount on 6/15/2010. The LCU applicable date is 6/2/2010 (30 days after the notice and demand date). Later, the corporation is audited and assessed an additional $65,000. Even though this amount is less than $100,000, the entire $65,000 would also be subject to the LCU interest rate.
The "start" date for charging the LCU rate is referred to as the "applicable" date or "trigger" date.
An applicable date is seldom voided but the letter or notice that set the applicable date may be disregarded if:
The amount shown in the letter or notice is paid within 30 days of the letter or notice date.
As a result of an administrative error, the letter or notice is issued to the wrong taxpayer or for the wrong taxable period.
The tax assessment or proposed assessment for which the letter or notice was sent is subsequently abated in full.
The notice of deficiency is rescinded under IRC 6212(d).
The additional two-percent interest charge on large corporate underpayments begins to run after the "applicable date" . For the period January 1, 1991 to December 31, 1997 (pre-98), the applicable date is the 30th day after the date on which the IRS sends to the taxpayer either:
An initial letter of proposed deficiency that allows the taxpayer the opportunity for administrative review in Appeals (30-day letter).
A statutory notice of deficiency (90-day letter).
A notice or letter of assessment or proposed assessment. "Notice" refers to a bill for payment of tax, penalties, interest, additions to tax, and additional amounts.
Under pre-98 LCU rules, the applicable date would be based on the "earlier" of the above issued letter or notice date that was not paid within 30 days. An applicable date could be set based on any amount shown in the unpaid letter or notice. Additionally, the amount shown in the letter or notice does not control whether a threshold underpayment exists. Therefore, under pre-98 rules, while an applicable date can be triggered based on any amount shown in the letter or notice, the LCU rate cannot be charged until there also exists a "threshold" underpayment.
T, a C-corporation, filed its 1993 income tax return reporting an overpayment. However, as the result of a computational error on the return, no refund is issued and the taxpayer was, instead, sent a math error notice for $300.00 of unpaid tax on March 25, 1994. The notice was paid on May 16, 1994, 52 days after the notice date. Although the amount shown in the notice of March 25, 1994 was fully paid on May 16, 1994, it cannot be disregarded for purposes of setting an applicable date because it was not paid within 30 days. Thus, an applicable date of April 24, 1994 is set based on the math error notice that was not paid within 30 days. While an applicable date is set, the LCU rate is not charged at this time because a threshold underpayment does not exist. On January 9, 1996, the taxpayer is issued a 30-day letter for additional tax of $135,000, which the taxpayer pays on February 18, 1996. Because the "aggregate" of unpaid tax as of the unextended return due date is now $135,300, the criteria for charging the LCU rate has been met; an applicable date and threshold underpayment exceeding $100,000 exists. Interest at the prevailing underpayment rate is charged from the return due date to April 24, 1994. Interest is charged at the LCU rate on the total underpayment of $135,300 (plus accrued interest at the prevailing rate) from the April 24, 1994 applicable date (30 days after the March 25, 1994 $300.00 notice date) to the interest ending date.
Even when the underpayment is paid in full, the applicable date remains, and interest at the LCU rate is charged from the applicable date for any subsequent unpaid balances.
In determining whether the LCU rate is charged, consideration must also be given to the liability amount ultimately assessed. An applicable date may be set and threshold underpayment determined but the amount "ultimately" assessed impacts whether the LCU rate is charged.
The taxpayer is issued a 30-day letter for $120,000 on June 9, 2007. The taxpayer fails to pay the $120,000 within 30 days of the 30-day letter date. Therefore, July 9, 2007 becomes the applicable date. The taxpayer goes to Appeals and is only assessed $80,000 on August 5, 2009 and full pays that amount on August 15, 2009. The $80,000 is not subject to the LCU rate since the ultimate assessment is under $100,000. Therefore, interest on the $80,000 assessment is computed from the return due date at the normal underpayment rate (through July 9, 2007) until August 15, 2009. On January 20, 2011, there is a TEFRA flow-through adjustment of $300,000. This underpayment amount is subject to the additional LCU rate from the July 9, 2007 applicable date.
In the above example, the TEFRA flow-through underpayment was subject to the LCU rate. If, however, there had not been a prior 30-day letter, 90-day letter, or notice and demand for payment over $100,000, an applicable date would not have been triggered. The issuance of partnership 60-day letters and notices described in IRC 6223(a)(1) and IRC 6223(a)(2) do not trigger an "applicable" date. See Treas. Reg. 301.6621–3(c)(4).
The Taxpayer Relief Act of 1997 (TRA ’97) modified IRC 6621(c) that for periods after December 31, 1997 (post-97), the applicable date is the 30th day after issuance of a letter or notice of an amount (or proposed amount) greater than $100,000 (not including interest, penalties, or additions to tax) that is not paid within 30 days. Letters and notices with amounts not greater than $100,000 are disregarded and cannot trigger an applicable date. Letters and notices for small amounts may not be combined to meet the over $100,000 letter or notice requirement.
