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Part 20. Penalty and Interest

Chapter 2. Interest

Section 14. Netting of Overpayment and Underpayment Interest

20.2.14  Netting of Overpayment and Underpayment Interest

20.2.14.1  (10-01-2006)
Interest Netting Overview

  1. The Tax Reform Act of 1986 authorized different interest rates for underpayments and overpayments of tax. Because of the difference, it is possible that a taxpayer may be charged interest on an underpayment at a higher rate for a period in which the taxpayer was entitled to overpayment interest at a lower rate.

    Example:

    Marin Corporation EIN 66–1000100, filed Form 1120 for the tax period ending December 31, 1999 showing an overpayment of $1,654,900.00, that was refunded with interest on October 22, 2000. It is later determined that Marin Corporation owes additional tax in the amount of $595,890.00 for the same tax return. Underpayment interest is accruing at a higher rate between March 15, 2000, (the return due date) and October 13, 2000, (the date of the refund minus 9-days back-off) than was allowed on the overpayment.

  2. Internal Revenue Code section 6601(f) provides that, if any portion of a tax is satisfied by credit of an overpayment, no interest shall be charged on the portion of tax satisfied for any period during which interest would have been allowed on the overpayment if the credit had not been made.

  3. The Service will consider, within a single tax period, all increases and decreases in a taxpayer’s liabilities before applying the statutory interest rules to a tax module. Known as "within module (or annual) netting" this is accomplished by computing underpayment interest at overpayment rates during a period of time when interest on an underpayment overlaps a period of time during which interest was allowed and refunded on an overpayment.

    Example:

    In the previous example, Marin Corporation’s underpayment interest on the underpayment of $595,890.00 would accrue at the lower overpayment interest rate from March 15, 2000 to October 13, 2000 (refund date minus 9-days). Interest would then resume at the higher underpayment interest rate from October 23, 2000, until paid.

  4. Section 3301 of the IRS Restructuring and Reform Act of 1998 added IRC section 6621(d), which authorizes "net rate" interest netting between two or more tax modules.

    Note:

    While within module netting allows for interest-free periods when no credit interest was paid, net rate netting does not. In this case, because the netting is within the same module, no debit interest is charged from October 14, 2000 to October 22, 2000. However, if this refund were being netted against another tax period, debit interest would begin on October 14, 2000, and be charged at the overpayment rate during the "netting period" .

  5. Effective January 1, 1999, underpayment and overpayment interest rates are equalized for non-corporate taxpayers, therefore interest netting under 6621(d) is not applicable.

  6. The Service purchased the Automated Computation Tool (ACT) InterestNet by Decision Modeling Inc. specifically designed to perform net rate interest netting computations. In addition to Command Code COMPA, the Service supports only the ACT InterestNet software for calculating interest . See IRM 20.2.6 for Methods of Computing Interest.

20.2.14.2  (09-20-2006)
Applicable Revenue Procedures

  1. Rules that affect interest netting include:

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

    • Revenue Procedures 99-19 and 99-43; provide guidance for net rate interest netting between modules for interest accruing prior to October 1, 1998.

    • Revenue Procedure 2000-26 provides guidance on the application of section 6621(d) for interest netting between modules, if the overlapping period of differential interest rates begins after September 30, 1998.

    Note:

    These procedures do not apply to interest accruing after December 31, 1998 for non-corporate taxpayers (the interest rate on underpayments and overpayment is equal for such taxpayers on or after January 1, 1999). However, non-corporate taxpayers, subject to the higher 120 percent (tax motivated transaction) rate of interest under the repealed IRC section 6621(c) are entitled to annual netting consideration.

20.2.14.3  (09-20-2006)
Annual Interest Netting

  1. Revenue Procedure 94-60 explains how the Service is to equalize or "net" underpayment and overpayment interest rates for the same tax module. When "netting" interest, underpayment interest is computed at overpayment rates during periods of time when an underpayment period on a subsequent assessment overlaps a period in time where credit interest was previously allowed on a tax overpayment.

20.2.14.3.1  (09-20-2006)
Overlapping Period Defined for Annual Interest Netting

  1. The following example illustrates an overlapping underpayment/overpayment interest period:

    Example:

    A taxpayer files an amended income tax return (Form 1040X), increasing his 1995 tax liability by $500.00. The 23C date of the additional assessment is September 9, 1996. The original return was timely filed and overpaid by $100.00 based on prepaid credits. The overpayment, with interest, was refunded on July 15, 1996.

