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Part 20. Penalty and Interest

Chapter 2. Interest

Section 5. Interest on Underpayments

20.2.5  Interest on Underpayments

20.2.5.1  (03-01-2002)
Underpayment Interest Overview

  1. Debit interest, at the underpayment rate established under IRC section 6621, is charged on an outstanding liability from the due date of the UNPAID liability to the date fully paid.

    1. The rate is set quarterly.

    2. Special rules apply for large corporate underpayments and tax motivated transactions (TMT).

    3. See Lem 20.2.

20.2.5.2  (03-01-2002)
Statutory Period for Assessment and Collection of Interest

  1. Interest may be assessed and collected at any time during which the ta07-31-2001 to which it relates may be collected. IRC section. 6601(g).

  2. Generally, taxes assessed after November 5, 1990 must be collected within 10 years after date of assessment (Collection Statute Expiration Date (CSED)), IRC section. 6502(a). See IRM 25, Statute of Limitation, Collection, for additional information on CSED.

  3. Prior to November 5, 1990, the statutory period for collection was six years.

  4. The statutory period of limitations for filing a claim for refund of overpaid debit interest is generally two years from the date of the payment or three years from the return due date. See IRM 25, Statute of Limitation, Claims, Abatements and Refunds, for additional information on Refund Statute Expiration Date (RSED).

    Exception:

    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 interest is also extended six months from the new ASED.

20.2.5.3  (03-01-2002)
Interest on Penalties and Additions to Tax

  1. With the exceptions of (2) through (5) below, penalties (including penalties referred to as "additions to tax" ) are due on the date of notice and demand (IRC section 6601(e)(2)(A)), which is the assessment date or "23C" date. Therefore, interest is computed and assessed on penalties from the assessment date.

  2. Interest on the following penalties is due from the due date of the related return (RDD), the extended due date, or July 18, 1984, whichever is later. (Use 07181984 as start date on CC COMPA). This change is effective for interest accrued after July 18, 1984, with respect to penalties assessed on or after July 18, 1984 (IRC section 6601(e)(2)(B)). If assessed before July 18, 1984, use the 23C date of the assessment as the interest start date.

    Note:

    For returns due after December 31, 1989, refer to (5).

    • IRC section 6651(a)(1), Failure to File Penalty (TC 16X)

    • IRC section 6659, Gross Valuation Overstatement Penalty (TC 240, Reference Number 680)

    • IRC section 6660, Valuation Understatement Penalty for purposes of estate or gift taxes (TC 240, Reference Number 682)

    • IRC section 6661, Substantial Understatement Penalty (TC 240, Reference Number 681)

    • When IRC section 6651, 6659, 6660, and 6661 penalties have been asserted due to the recapture of carryback allowances, 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 an extension is later reversed, as shown by TC 462 (Correction of a TC 460 Transaction Processed in Error), compute interest on the penalty from the original return due date or from July 18, 1984, whichever is later.

  3. TC 240 (Miscellaneous Penalty), penalties assessed on civil penalty modules (MFTs 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.—IRC section 6676(d)(1)(B) and IRC section 6724(c)(3)(B)

    Note:

    IRC section 6676 was repealed for returns and statements, if the due date is after December 31, 1989.

  4. Effective for returns with due dates after December 31, 1988 (without regard to extensions) interest is computed on the Fraud Penalty (TC 320) or Negligence Penalty (TC 350) from the due date or extended due date. whichever is later,

    • Interest on penalties asserted due to the recapture of carryback credits begins on the due date of the loss year return or the extended due date, whichever is later. With these adjustments, penalty and interest must be manually computed and restricted by input of TC 340.

  5. For returns due after December 31, 1989, (without regard to extension), interest on the Accuracy Related Penalty (IRC section 6662) is computed from the due date or extended due date, whichever is later, of the related return.