On Taxpayer Z's 1997 return, a math error notice is sent dated 5/15/1998 for $110,000. Taxpayer Z paid $60,000 within 30 days of the notice and the $50,000 balance was not paid within 30 days of the notice date. Later, a 30-day letter for $21,000 was sent and not paid within 30 days. The $21,000 assessment was made on 11/7/1998 and was paid within 30 days. The applicable date is 6/14/1998, 30 days after the math error notice date. Since only part of the amount stated in that notice was paid within 30 days, the notice is not disregarded. The LCU rate applies to any amounts due for that tax period ($50,000 and $21,000 plus interest) after the 6/14/1998 applicable date.
A revenue agent's report (RAR) is not a notice of demand as defined in IRC 6601(c). Therefore, it does not set an applicable date.
When a copy of the 30-day letter, 90-day letter, or notice and demand is not available for determining an applicable date, use the date AIMS went into Status 13 or 24 or as annotated in the case file. A Master File Status Code 30 on CC TXMODA located in the history item section will show the date and amount for a 30-day or 90-day letter sent to the taxpayer. The history section information is populated based on completing item 03 and item 04 on the AIMS closing document Form 5344, Examination Closing Record or Form 5403, Appeals Closing Record. This status code is for information purposes only, since it does not affect the "applicable" date on the module.
If the taxpayer agreed to an underpayment before a 30-day letter was issued, then the notice and demand date is used to determine an applicable date. The notice and demand date can be found on TXMOD in the Master File Status section as Status Code 19 or 21. After 2011, a TC 971 action code (AC) 257 indicates a Statutory Notice of Deficiency (90-day letter) was issued for over $100,000 in tax by a BMF Correspondence Unit, such as the Automated Underreporter Unit (AUR).
If the LCU interest start date cannot be determined, contact the examining officer to request research to find the date the taxpayer was mailed the first notification of liability meeting the LCU criteria.
If it is determined that the taxpayer never received the proper notification of liability or agreed to the assessment prior to issuance of a 30-day letter, post the assessment without calculating LCU interest and monitor until 30 days after notice and demand is sent. A computer generated interest computation will automatically charge at the LCU rate if the taxpayer has not paid. Make sure there is no prior "applicable" date on the module.
When a taxpayer's account is impacted by both pre-98 and post-97 LCU rules refer to IRM 22.214.171.124.5.
Always verify the "applicable" date on TXMOD or BMFOL for LCU interest through careful analysis of the case. If incorrect, then correct this date using Document Code 54, CC AMCLS, or on Form 2859, Request for Quick or Prompt Assessment.
Remove an erroneous applicable date on IDRS by entering all 9's into the "2% Interest Date" field. A manual correction or removal of an applicable date will require input of a TC 340 or 341. Whenever possible, use a non-restricting TC 340.
When an applicable date is deleted, an indicator of "1" will appear as a value entry in the new "2% INT DT MAN DEL" field. If the applicable date has not changed, or a new date is later input, the indicator value is displayed as "0" . On BMFOLT shown below the TC 340 entry, the "2% Trigger Date" field will show "12319999" when an applicable date is deleted. Page one of BMFOLT in this situation will show all "zeros" in the "2% Interest Date" field.
Generally, modules requiring the LCU interest rate must have interest manually computed and restricted, especially if there is more than one "applicable" date.
In limited instances, if Master File has the correct applicable date, it can systemically compute the LCU interest rate provided there are no other issues that require the module to be restricted. However, a manual interest computation is required when assessing additional tax on AIMS using CC AMCLS. Always monitor the case, even if not restricting, using TXMOD or BMFOL one to two cycles later to verify the correct posting of interest. If the account is unpaid after 30 days, make sure the LCU indicator is set. If not, then a manual computation of interest must be done.
Prior to 2015, assessments input with an interest computation date (shown as INTCMP-DT on CC REQ54 and INT-CMPTN-DT on CC TXMODA) (e.g., with carryback or interest-free employment tax adjustments) must have the LCU rate manually computed if it applies. Starting in 2015, Master File recognizes assessments with an INT-CMPTN-DT (not full paid within 30 days) and considers the LCU rate, if applicable.
If the "C" corp indicator is not present on TXMOD/BMFOLT, but BMFOLE shows the taxpayer has a Form 1120 filing requirement (1120:01), then starting in July 2017, this can be corrected with a TC 971 AC 359 for each year an indicator is needed.