  2. Steps required to determine the overlapping interest periods for annual interest netting:

    1. Determine the underpayment interest computation period. Debit interest is owed from April 15, 1996 (RDD), to September 9, 1996, (23C date of the assessment).

    2. Determine the overpayment interest computation period on the refund. Credit interest on the refund was computed from April 15, 1996 to July 2, 1996, (refund date less 13-days).

    3. The overlapping underpayment/overpayment interest period is from April 15, 1996 to July 2, 1996. This is the time frame during which both debit and credit interest accrued during the same time period. Because no interest was allowed during the period July 3, 1996 to July 15, 1996, that period becomes an interest-free period for underpayment interest too, up to the amount of the refund.

  3. Compute "netted interest" (debit interest charged at the lower credit interest rate) on the amount of underpayment " equal" to the overpayment during the overlapping period. Netted interest is "charged" on $100 of the $500 underpayment during the overlapping interest period from April 15, 1996 to July 2, 1996. Continue the debit interest computation on the netted underpayment amount of $100 plus the netted interest of $1.50 from the July 15, 1996 refund date to the interest computation ending date.

    Note:

    The 9/13-day "back-off period " for computation of overpayment interest on the refund (see IRM 20.2.4, Overpayment Interest) is "interest-free" . No overpayment interest is allowed during that period. Therefore, no underpayment interest is charged during that period (up to the amount of the original overpayment).

  4. Compute debit interest on the amount of underpayment that exceeds the overpayment from the return due date/applicable interest start date to the interest computation ending date. Underpayment interest is charged from April 15, 1996 on the remaining $400 to the September 9, 1996 assessment date.

20.2.14.3.2  (09-20-2006)
General Netting Computation Information

  1. Although there are some differences in the way netting is performed for a single module (within module netting) and multiple modules (net rate netting), the general computation method is the same. The following steps must be taken in order to determine the netted interest amounts:

    1. Determine the overlapping interest computation period(s).

      Note:

      It may be helpful to prepare a time line reflecting the underpayment and overpayment interest computation periods to determine where the overlapping period(s) occur.

    2. Determine the overlapping amount.

    3. Determine the overlapping rates.

    4. Compute netted interest.

    5. Compute underpayment interest.

    6. Determine amounts and periods still available for netting.

  2. Using the following example, each step of the process will be discussed throughout the section.

    Example:

    Marin Corporation, EIN 66-1000100, filed Form 1120 for the tax period ending December 31, 1999 showing an overpayment of $1,654,900.00 which was refunded with the 23C date of October 22, 2000. Overpayment interest of $62,829.13 was computed to October 13, 2000, at the "high" rate on the first $10,000.00 and at the GATT rate on the remainder. It is later determined that Marin Corporation owes additional tax in the amount of $595,890.00 for the same tax return and the taxpayer is not subject to large corporate underpayment (LCU) interest. The taxpayer sent a payment of $595,890.00 on August 21, 2002. There are no interest waiver periods. Interest will be computed to September 12, 2002 the date the notice was issued.

20.2.14.3.3  (09-20-2006)
Manually Computing Interest Netting

  1. All net rate interest netting cases should be computed using the Automated Computation Tool (ACT) which is the InterestNet software developed by Decision Modeling Inc. (DMI). Within module netting is usually less complex and should be computed using the ACT software. The ACT software completes the following steps for you:

    • Single module interest positions

    • Benefits of offsetting

    • Interest rate equalization

    Caution:

    The ACT software computes net rate interest netting to the taxpayer’s best benefit by doing a day by day comparison and applying the net rate where the interest rate spread is the greatest. It is not administratively feasible to do this kind of comparison with other interest computation tools or IDRS. The ACT software should always be used for net rate interest netting.

  2. It is necessary to know how interest netting was accomplished prior to use of the ACT.

20.2.14.3.3.1  (09-20-2006)
Determining the Overlapping Period

  1. Compute a running module balance on the tax module to verify the original debit and credit interest amounts.

  2. If you are unable to determine how the interest was originally computed, the original interest computations can often be found with the adjustment source document.