    If Then
    The extension is later reversed, as shown by TC 462 Interest is computed from the original return due date. This penalty is assessed or abated with Reference Number 680.
    The penalty posts to Master File TXMOD reflects TC 240 along with the reference number.

  6. Interest on the Fraudulent Failure to File Penalty (IRC section 6651(f)) is computed from the due date of the related return or extended due date, whichever is later, for returns due on or after December 1, 1989 (not including extensions).

  7. Interest is computer generated on penalty assessments according to the above rules. Do NOT manually compute and assess interest on the above penalties unless a manual restriction of interest is necessary for some other reason.

  8. See Exhibit 20.2.5 - 1., Interest on Penalties, shows how the interest rules described above are applied. Since the late filing penalty (TC 166) is one of the penalties assessed as of the return due date, it posts with that date as its 23C date. It is placed in CC DINCOMP screen just under the TC 150 and is assigned the date of 04301993 as its interest start date.

    1. For Failure to Pay Penalty (FTP) (TC 276), interest begins on the assessment date (the 23C date) of the posting cycle. The DINCOMP Display shows how FTP penalty was inserted into the computation according to the 07191993 assessment date.

    2. See Exhibit 20.2.2–1, Return Due Date Chart.

20.2.5.4  (03-01-2002)
Notice and Demand and Debit Interest

  1. Once notice and demand is issued, the taxpayer has a limited amount of time to pay the amount shown before additional interest is charged.

    1. For notice and demand issued before January 1, 1997, if the amount shown on the notice is paid within 10 days, additional debit interest is not computed.

    2. 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.

  2. See LEM 20.2

  3. Compute debit interest only when a liability is both due and unpaid.

  4. Taxpayers are required to pay the tax due on or before the due date of the return. See Document 6209, Section 2 for the due dates of filing various returns.

  5. 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

20.2.5.5  (03-01-2002)
Application of IRC section 7503 in Interest Computations

  1. A liability must be paid on or before the due date to avoid debit interest accruals.

    Exception:

    IRC section 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.

    Caution:

    IRC section 7503 does NOT prescribe a new due date. However, the application of IRC section 7503 may relieve the taxpayer of the liability for penalty for late filing and payment.

  2. Any authorized extension of time shall be included in determining the last day for performance of any act under IRC section. 7503.

    If the liability is Then
    Paid in full by the following FIRST WORKDAY NO interest is charged
    NOT paid in full by the following FIRST WORKDAY Charge interest:
    FROM: actual due date
    TO: date of full payment

20.2.5.6  (03-01-2002)
Suspension of Interest on Deficiencies

  1. Cases closed by Examination, Appeals, or SFR often contain waivers of the restrictions of assessment and collection of deficiencies (Forms 870, 870–AD and 890) signed by taxpayers. See IRM 20.2.9.7 for instructions for computing interest on tax modules with 870 waiver periods.

20.2.5.7  (03-01-2002)
Revenue Ruling 99–40 (Formerly Revenue–Ruling 88–98) Use of Money

  1. In Avon Products Inc. v. United States: 588 F.2d 342 (2d Cir. 1978) the court interpreted IRC Section 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 either

    1. A refund without allowable interest in issued, and/or

    2. An overpayment is applied to a succeeding tax period as a credit elect.

20.2.5.7.1  (03-01-2002)
Rev. Rul. 99–40 and Refunds

  1. If a refund was issued without interest, compute interest on a subsequent underpayment using a current TXMOD or Master File transcript as follows:

    1. Compute a running module balance including the subsequent underpayment from the return due date to the availability date of the amount refunded.

    2. Suspend underpayment interest on the amount of the refund or the module balance whichever is less from the availability date to the date of the refund.

    3. Resume interest on the full module balance including the amount suspended for the refund.

    Note:

    Refunds given WITH credit interest are covered in Chapter 23.

20.2.5.7.2  (03-01-2002)
Rev. Rul. 99–40 and Credit Elects (May/Sequa)

  1. 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 failure to pay estimated income tax penalty under IRC sections 6654 or 6655 for that year.