Once it is determined that the LCU interest rate is to be charged:
Using a current TXMOD or Master File transcript, compute a running module balance from the return due date to the applicable date (notice date plus thirty days).
Compute underpayment interest on the balance due as of the applicable date at the LCU rate, starting from the applicable date to the payment date, waiver + 30 date (if applicable), or 23C date, whichever is earlier.
When using ACT/DMI, the LCU applicable date must be entered in the "Edit Existing Module" screen
Prior to January 1, 1998, an unpaid letter or notice for any amount could trigger application of the LCU interest rate if the other criteria were met. After December 31, 1997, the letter or notice must show an amount exceeding $100,000. Special consideration must be given when a tax module is impacted by both pre-98 and post-97 LCU interest rules. Interest must be manually computed and restricted when a module is impacted by pre and post LCU rules.
If an applicable date was triggered prior to January 1, 1998 and the letter or notice initiating the LCU rate was for an amount under $100,000, the LCU rate stops on 12/31/1997. The LCU rate will not begin again until 30 days after a letter or notice is issued for an amount exceeding $100,000, provided that letter or notice is not paid within 30 days.
If an applicable date was triggered prior to January 1, 1998 based on a letter or notice for an amount exceeding $100,000, the LCU rate continues to be charged from that original applicable date until all amounts are paid.
Y, a C corporation, had a 30-day letter issued for the 1994 income tax return on May 12, 1996 for tax of $70,000. Another 30-day letter was issued December 8, 1996 for tax of $20,000. A third 30-day letter was issued February 5, 1999 for tax of $105,000. None of the amounts were paid. Because the aggregate of unpaid tax as of the unextended due date of the return is $195,000, the criteria of a large corporate underpayment has been met. The applicable date is June 11, 1996, 30 days from the first letter of May 12, 1996 that was not paid within 30 days. The applicable date is valid for the other assessments as well. Therefore, LCU interest begins on the total underpayment (unpaid tax of $70,000, $20,000 and $105,000 plus accrued interest) on June 11, 1996. Interest at the higher LCU rate ends on December 31, 1997 because the pre-98 applicable date was set by a letter/notice for an amount under $100,000. The LCU rate will however begin again on March 7, 1999, 30 days after the unpaid letter issued on February 5, 1999 for over $100,000. If the May 12, 1996 letter setting the pre-98 applicable date was for an amount exceeding $100,000, then the LCU rate would not stop on December 31, 1997.
IRC 6621(c), formerly pertaining to interest on tax motivated transactions (TMT), was repealed for returns with due dates (without regard to extensions) after December 31, 1989. Since January 1, 1991, IRC 6621(c) refers to Large Corporate Underpayment (LCU) interest (IRM 126.96.36.199). Prior to its repeal, IRC 6621(c) imposed an interest rate of 120% of the underpayment rate determined under IRC 6621 (for interest accruing after December 31, 1984), on substantial underpayments attributable to tax motivated transactions.
Interest at the 120% rate is computed only on the tax amount determined to be motivated. Interest on any penalties associated with the TMT tax liability is computed at the prevailing underpayment (non-TMT) rate.
There are still active TMT cases that are either pending an assessment/abatement or in a collection status, with TMT rates continuing to apply to those balances.
A taxpayer may be liable for both TMT and LCU interest (IRM 188.8.131.52 and IRM 184.108.40.206.1).
Annual (within module) netting and net rate netting are applicable when the underpayment interest rate is TMT. See IRM 20.2.14, Netting of Overpayment and Underpayment Interest.
For returns with due dates before January 1, 1990 (without regard to extensions), IRC 6621(c) required that tax assessments resulting from tax motivated transactions be subject to an interest rate that was 120% of the rate determined by IRC 6621(a). Generally, 120% interest is computed on the TMT underpayment from the later of the return due date (RDD) or December 31, 1984.
If the return due date or interest start date of the assessment is: Then prior to January 1, 1985, 1. compute interest at the applicable underpayment rate, on the tax motivated principal amount to December 31, 1984.
2. compute 120% interest on the tax motivated principal PLUS the total compounded interest from step 1, from December 31, 1984 to the applicable interest ending date.
after December 31, 1984, compute 120% interest on the tax motivated principal amount from the return due date to the applicable interest ending date.
See IRM 220.127.116.11.5.2 for an example of a TMT interest calculation.
If a taxpayer is liable for both TMT and LCU interest, compute underpayment interest at the 120% rate on the TMT tax starting on January 1, 1985, and effective January 1, 1991, compute interest at 120% of the LCU interest rate (beginning from the LCU applicable date).
There are special conditions that apply to the processing of TMT interest assessments:
Assessments are generally made only by Examination, Criminal Investigation, and Appeals.
The 120% interest rate ONLY applies to a TMT assessment of $1,000 or more.