  3. If a source document is unavailable, and information on an adjustment is needed to accurately compute the interest computation, all avenues must be used to locate the required documentation, such as;

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

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

    3. Contacting the taxpayer directly to obtain copies of any documents they may have (e.g. ACT Reports, Form 2285, etc.)

20.2.14.3.3.2  (09-20-2006)
Prepare a Time Line

  1. Prepare a time line to determine where the overlapping period(s) occur.

    1. Begin the time line with the earliest tax event, usually the return due date of the oldest tax period,

    2. Continue building the time line with each event that impacts interest (such as payments, refunds, penalty assessment, waiver periods, etc.) for that entire tax module,

    3. Indicate relevant information, such as GATT/LCU/TMT along the time line,

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

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

    6. Indicate overlapping periods on the time line.

    7. Identify unused and unnetted periods and amounts.

    Note:

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

  2. In the Marin Corporation example, the overlapping period is from March 15, 2000, the return due date to October 13, 2000, the last day overpayment interest was paid. For netting purposes, do not include periods when no overpayment interest was paid.

20.2.14.3.3.3  (09-20-2006)
Determine the Overlapping Amount

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

  2. In the previous Marin Corporation example, the interest start date for both the overpayment and the underpayment are the same, March 15, 2000. The overpayment amount on which credit interest is allowed is $1,654,900.00. The underpayment on which debit interest is charged is $595,890.00.

  3. In this example the underpayment is the lesser amount, so the overlapping amount is $595,890.00 as of March 15, 2000.

    Figure 20.2.14-1

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    Overlapping Period Time Line

20.2.14.3.3.4  (09-20-2006)
Determine the Interest Rate during the Overlapping Period

  1. Generally, the net rate adjustment is made to the underpayment module and underpayment interest is assessed at the overpayment rate allowed on the overlapping overpayment module.

  2. Because the Service calculated interest differently when computing GATT overpayment interest prior to January 1, 1999, overpayment interest is to be recomputed in the same manner as originally allowed. To allow the taxpayer the best benefit of netting, if the entire overpayment is not used, use the GATT rate first, then the higher rate for net rate purposes. See IRM 20.2.4.9.3 for instructions on computing interest at the " GATT" rate.

  3. In the example for Marin Corporation the amount of the overpayment subject to the GATT rate exceeds the underpayment amount so the entire net rate adjustment will be computed at the GATT rate.

    Figure 20.2.14-2

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    Overlapping Period Time Line

20.2.14.3.3.5  (09-20-2006)
Compute Netted Interest

  1. Using the overlapping period, amount, and rates determined above, compute underpayment interest at the lower overpayment rate.

  2. In the Marin Corporation example, GATT interest is computed on $595,890.00 from March 15, 2000 to October 13, 2000 for a total of $22,590.66. This is the netted interest amount and will be input with a TC 772.

20.2.14.3.3.6  (09-20-2006)
Compute Underpayment and Overpayment Interest

  1. At the end of the netting period, underpayment interest continues on the running module balance at the underpayment rate.

  2. In the Marin Corporation example, the module balance at the end of the netting period is the principal of $595,890.00 plus the netted interest of $22,590.66. Because normal underpayment interest processing allows an interest-free (9-day back-off) period on this module from October 14 to October 22, begin corporate underpayment interest on $618,480.66 on October 23, 2000 and compute a running module balance until the date of the notice, September 12, 2002.

20.2.14.3.4  (09-20-2006)
Using the Automated Computation Tool (ACT)

  1. The Automated Computation Tool is programmed to complete all of the above steps to correctly compute both within module and net rate interest netting once the correct data has been input for each module.

    Note:

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

  2. First, enter the tax module information into the program to verify the previous interest as shown in Figure 20.2.14–3.

    Figure 20.2.14-3

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    ACT Report Update Module Screen

  3. Next, enter the current adjustment as shown in Figure 20.2.14–4.

    Figure 20.2.14-4

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

    ACT Report Update Module Screen

  4. The program will compute the netted and underpayment interest and provide a Report 490 Activity Summary (Figure 20.2.14–5) which is to be sent to the taxpayer. The report must also be used as documentation for the interest adjustment and be attached to the case to be filed.

    Figure 20.2.14-5

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

    ACT Report 490 Activity Summary

  5. The Report 490 Figure 20.2.14–5 shows that the account needs the following interest adjustments made:

    • Netted interest (TC 772) in the amount of $22,590.66, and

    • Underpayment interest (TC 340) in the amount of $88,326.66.

      Note:

      Occasionally, there is a rounding difference of one cent shown on the report. This difference should be disregarded.