    Note:

    Transaction Codes 830/836 identify the credit elect amount on the overpaid module and Transaction Codes 710/716 identify the credit elect amount on the subsequent year tax module.

  2. If a subsequent underpayment is assessed on a tax module with credit elect to a succeeding tax period, the taxpayer may request interest be computed according to Rev. Rul. 99-40. Employees may receive such requests on Form 843 or informal claims. There is no requirement that such requests be filed on Form 843. These claims/requests impact both IMF and BMF returns for which estimated tax payments are made.

    1. If the claim also requests an adjustment to tax, existing claim procedures will be followed (CAT A, etc.).

    2. If the taxpayer already has an open/active account on AIMS or IDRS, the claim will be routed for association.

    3. Claims/requests involving restricted interest are only sent to Appeals when:

      1. The claim/request year is open in Appeals.

      2. The claim/request has been disallowed and the taxpayer requests the case be sent for Appeals consideration.

  3. Once it is determined that there is a underpayment in tax in a year for which the taxpayer made a credit elect, determine whether the credit elect was needed to avoid failure to pay estimated tax penalty for the succeeding tax period. The following information is needed to make this determination:

    1. when the tax became overpaid,

    2. what, if any, payments of estimated tax the taxpayer made for the succeeding tax period,

    3. estimated tax liability for each installment period based on the taxpayer's required installments of estimated tax for purposes of section 6654 or section 6655.

      Note:

      Benefit is allowed even if there is a penalty for failure to make timely estimated tax payments on the succeeding tax period.

      Example:

      There is a $10,000 estimated tax payment due for the first installment and the taxpayer paid $2,000 and had a credit elect for $5,000. The estimated tax penalty would be on the faiure to pay $3,000, but the taxpayer would still recieve the benefit of $5,000 in an underpayment interest calculation.

  4. This information can be found on the TXMOD or Master File transcripts of the taxpayer's account for the underpayment and succeeding tax period, and the taxpayer's return for the succeeding period, including Form 2220, Underpayment of Estimated Tax by Corporations; Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts; or Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman.

  5. Using the information described in 3 and 4 above, determine the amount of each of the taxpayer's required installments of estimated tax for the succeeding year. See IRC sections 6654(d) and 6655(d) or (e).

    If Then
    The required installment is equal to or less than the amount of timely estimated tax payments made on or before the due date of that installment period, The credit elect amount is not needed and the taxpayer is not liable for underpayment interest on the credit elect amount to the due date of the installment
    The required installment exceeds the amount of all timely estimated tax payments made on or before the due date for that installment. The credit elect (or a portion thereof) is needed and underpayment interest begins on the due date of the installment on the lesser of the underpayment, the installment amount, or portion of the installment.
    The required estimated tax is equal to or less than the amount of timely estimated tax payments made on or before the return due date. The credit elect amount is not needed and the taxpayer is not liable for underpayment interest on the credit elect amount prior to the return due date of the succeeding tax period

  6. Compute interest on the subsequent underpayment as follows:

    1. Using current TXMOD or Master File information compute a running module balance

    2. Suspend underpayment interest on the lesser of the credit elect or underpayment amount from the return due date to the date of the estimated tax payment to which it is applied.

    3. Resume interest on the module balance plus underpayment that is less than or equal to the estimated tax payment.

    4. See Exhibit 20.2.5 - 3.for an example of Rev-Rul 99-40.

20.2.5.7.3  (03-01-2002)
Credit Elects and Employment Tax

  1. Compute interest on overpayments treated as credit elects on Employment tax cases as follows:

    If a subsequent assessment is made and Then compute underpayment interest
    An employment tax overpayment is applied to the next period On the originating employment tax period
    FROM: due date of next period
    TO: date of full payment

  2. Example: An employer elects to apply an employment tax overpayment from a timely filed Form 941 from the first quarter return period to the second quarter return period. Later, there is a subsequent assessment made on the first quarter return.