The 120% interest rate MUST be manually computed and input with TC 340 due to Master File limitations.
Reference Numbers (Ref. No.) must be manually input whenever there is an assessment or abatement of either the TMT tax amount or TMT interest amount (positive or negative). The reference numbers are used to identify the portion of the total tax assessment and associated interest accruals related to TMT on the Master File account.
The reference numbers are displayed on all transcripts as Ref. No. 221 (TMT tax) and 222 (TMT interest).
Input Ref. No. 221 with TC 29X/30X for a significant tax amount to identify the portion of the total tax assessment related to TMT.
Ref. No. 221 should reflect the TMT tax for the specific tax adjustment it accompanies.
The total amount of TMT tax can be determined by totalling all of the Ref. No. 221 amounts on the module.
Interest on the Ref. No. 221 amount is computed at 120% of the applicable underpayment interest rate.
Ref. No. 221 posts to Master File and displays the literal "TX–MOTV–TRANS" .
Input Ref. No. 222 with TC 340 to identify the portion of the total interest assessment related to TMT.
The TC 340 amount will include the 120% TMT interest amount.
Interest accruals on the Ref. No. 222 amount must be manually computed.
Additional Ref. No. 222 amounts must be input to identify additional accruals of tax motivated interest until fully paid.
Include in the Ref. No. 222 amount the TMT interest associated with that adjustment up to the current adjustment date.
The Ref. No. 222 amount does not have to match the TC 340 amount being input.
The total TMT interest on the module will be the sum of all Ref. No. 222 amounts.
If Ref. No. 221 and 222 were previously omitted or incorrect, update the module by entering the reference number and appropriate amounts. Input these reference numbers with TC 290 or TC 300 for .00 and Hold Code 2. Include an explanation with the source document.
The 120% rate is used to compute interest on a tax motivated underpayment of tax. If the TMT tax is determined to be due to negligence or fraud (for applicable tax years), the 50% interest portion of the negligence or fraud penalty is computed using the 120% rate. See IRC 6653(a)(1)(B) and IRC 6653(b)(1)(B) prior to the 1989 tax law amendment.
Use the TMT interest rate to compute the 50% interest portion of the negligence or fraud penalty associated with the TMT underpayment. See IRM 18.104.22.168 for further details on how to compute the 50% interest portion of the negligence or fraud penalty.
After the penalties are assessed, normal interest rates apply to the interest accruals on the penalty amounts.
TMT interest is computed on all TMT tax assessments as of December 31, 1984. However, not all TMT tax assessments are subject to deficiency procedures per IRC 6212. The TMT tax may be assessed in some cases without a Notice of Deficiency (90-day letter).
Per PL 97–248, of the "Tax Equity and Fiscal Responsibility Act of 1982" (TEFRA), TMT assessments made under the provisions of IRC 6222 are not subject to deficiency procedures. A waiver is not obtained for these tax assessments (known as "TEFRA" assessments).
A waiver (referred to as an 870 agreement) may be obtained separately from the TEFRA tax assessment. The waiver suspension period applies to the penalties (see IRM 22.214.171.124, IRC 6601(c), Suspension of Interest on Deficiencies).
The total assessment may include TMT items that may or may not be TEFRA related, and may or may not have penalties. TEFRA related items can be identified in the administrative file or, after assessment, by the DLN associated with the Document Code 47 adjustment. The following blocking series, located in the ninth, tenth, and eleventh digits of the DLN, identify TEFRA assessments prior to January 1, 2007:
Use the following chart to determine if the waiver period may be applicable (this chart can also be used for non-TMT cases for tax years ending on or before August 5, 1997):
If the assessment is: Then a waiver suspension may apply: TEFRA tax only NO Non-TEFRA tax only YES Penalties only YES TEFRA tax and
TEFRA tax and
Non-TEFRA tax and
Non-TEFRA tax and
Partial payments must first be applied against any underpayments that are NOT due to tax motivated transactions. See Treasury Regulation 301.6621-2T, Q&A (11). Apply undesignated payments in the following order:
any penalties or fees;
non-TMT interest; then,
Because TMT tax is often assessed years later due to Tax Court decisions, or there may have been prior audit assessments paid prior to the TMT assessment, it may be necessary to recompute the module if there are open periods of collection on the prior assessments. When recomputing a module, payments previously used to pay TMT, interest and or penalties are reallocated in the order listed above (non-TMT tax, TMT tax, etc.). For interest computation purposes only, amounts previously used to pay assessed interest or penalties may, at a later date, be used to pay an additional tax assessment. This has the effect of reducing the amount of interest charged on subsequent adjustment(s) in most instances. However, when a non-TMT assessment follows a TMT assessment, the interest charges will generally increase after reallocation.