20.2.14.4  (09-20-2006)
Within Module Interest Netting under Revenue Procedure 94–60

  1. Revenue Procedure 94-60 describes procedures for the Service to calculate interest on an underpayment when the taxpayer has previously received a refund of an overpayment with interest for the same tax period (within module/annual interest netting).

  2. Overlapping periods are defined as occurring when a taxpayer owes underpayment interest on an underpayment for the same period of time that overpayment interest was previously paid on an excessive refund.

  3. Interest netting is unnecessary for interest periods prior to January 1, 1987, as underpayment and overpayment interest rates were equal prior to that date. Interest netting also does not apply to non-corporate taxpayers only for interest periods after January 1, 1999 as interest rates were equalized after that date.

    Note:

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

20.2.14.4.1  (09-20-2006)
Master File Computation of Within Module Netting

  1. Effective January 1993, Master File programming was updated to accomplish netting within a single module where refunds were issued with interest. Master File posts the netted interest with a TC 777 which carries a "999" in the Julian Date field of the DLN as shown in Figure 20.2.14-6.

    Figure 20.2.14-6

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

    Computer Generated Within Module (Annual) Netting

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

  3. Master File calculates the netted interest amount by:

    1. Recomputing the correct refund amount (the amount the taxpayer should have received based upon consideration of the subsequent assessment), if any.

    2. Recomputing the correct overpayment interest amount (the amount of interest that the taxpayer should have received on the corrected refund). Master File uses the same computation method for the overpayment interest as originally used (see IRM 20.2.4 Overpayment Interest).

    3. Calculating the netted interest by finding the difference between the amounts of the interest paid on the refunded overpayment and the recomputed overpayment interest on the corrected refund.

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

    • The amount of the subsequent assessment, in excess of the refunded overpayment, FROM the due date of the liability to the appropriate interest TO date, and

    • The netted underpayment amount and the netted interest FROM the 23C date of the refund to the appropriate interest TO date.

20.2.14.4.2  (09-20-2006)
Master File Limitations in Computing Within Module Interest Netting

  1. Master File does not "net" interest on any tax module that contains a restricted interest transaction. A restricted interest transaction can be identified by:

    • Transaction Codes (TC) 340, 341, 772, or TC 770 input with Document Code 47 or 54.

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

      Caution:

      When a tax module is restored from retention register, the "-I" Freeze is set. The interest computation is systemically restricted by Master File. A corresponding TC 34X may or may not be present.

  2. The process of applying within module interest netting results in an underpayment interest charge. Interest rules that pertain to underpayment interest also apply to netted interest. Master File may not be able to correctly compute netted interest in modules containing interest-free periods associated with refunds, IRC section 6601(c), waivers, etc. (see IRM 20.2.5, Interest on Underpayments) when an interest-free period(s) falls within an overlapping underpayment/overpayment interest period. Examples include, but are not limited to:

    • One or more interest-free periods due to section 6601(c) waiver periods.

    • Two or more refunds (one issued without interest and one or more issued with interest) and the underpayment interest period on the subsequent assessment overlaps both types of refunds.

  3. Underpayment interest periods which are "interest-free " by law are also interest-free for netted interest computations. When computing netted interest with an underpayment interest-free period within the FROM and TO dates, suspend netting computations during that interest-free period.

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

20.2.14.4.3  (09-20-2006)
Manually Computing Within Module Interest Netting

  1. Master File is currently programmed to compute within module netting. Do not restrict a tax module for within module netting unless there is another reason the module must be restricted or it is determined that Master File cannot correctly compute interest netting on that module.

  2. The following example illustrates an overlapping underpayment and overpayment interest period:

    Example:

    Mary James timely files a Form 1040 for the tax period ending December 31, 1997 showing an overpayment in the amount of $600.00 which was refunded with $9.28 interest on July 17, 1998. On February 22, 2000, the Service receives an amended income tax return (Form 1040X), increasing her 1997 tax liability by $800.00 with a payment for $800.00. The amended return is processed and the assessment posts to Master File on April 2, 2000.

  3. Using the Automated Computation Tool (ACT), compute a running module balance including the 13-day back-off period on the refund. The software is programmed to compute interest netting. See Figure 20.2.14-7 for the ACT input screen.

    Figure 20.2.14-7

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

    ACT Report Update Module Screen

  4. The Report 490 Activity Summary shows that underpayment interest in the amount of $114.15 and netted interest in the amount of $9.28 must be assessed. See Figure 20.2.14-8.