    • The overpayment from the first quarter is considered available as of April 30.

    • Credit is posted as of April 30 to the second quarter, without interest.

    • Compute debit interest on the first quarter subsequent assessment
      FROM: second quarter RDD (July 31) TO the 23C date or date of payment, whichever is earlier.

20.2.5.7.4  (03-01-2002)
Rev. Rul. 99–40 and Carrybacks

  1. 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, debit 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.

  2. Compute underpayment interest on the subsequent assessment as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on interest from the due date of the tax to the date the carryback is available.

      Note:

      For interest accruing for periods prior to October 4, 1982, the date the carryback is available is first day after the end of the loss year or the date the tax was paid, whichever is later.

    2. Suspend interest on the lesser of the module balance or the carryback amount on the carryback availability date.

    3. Resume debit 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, whicgever is earlier.

  3. See IRM 20.2.10 for rules concerning reassessments of erroneous carryback allowances.

  4. Effective for adjustments posting in cycle 198909 and later, debit interest is systemically computed in refund situations under the above rules if the module is not restricted. Do not unnecessarily restrict a tax module.

20.2.5.8  (03-01-2002)
Large Corporate Underpayment

  1. Effective January 1, 1991, the debit interest rate was increased two percentage points (above the prevailing underpayment rate) for "C" Corporations (includes corporate income, employment and excise tax returns) when:

    1. The notice of underpayment or proposed deficiency (or the assessment of the proposed deficiency) is greater than $100,000 (determined without regard to interest, penalties, or additions to the tax), AND

    2. the balance due is not paid within 30 days of the date of notice and demand if deficiency procedures do not apply, OR

    3. 30 days from the date the taxpayer was notified of a proposed deficiency of tax by either a 30/90–Day Letter (whichever is earlier).

      Exception:

      See Section 5.8.5.for start dates prior to December 31, 1997.

    Note:

    "C" Corporation is any BMF taxable entity with a significant Form 1120 filing requirement (except Form 1120S), and any BMF taxable entity without a significant Form 1120 filing requirement, but having an Exempt Organization Section present with a Corporate Indicator.

20.2.5.8.1  (03-01-2002)
Threshold

  1. The "2% Interest" threshold amount is $100,000. Once $100,000 is exceeded and the other criteria mentioned above are met, the additional 2% interest applies.

  2. The threshold refers to the underpaid tax (TC 150, TC 29X and/or TC 30X) for a single tax period.

    Caution:

    DO NOT INCLUDE interest, penalties, or additions to tax to determine the threshold.

  3. If the $100,000 threshold is exceeded, compute the additional 2% interest on the total liability (including interest, penalties and additions to tax) from the "applicable" date for beginning 2% interest.

20.2.5.8.1.1  (03-01-2002)
Consideration of Payments

  1. Do NOT apply the additional 2% interest if the liability is paid within 30 days of the date of the notice or the date of a 30/90 Day Letter. See LEM 20.2

  2. Cash bonds are not considered for purposes of determining whether the underpayment (shown in the notice or letter) is paid within 30 days.

    Example:

    The taxpayer has a threshold underpayment that exceeds $100,000 and submits a cash bond. The taxpayer is subject to the additional 2% interest, because the cash bond is not considered as payment of the liability.

  3. To avoid the additional 2% interest, all of the tax, penalty, interest and additions to tax must be paid within 30 days of the notice or 30/90 Day Letter.

    If the threshold is met Then
    and the total liability, including interest, penalty and additions to tax, is paid within 30 days of the notice or 30/90 Day Letter The additional 2% interest does NOT apply
    and the total liability, including interest, penalty and additions to tax, is not paid within 30 days of the notice or 30/90 Day Letter Assess additional 2% interest on the total liability from the applicable date.

    Example:

    A math error was made on an original 1995 Form 1120 which resulted in a bill for $50, that was not paid. One year later, an audit assessment resulted in a deficiency of $99,951. The additional 2% interest rate applies to interest accruing for the underpayment period ending on or before December 31, 1997.