Payments are not reallocated from interest to tax for interest assessed prior to January 1, 1983, or if the CSED has expired on the prior assessment(s). Also, payments are not reallocated for purposes of determining an underpayment interest suspension period (e.g., a waiver period per IRC 6601(c), also called 870 waiver).
Interest is computed at the prevailing underpayment rate on the non-TMT tax and penalty assessment from the return due date (or extended due date for certain penalties) until 30 days after the waiver date. See IRM 126.96.36.199 for interest on penalties.
Interest is suspended from 31 days after the waiver date until the 23C date of the TC 300 assessment.
Interest continues to accrue on the principal plus interest accruals from the 23C date of the TC 300 assessment until paid.
A timely filed 198212 return is audited. The taxpayer agrees to the audit adjustment of $9,086 in tax and $1,452 for a substantial understatement penalty on December 13, 1989. The tax of $9,086 includes motivated tax of $7,260 and non-motivated tax of $1,826. The assessment is not made until May 28, 1990. He pays $21, 277.84 on July 2, 1990. In the figures below, interest is computed using CC COMPA and CC COMPAP. Separate interest computations must be done for the non-TMT tax and penalties from the TMT tax. Then the interest is combined.
Computing Underpayment Interest on non-TMT Tax using CC COMPA
Step Action 1. Using CC COMPA, compute interest at the prevailing underpayment rate on the non-TMT tax from the return due date to July 18, 1984, when interest on penalties became law.
04151983 07181984 1,826.00
Total Interest $293.06
2. Compute interest at the prevailing underpayment rate on the non-TMT tax plus accrued interest and on the substantial understatement penalty from July 18, 1984 to 30 days after the waiver date (January 12, 1990).
07181984 01121990 3,571.06 (1,826.00, plus 1,452.00, plus 293.06)
Total Interest $2,812.30
3. Compute interest on the principal plus the accrued interest (step 1 and 2) from May 28, 1990 (23C date) to the date of payment. Note: IRC 6601(c) waiver period is applicable. Interest is suspended from the 30th day after the waiver date to the 23C date of the assessment.
05281990 07021990 6,383.36 (3,571.06 plus 2,812.30)
Total Interest $67.68
4. The payment of $21,277.84 is allocated per 188.8.131.52, Payment Allocation and Reallocation. Tax, penalty and interest are partially paid as of July 2, 1990. Add together the "total interest" amounts from step 1 through step 3 to arrive at the total interest associated with the non-TMT tax underpayment and the penalty.
$3,105.36 plus $67.68 equals $3,173.04
The following figure illustrates the example in IRM 184.108.40.206.5.1 for the TMT interest computation using CC COMPA and CC COMPAP.
Computing TMT Interest using CC COMPA and CC COMPAP
Step Action 1. Use CC COMPA to compute interest at the normal underpayment rate on the TMT assessment from the RDD to December 31, 1984 (the effective date for TMT interest).
04151983 12311984 7,260.00
Total Interest $1,596.18
2. Use CC COMPAP to compute TMT interest on the total principle plus accrued interest as of December 31, 1984 to 30 days after the waiver date.
12311984 01121990 8,856.18 (7,260.00 plus 1,596.18)
Total Interest $7,891.07
3. Compute interest from the 23C date of the assessment to the payment date on the TMT underpayment principle plus the accruals of TMT Interest as of 30 days past the waiver date.
05281990 07021990 16,747.25 (8,856.18 plus 7,891.07)
Total Interest $213.29
4. The payment of $21,277.84 is allocated per IRM 220.127.116.11, Payment Allocationand Reallocation. Non-TMT tax, penalty and interest (including the normal interest computed on the tax motivated assessment as of December 31, 1984) are partially paid as of July 2, 1990. Add together the "total interest" amounts from step 2 and step 3 to arrive at the total TMT interest associated with motivated tax as of July 2, 1990.
$7,891.07 plus $213.29 equals $8,104.36.
If using ACT/DMI to compute interest, assign the amounts that are subject to TMT including any prior refunds (if applicable) by changing the transaction type under the "Adv" tab to "Motivated " . This may also be accomplished by changing the transaction subject to TMT interest to "Code 1001" . Review reports to ensure the proper results are achieved.
Using the same example, determine the remaining balance as of the payment date. Subtract from the payment, the tax, penalty, and interest liabilities. The total underpayment as of July 2, 1990, is $2,133.71.