    Figure 20.2.14-8

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

    ACT Report 490 Activity Summary

  5. If the Automated Computation Tool is not used, take the following steps to determine the overlapping interest periods for within module interest netting:

    1. Determine the underpayment interest computation period. Underpayment interest is charged from April 15, 1998 (RDD), to February 22, 2000 (date of the payment for $800.00). Underpayment interest will continue to the date of the computation April 2, 2000.

    2. Determine the overpayment interest computation period on the refund. Overpayment interest on the refund was computed from April 15, 1998 to July 4, 1998 (refund date less 13-days).

    3. Prepare a time line reflecting the underpayment and overpayment interest computation periods to determine where the overlapping period(s) occur. When preparing a time line, the ending date for the overpayment interest computation period must be the date to which the overpayment interest was actually computed (i.e., the overpayment interest back-off date). The overlapping underpayment/overpayment interest period is from April 15, 1998 to July 4, 1998. This is the time frame during which both underpayment and overpayment interest accrued.

    4. Compute netted interest (underpayment interest charged at the lower overpayment interest rate) on the amount of underpayment equal to the overpayment during the overlapping period. Netted interest is computed on $600.00 of the $800.00 underpayment during the overlapping interest period from April 15, 1998 to July 4, 1998. Netted interest on the $600.00 amount totals $9.28.

    5. Continue the underpayment interest computation on the netted underpayment amount of $600.00 plus the netted interest of $9.28 from the July 17, 1998 refund date of the overpayment to the interest computation ending date. For purpose of this example, use the posting date of April 2, 2000.

      Note:

      The 9/13 day back-off period for computation of overpayment interest on a generated refund (see IRM 20.2.4 Overpayment Interest) is interest-free. No overpayment interest is allowed during that period so no underpayment interest is assessed during that period for within module netting.

    6. Compute underpayment interest on the amount of underpayment that exceeds the overpayment from the return due date/applicable interest start date to the interest computation ending date. In this example, underpayment interest is charged from April 15, 1998 on the remaining $200.00 to April 2, 2000.

    7. Manually calculated netted interest should mirror Master File computations.

    8. Begin the netting calculation with the earliest refund and continue through the latest refund when processing subsequent assessments with multiple prior refunds.

  6. Input a separate TC 772 for each netted interest amount for each overpayment that was netted.

    Exception:

    When processing erroneous refunds with TC 844 (on a module where the interest is not restricted) do not input TC 772. Master File programming will generate a TC 777 for the " netted interest" amount.

  7. Input the underpayment interest with a TC 340. DO NOT include the netted interest amount(s) with the TC 340 amount.

20.2.14.4.4  (09-20-2006)
Within Module Netting for Quick and Prompt Assessments

  1. Special procedures apply for netted interest related to quick and prompt assessments on Form 2859.

  2. If the interest is not restricted for another reason, take the following steps:

    1. Calculate the netted interest as shown in 20.2.14.4.3 above, and

    2. Enter as TC 190 the sum of the netted interest plus the underpayment interest, and

    3. Indicate in the "Remarks" area of Form 2859 (Request for Quick or Prompt Assessment) the separate components of the interest.

      Note:

      Master File will generate TC 777 (which should match the netted interest amount computed and entered on Form 2859) to adjust the TC 190 for the included amount of netted interest.

  3. If the interest is restricted, compute netted interest as shown above, input TC 772 for each netted interest amount, and input TC 340 for the underpayment interest.

20.2.14.5  (09-20-2006)
Manual Annual Netting Procedures

  1. Effective January 1993, netting procedures apply to all modules which contain refunds (with interest) with effective dates January 1, 1987, and subsequent.

    Reminder:

    Master File is able to perform interest netting on unrestricted modules. If a module is not or does not require restriction, DO NOT restrict the interest with TC 34X, unless there are specific issues on that module that would prevent Master File from netting.

  2. Manually calculate "netted interest" to mirror Master File computations except in netting situations where debit interest rules involving interest-free periods override credit interest rules (see Exhibit 20.2.14-2).

  3. Refer to the following chart for general manual netting procedures, when the overlapping period involves only one prior refund.