    • The Form 1120 is a "C" Corp.; AND

    • The threshold underpayment amount was exceeded, $100,001 ($99,951 + $50),

    • The first underpayment of tax ($50) was not paid within 30 days of notice and demand, AND

    • The interest period ends on or before December 31, 1997.

20.2.5.8.2  (03-01-2002)
Start Date for Additional 2% Interest

  1. The date of the 30–Day Letter, date of notice of deficiency (90 day letter) or the date of notice and demand is known as the "notice" date.

  2. The earliest notice date is used for purposes of determining when the additional 2% interest starts. The notice dateplus 30 days is referred to as the "applicable" date.

    Example:

    If a taxpayer does not pay the amount shown within 30 days of the first notice, and subsequently another notice is issued, the "applicable" date remains the earliernotice date plus thirty days.

20.2.5.8.3  (03-01-2002)
Master File and Additional 2% Interest

  1. Generally, Master File programming can not systemically compute the additional 2% interest. These modules must be manually computed and updated.

20.2.5.8.4  (03-01-2002)
Application of 2% Interest

  1. Once it is determined that additional 2% is to be charged;

    1. Using a current TXMOD or Master File transcript, compute a running module balance from the return due date to the day after notice date plus thirty days (applicable date).

    2. Compute debit interest, including the additional 2% interest, starting from the applicable date to the payment date, W+30 date (if applicable), or 23C date, whichever is appropriate.

  2. If the taxpayer is liable for 120% TMT deficiency interest and 2% interest, compute deficiency interest by adding 120% to the additional 2% interest rate.

20.2.5.8.5  (03-01-2002)
Special Application of 2% Interest for Periods Before and After December 31, 1997.

  1. Prior to December 31, 1997, an unpaid notice for any amount would activate the additional 2% for large corporate underpayments if the other criteria were met. After December 31, 1997, the notice must show an amount of $100,000 or greater. Because of this, special consideration must be made.

  2. If the notice activating the increased rate prior to December 31, 1997 was for less than $100,000, the increased rate is not assessed after December 31, 1997.

  3. It is possible to have a second notice for $100,000 or more activate the additional 2% rate after December 31, 1997 after a first notice of less than $100,000 activated the increased rate before December 31, 1997. In this case, there would be two "applicable" dates for the start of the increased rate. One prior to December 31, 1997 with the increased rate ending on that date and the other after December 31, 1997 with the increased rate resuming on the new "applicable " date.

20.2.5.9  (03-01-2002)
Corporate Installment Payments, Form 7004 (1982 and Prior)

  1. Prior to January 1, 1983, the taxpayer was considered to have elected to pay tax in installments if Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return was timely filed and at least one-half of the tax shown on Form 7004 was paid.

  2. When the tax was allowed to be paid in installments, the due date of the tax was the same as the date of the installment and interest is not charged if the tax was timely paid.

    1. If the additional tax paid with the return was not less than one-half the estimated tax on Form 7004, no interest is due on the installment.

    2. If the actual tax is less than the estimated tax shown on Form 7004 and a subsequent assessment is made, the taxpayer may be able to claim the unused installment privilege on all or part of additional tax.

  3. For tax years beginning after 1982, the privilege of paying corporate income tax in installments was repealed. Compute interest from the return due date for tax periods beginning after December 31, 1982, without regard to extensions on Form 7004.

20.2.5.9.1  (03-01-2002)
Form 7004 (1982 and Prior) Installment Computations

  1. If an installment was not timely paid, interest is charged from the installment due date until the tax is paid

  2. Interest is charged on amounts due that are not included on the return or Form 7004 from the due date of the return until the date of payment.

  3. If the installment privilege was taken and a deficiency is assessed, the deficiency amount is prorated to the installments. Interest is charged from the due date of the first installment to the date of payment. IRC section 6152(c). See Figure 20.2.5.8-1.for computing the allowable installment privilege on deficiencies.