Amount Type (tax, penalty, interest, or payment) ($21,277.84) — Payment 1,826.00 — non-TMT tax 7,260.00 — TMT tax 1,452.00 — Substantial understatement penalty 3,173.04 — Normal interest non-TMT tax & penalty 1,596.18 — Normal interest/TMT tax 8,104.36 — TMT interest $2,133.74 — Module Balance as of July 2, 1990
Because all of the non-TMT liabilities have been paid, the remaining balance is unpaid TMT interest. Using CC COMPAP, compute TMT interest on the remaining balance from July 2, 1990, to the pay-off date requested by the taxpayer. If using ACT/DMI, recompute the entire module making sure to assign the TMT interest rate to those items subject to TMT (see IRM 18.104.22.168.5.2, above).
Interest on the substantial understatement penalty starts on the return due date, extended due date or July 18, 1984, whichever is later. When using ACT/DMI, all previously issued refunds (up to the amount of the TMT tax) must be annotated as TMT to ensure the ACT/DMI program accurately computes the TMT interest amount.
Applies to corporate returns filed prior to January 1, 1983. The privilege of paying corporate income tax in installments without additional interest was repealed for tax years beginning after December 31, 1982.
See revision dated 2-4-2015, if needed.
Consider the following special rules for the due date of payments for Form 2290, Heavy Highway Vehicle Use Tax Return, jeopardy assessments, accumulated earnings tax, and penalties.
See IRM 22.214.171.124.10, Heavy Highway Vehicles, or IRM 126.96.36.199.2, Form 2290, Heavy Highway Vehicle Use Tax Return, for instructions for Form 2290. Beginning July 1, 2005, the installment privilege was eliminated. The installment payment line on Form 2290 was deleted. Tax must be paid in full with the filing of Form 2290. Otherwise, penalties and interest will accrue on the unpaid balance (IRM 188.8.131.52.2.5.1, Balance Due Payment).
In the case of a jeopardy assessment, notice and demand for payment is issued immediately [IRC 6861(a)]. The due date for payment of the assessment is the date of the notice and demand.
The due date of accumulated earnings tax (IRC 531) is the due date of the income tax return, determined without regard to extensions. For returns due before January 1, 1986, the accumulated earnings tax was due on notice and demand.
Underpayment interest is computed on penalties from the due dates set forth in IRM 184.108.40.206.
Disregard any extension of time for filing the return or any installment agreement entered under IRC 6159 when determining the due date for payment of the above liabilities.
Procedures for interest on Form 8752, Required Payment or Refund Under IRC 7519, can be found in IRM 220.127.116.11, Form 8752, Required Payment or Refund Under IRC 7519.
Procedures for interest on the trust fund penalty can be found in IRM 18.104.22.168.8.1, Interest on TFRP.
IRC 1363(d)(2) applies when a C corporation elects to become an S corporation. It provides that the payment of tax related to the last-in first-out (LIFO) recapture is due in 4 equal installments. The first installment shall be paid by the due date of the return for the last year as a C corporation and the 3 succeeding installments shall be paid by the due date for the S corporation return for the 3 succeeding taxable years. There is no interest charge for the period of extension. There is no interest charge provided payments are made by the installment due date.
When a payment is refunded from the unidentified remittance account, no interest is allowed.
When a payment from the unidentified account is correctly identified and applied to a tax module, it is treated the same as any other payment on the module. Normal underpayment and overpayment interest rules apply.
To ensure correct interest computations, always apply a payment from the unidentified remittance account using the payment received date.
IRC 6402(a) permits the IRS to credit a taxpayer’s overpayment to his or her outstanding liability. In order to be "outstanding," a liability must be unpaid.
Generally, when manually offsetting, use transaction code (TC) 820/700. See IRM 22.214.171.124, Offsets, regarding overpayment interest.
An offset can’t be applied until a determination of liability has been made, which means it will never be earlier than the due date of the receiving module, unless a termination assessment has been made. Otherwise, penalties could erroneously be reduced. See IRM 126.96.36.199.2(2), Rules for Applying Offsets Under Section 6402, for exceptions.
When offsetting overpayments that include estimated tax payments, do not use TC 662/660, unless the estimated payment was actually applied to the wrong taxpayer or year. This includes any payment (e.g., TC 640, 670, 680, etc.) on the module.
If an overpayment is applied to an outstanding tax liability, compute underpayment interest from the due date of the liability to the availability date of the overpayment. Underpayment interest stops as of the credit availability date on any portion of a liability satisfied by credit of an overpayment.
Compute underpayment interest on a liability satisfied by an offset of a credit with an availability date that is later than the liability due date as follows:
Using a current TXMOD or Master File transcript, compute a running module balance on the liability from the due date of the tax to the date the credit is available.
Apply the offset as a payment on the credit availability date. The offset credit is to be treated the same as a payment in regards to notice grace periods. See IRM 188.8.131.52, above. The earliest available credit is always offset first, regardless of the year (prior or later) it is offset to.
Continue underpayment interest to the applicable interest computation ending date: waiver date plus 30 days (if applicable), payment date, or 23C date, whichever is appropriate.
Whenever possible, offset overpayments in a manner that will not create overlapping underpayment and overpayment interest periods. This is done to avoid creating a net rate interest netting situation.
No underpayment interest is charged on a liability (up to the amount of the credit) that is fully satisfied by an offset credit dated earlier than the liability due date.
If the original payment that created the offset is returned due to "insufficient funds," then the offset needs to be manually reversed, including any allowable interest. Otherwise, the taxpayer is erroneously receiving credit for the payment on another module. See IRM 184.108.40.206.2(5), Rules for Applying Offsets Under Section 6402, for more information.
A liability of one taxpayer may be paid by the overpayment of another taxpayer at the overpaid taxpayer’s request. Research may be needed to determine if it is the same or a different taxpayer. For corporate returns, it will depend on if they were the same corporation during the tax years to and from which the payments are being applied.
Corp A has an overpayment for 2009; Corp B has an underpayment for 2010. A and B merge in 2011 with A surviving. If A’s overpayment is used to satisfy B’s underpayment, it would be considered a liability paid by a different taxpayer.
Corp C has an overpayment 2009; Corp C and Corp D merge with C surviving in 2010; C has an underpayment in 2011. C’s 2009 overpayment is applied to C’s 2011 underpayment. This would be an offset, not a liability paid by a different taxpayer.
Compute underpayment interest on the liability satisfied by the offset of the credit as follows:
Using a current TXMOD or Master File transcript, compute a running module balance on the liability from the due date of the tax to the date the offset is applied.
Apply the offset as a payment using the current 23C date.
Continue underpayment interest to the applicable ending date. This will be the earlier of: the waiver date plus 30 days (if applicable), payment date, or 23C date.
John and Jane Smith file a joint return for 201012 showing an overpayment. Rather than getting the refund sent to them, they request that it be applied to their son, Fred Smith, who still owes on his 200912 return. Even though the overpayment is available on April 15, 2011, the effective date will be the date the payment gets transferred, which is usually the current 23C date. If the 23C date is November 7, 2011, then the overpayment will be offset using November 7, 2011 as the availability date of the credit.
• Underpayment interest is computed on Fred Smith’s liability from April 15, 2010, to November 7, 2011 (the current 23C date), when John and Jane Smith’s overpayment (with interest) is applied.
• Overpayment interest is computed on John and Jane Smith's overpayment from April 15, 2011, to November 7, 2011, when the overpayment will be transferred to Fred Smith's liability.
• The overpayment will be offset with TC 820 and TC 700, while the interest will be applied using TC 850 and TC 730.
• If Fred Smith’s liability is not totally satisfied, underpayment interest will continue to accrue on the balance until it is fully paid.
For Non-Mirrored spousal assessments made on MFT 31, the related MFT 30 needs to be analyzed to determine if interest needs to be manually computed. None of the normal indicators, such as disasters, combat zone, filing extensions, etc. are mapped over to the MFT 31 module. Thus, if these apply, in addition to refunds with or without interest and other restricted interest reasons, interest needs to be manually computed. See IRM 220.127.116.11.1, Reasons to Manually Compute Interest, for a list of some of the reasons interest must be manually computed. Most of the time a non-restricting TC 340 can be used. See IRM 18.104.22.168.3, Non-Restricting Transaction Code (TC) 340.
For returns showing an extension was filed, a TC 460 can be input directly onto MFT 31 using DLN 10, so that interest doesn’t need to be manually computed. Interest on certain penalties, such as accuracy-related, start from the extended due date. Without a TC 460 on the module, systemic interest will start on these penalties from return due date, rather than from the extended due date.
For more information on MFT 31, see IRM 21.6.8, Split Spousal Assessments (MFT 31 / MFT 65).
After March 23, 2011, TC 971 AC 102 indicates the module is a restitution-based assessment (RBA).
The statutory period of limitations for filing a claim for refund of overpaid underpayment interest is two years from the date of the payment or three years from the time the return was filed, whichever is later. See IRM 22.214.171.124.2.7, Claims for Credit or Refund-General Time Period for Submitting a Claim. The amount of credit or refund may not exceed the portion of the tax paid within the period immediately preceding the filing of the claim equal to 3 years plus the period of any extension of time for filing the return. Prepaid credits are considered paid on the return due date for this purpose. See IRC 6511.
If a consent (Form 872) to extend the Assessment Statute Expiration Date (ASED) is secured, the period for filing a claim for refund of overpaid underpayment interest is also extended six months from the new ASED. The amount of credit or refund may not exceed the portion of the tax paid after the execution of the agreement and before the filing of the claim, as well as the portion of the tax that would have been open under the two or three year statute periods, if a claim had been filed on the date the agreement was executed.