  4. If the tax module indicates that the taxpayer defaulted but a timely installment payment is found and applied, Master File will re-analyze the module. If the payment satisfies an earlier installment and the module is still in default for later installments, Master File will compute penalties and interest for the later installment.

    Figure 20.2.5-1

    Installment Privilege for Corporations 1982 and Prior
    1. Enter TC 620 Memo amount from transcript
    ___________
    2. Enter Prepaid credits prior to filing of Form 7004

    ___________
    3. Line 1 minus Line 2.

    Note:

    If less than zero, no privilege is extended.



    ___________
    4. due with Form 7004. (1/2 of Line 3.)
    ___________
    5. Paid with Form 7004 (TC 620 with credit amount from transcript should equal Line 4; may not be less than Line 4.)



    ___________
    6. Second Installment (Line 3 minus Line 5. If Line 5 is greater, no privilege remains.)


    ___________
    7. Tax per transcript, including original tax and subsequent assessments. Do not include carryback amounts.



    ___________
    8. Tax remaining. (Line 1 minus Line 7. If Line 7 is greater, no privilege remains.)



    ___________
    9. Installment privilege available for this assessment. (Lesser of Line 6 and Line 8.)


    ___________

20.2.5.10  (03-01-2002)
Special Rules for Determining Due Date of Payments

  1. Consider the following special rules for the due date of payments for Form 2290 Heavy Vehicle Use Tax Return, Jeopardy Assessments, Accumulated Earnings Tax, and Penalties.

    1. See IRM 21.7.8.4.22.13 for instructions for Form 2290 and installment payments.

    2. In the case of a jeopardy assessment, notice and demand for payment is issued immediately (IRC Section. 6861(a)). The due date for payment of the assessment is the date of the notice and demand.

      Caution:

      Taxpayers normally have 21 calendar days from the notice date, or 10 business days if the amount due is over $100,000, to pay the amount shown on a notice.

    3. The due date of Accumulated Earnings Tax (IRC Section 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.

    4. Debit interest is computed on penalties from the due dates set forth in IRM 20.2.3.

  2. Disregard any extension of time for filing the return or any installment agreement entered under IRC section. 6159, when determining the due date for payment of the liability.

20.2.5.11  (03-01-2002)
Unidentified Remittance Account Payments

  1. When a payment is refunded from the Unidentified Remittance Account, no interest is allowed.

  2. 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 debit and credit interest rules apply.

  3. To assure correct interest computations, always apply a payment from the Unidentified Remittance Account using the payment received date.

    Note:

    If an amount from the unidentified payments account is returned to the taxpayer because the taxpayer establishes that it was sent in error, no interest is allowed.

20.2.5.12  (03-01-2002)
Debit Interest on Liabilities Paid by Offset

  1. IRC section 6402(a) permits the Service to credit a taxpayer’s overpayment to his/her outstanding liability.

    Note:

    In order to be "outstanding" the liability must be unpaid.

  2. Debit interest stops on any portion of a liability satisfied by credit of an overpayment, as of the credit availability date.

  3. Compute debit interest on the liability satisfied by an offset of credit as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on interest from the due date of the tax to the date the offset is available.

    2. Apply the offset as a payment on the credit availability date.

    3. Continue debit interest to the applicable ending date, waiver date plus 30 days (if applicable), payment date or 23C date, whichever is appropriate.

  4. If possible, offset overpayments in a manner that will not create overlapping debit and credit interest periods creating a net rate netting situation.

  5. If an overpayment, on which interest is prohibited by law, is applied to an outstanding tax liability, compute interest from the due date of the liability to the availability date of the overpayment.