For rules concerning the statute of limitations, see IRM 25.6.1, Statute of Limitations Processes and Procedures.
Agreed cases closed by Exam via a Form 906, Closing Agreement on Final Determination Covering Specific Matters, do not receive an interest suspension period under IRC 6601(c) (often referred as the "870 waiver suspension" ). The form by itself doesn’t constitute a waiver. See IRM 8.13.1, Processing Closing Agreements in Appeals, for more information on interest and waivers on closing agreements.
A Form 870 or Form 870-AD is also received and accepted before the closing agreement is approved and is not conditional upon the execution of the closing agreement.
Form 906 includes a statement that the taxpayer is entitled to a suspension of interest under IRC 6601(c).
Delinquent returns when the TC 150 is a Substitute for Return (SFR). Starting in 2017, assessing the delinquent return will require either a TC 300 with Disposal Code (DC) 08 or TC 290 with no TCB date. This is needed in order to prevent an erroneous suspension of interest. Delinquent returns closed in Appeals can continue to use DC 03 with no agreement date. However, signed agreements (e.g., Form 870, Form 4549) will follow normal closing procedures. These agreements are treated the same as any other agreements for interest purposes. As such, they will need to be expedited if the deficiency is over $100,000 and not fully paid. See IRM 126.96.36.199, IRC 6601(c), Suspension of Interest on Deficiencies.
For TEFRA adjustments with return due dates ending on or before August 5, 1997, see IRM 188.8.131.52.4.
Amended returns filed by the taxpayer showing additional tax due.
Taxpayer Book, Inc., 33-1111111, timely filed with an extension and paid Form 1120 for tax periods ending December 31, 2008, and December 31, 2009. Each period had overpaid estimated tax payments, which the taxpayer elected to have credited to their respective succeeding tax periods.
Subsequently, on June 23, 2010, the taxpayer submitted an amended tax return for 200812, which resulted in a tax assessment of $521,886. The amended return included a payment of $540,000.
After receiving a notice for additional interest of $7,594.70, the taxpayer requested that Rev. Rul. 99-40 be applied.
Using TXMOD information, Form 2220, and the chart shown on the following page, we determined that the taxpayer can apply Rev. Rul. 99-40 as follows:
|Credit elect used on 9/15/2009||-246,913.50|
|Credit elect not used until 3/15/2010||-214,472.50|
|Balance of underpayment||60,500.00|
Underpayment interest starts as follows
Underpayment interest starts on the underpayment in excess of the credit elect on the return due date.
The application of Rev. Rul. 99-40 may not extend the underpayment interest start date past the return due date of the succeeding tax period.
TXMOD of Assessed Tax Period
TXMODA 33-1111111 MFT 02 TX-PRD 200812 NM-CTRL<BOOK
|460||03152009||0.00||Ext Dt 09152009|
TXMOD of Subsequent Tax Period
TXMODA 33-1111111 MFT 02 TX-PRD 200912 NM-CTRL<BOOK
|460||03152010||.00||EXT DT 09/15/2010|
|ADJ54 xxx-xx-xxxxMFT<30PLAN<000TX-PRD<xxxx12 NM-CTRL<NCNC|
|DB-INT-TO-DT<03182012 ---------------------COMP-INT-AMT<23,456.89 --------------------------OTN<|
|***************** ITEM-REF-CDS/ABST-CDS/CR-REF-CDS/FUTA-STATE-CD/DRI-CD ****************|
|CIS-IND<---------SOURCE-DOC-ATTACHED?<Y REMARKS<SD ADJUST INT & PNLT<|
|Interest Computation Part of the Penalty|
|•||For tax returns due after December 31, 1981, interest for purposes of the additional 50% interest component [provided by IRC 6653(a)(2), Negligence Penalty], begins to accrue on the return due date (determined without regard to an extension) through the payment date, 23C date or waiver plus 30 days, whichever is earlier. Between December 31, 1981, through September 3, 1982, there was no provision for the additional 50% interest component attributable to fraud.|
|•||For tax returns due after September 3, 1982 through December 31, 1988, interest for purposes of the additional 50% interest component (provided by IRC 6653(b)(2), Fraud Penalty), begins to accrue on the return due date (determined without regard to an extension) through the payment date, 23C date or waiver plus 30 days, whichever is earlier.|
|•||The 50% interest component must be adjusted if any portion of the negligent or fraudulent tax is abated.|
|•||Once assessed, interest on the penalty amount is computed from the 23C date of the tax and penalty assessment. Effective December 31, 1986, IRC 6653(a)(2) was renumbered to IRC 6653(a)(1)(B) and IRC 6653(b)(2) was renumbered to IRC 6653(b)(1)(B).|
|•||For returns due after December 31, 1988, the additional 50% interest component was repealed.|