20.2.5.12.1  (03-01-2002)
Debit Interest on Liabilities Paid by Offset from a Different Taxpayer

  1. A liability of one taxpayer may be paid by the overpayment of another taxpayer at the overpaid taxpayer’s request.

  2. Compute debit interest on the liability satisfied by the offset of credit as follows:

    1. Using a current TXMOD or Master File transcript, compute a running module balance on interest from the due date of the tax to the date the offset is applied.

    2. Apply the offset as a payment on the current date.

    3. Continue debit interest to the applicable ending date, waiver date plus 30 days (if applicable), payment date or 23C date.

    Example:

    ABC Corporation was purchased by XYZ Corporation on March 31,1999. On June 15, 1999, ABC Corporation filed a short period return showing an overpayment. The taxpayer requested the overpayment be applied to XYZ's liability for the full year return due and filed on March 15, 2000. The technician is performing the credit transfer on July 16, 2001. Interest is computed to the current 23C date.

    • Debit interest is computed on XYZ’s liability from March 15,2000, to July 23, 2001 (the current 23C date), when ABC’s overpayment (with interest) is applied.

    • Credit Interest is computed on ABC Corp.'s overpayment from June 15, 1999 to July 23, 2001 and may be transferred to XYZ's liability with the July 23, 2001 date.

    • If XYZ’s liability is not totally satisfied, debit interest will continue to accrue on the balance until it is satisfied.

20.2.5.13  (03-01-2002)
Insolvent Taxpayers, Seized Property, and Collection Costs

  1. 1. See IRM 20.2.5.13, Bankruptcy and Receivership Cases, for information on computing interest on taxpayers in bankruptcy or receivership.

    1. If unable to determine computation dates for interest, contact the Service Center Bankruptcy Coordinator or Area Office Special Procedures Function (SPF) where the bankruptcy was filed. Document 6567 has a listing of SPF telephone numbers

  2. When levy proceeds are returned, the delinquent tax is not forgiven. The taxpayer is still obligated to pay the amount owed, and the Service is obligated to collect it. However, the taxpayer will not be charged failure to pay penalty and interest during the period that the Service held the money.

    Example:

    The taxpayer owed $10,000. On April 10, 1998, $2,500 was collected as levy proceeds. On May 4, 2000, the $2,500 was returned.

    1. Compute a running module balance on $10,000 through April 10, 1998.

    2. Suspend interest on $2,500 for the period April 11, 1998, though May 4, 2000.

    3. Resume interest on the running module balance plus the $2,500 on May 4, 2000. Input the TC 340 with the COMP-INT-AMT and INT-TO-DT fields complete. This will allow IDRS and master file to compute interest after that.

  3. If property of an individual other than the taxpayer is wrongfully levied upon and the property or proceeds from the sale of the property is applied to satisfy a liability of the taxpayer, and later is returned to that individual, underpayment interest should be charged on the taxpayer's liability during the period that the amount was applied.

  4. Collection procedures stipulate that monies derived from a sale or auction are to be applied against lien fees and collection costs first, and the balance of monies, if any, applied against the past due tax liability.

    If lien fees and collection costs Then interest is computed
    Are not fully satisfied and become part of the unpaid balance FROM: due date of the return
    TO: date of full payment

20.2.5.14  (03-01-2002)
Claims for Refund of Overpaid Interest

  1. The statutory period of limitations for filing a claim for refund of overpaid debit interest is two years from the date of the payment or three years from the filing date (return received date) of the return (determined without regard to any extensions of time to file).

    Exception:

    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 interest is also extended six months from the new ASED.

    Example:

    The normal ASED is April 15,2000. A consent Form 872 was secured and extended the ASED to December 31, 2000. The taxpayer has until June 30, 2001 to file a claim for overpaid debit interest.

  2. See IRM 25.6 for rules concerning the statute of limitations.

Exhibit 20.2.5-1  (03-01-2002)
Interest on Penalties

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Exhibit 20.2.5-2  (03-01-2002)
Payment Effective Date Decision Chart

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Exhibit 20.2.5-3  (03-01-2002)
Rev. Rul. 99–40 Example

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