    If credit interest was Is there an overlapping interest period Then
    ALLOWED NO Annual netting does not apply, charge debit interest (see Chapter 5, Interest on Underpayments).
    NOT ALLOWED NO Annual netting does not apply, charge debit interest (see Chapter 5, Interest on Underpayments).
    ALLOWED YES Annual netting DOES apply:

    1. Charge netted interest, at the credit rate on the liability (up to the amount of the refunded overpayment) during the overlapping debit/credit interest periods(s).

    2. Charge interest at the underpayment rate on the liability in excess of the refunded overpayment from the appropriate start date to the interest ending date, and

    3. Charge debit interest on the netted underpayment and netted interest amounts from the 23C date of the refund (see 20.2.14.3.1, Determining the Overlapping Period, defined for Annual Interest Netting).

  4. Begin the netting calculation with the earliest refund and continue through the latest refund when processing subsequent assessments with multiple prior refunds.

  5. Input the "netted interest" amount with a TC 772 for overpayment(s) that were netted.

    Exception:

    When processing erroneous refunds with TC 844 (on a module where the interest is not restricted) do not input TC 772. Master File programming will generate a TC 777 for the "netted interest" amount.

  6. Input the underpayment interest with a TC 340. DO NOT include the netted interest TC 772 amount(s) with the TC 340 amount.

20.2.14.5.1  (09-20-2006)
Annual Interest Netting on Subsequent Assessments Involving Tax Motivated Transactions (TMT)

  1. When making an annual interest netting adjustment due to a subsequent assessment involving TMT interest:

    1. During the overlapping period, interest on the tax motivated transaction is charged at the same credit interest rate that was allowed on the overpayment.

    2. The amount of tax subject to the annual netting adjustment is limited to the amount of overpayment on which interest was allowed.

  2. The 50 percent interest component of a negligence or fraud penalty (asserted against tax attributable to a tax motivated transaction), is computed at the 120 percent interest rate. After computing the second component to arrive at the total penalty amount due, interest on the total penalty amount is computed at the underpayment rate.

  3. Use the following chart to determine the portion of the total assessment that would be subject to interest netting procedures.

    If total assessment is Then during the overlapping period
    Non-TMT tax Up to the amount of overpayment, charge debit interest at the same credit rate as allowed on the overpayment.
    TMT tax If any unnetted overpayment remains, charge debit interest at the same credit rate as allowed on the overpayment.

    Note:

    Apply annual netting procedures first to interest on the non-TMT tax adjustment.

20.2.14.5.2  (09-20-2006)
Erroneously Computed Credit Interest

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

    If credit interest was originally And the Statute for Then
    OVERPAID recovery is OPEN Implement erroneous refund procedures.
    OVERPAID recovery is CLOSED DO NOT implement erroneous refund procedures.
    UNDERPAID refund is OPEN Reduce the debit interest on the subsequent assessment by the amount of credit interest that was underpaid.
    UNDERPAID refund is CLOSED DO NOT reduce the debit interest on the subsequent assessment by the amount of credit interest that was underpaid.

20.2.14.6  (09-20-2006)
Net Rate Interest Netting

  1. Net Rate Interest Netting is defined in the Internal Revenue Code 6621(d) as follows: "Elimination of interest on overlapping periods of tax, overpayments and underpayments. To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period."

20.2.14.6.1  (09-20-2006)
Net Rate Interest Netting Post-Enactment Interest

  1. Code section 6621(d), added by the IRS Restructuring and Reform Act of 1998 and modified by the Tax and Trade Relief Extension Act of 1998, provides for a net interest rate of zero to the extent of overlapping tax underpayments and tax overpayments. While generally applying to interest accruing on or after October 1, 1998, section 6621(d) may apply to interest before that date if some conditions are satisfied. See IRM 20.2.14.6.1.2.

    Note:

    The reference in the provision that the "net rate of interest shall be zero" does not mean the IRS will not charge or allow interest. It means that interest allowed or allowable on the overpayment and interest paid or payable on the underpayment during the overlapping interest period will be equalized so that they net to zero. During an overlapping interest period(s) that occur between one or more tax periods, underpayment interest may be charged at the overpayment rate or overpayment interest may be allowed at the underpayment/debit rate. To implement the provision, the Service will use an interest computation method to "equalize/eliminate " the interest differential. This equalization procedure is referred to as "net rate" interest netting.

  2. Section 6621(d) applies to all types of tax. Therefore, taxpayers may apply the net rate to one type of tax that was charged underpayment interest based on an overpayment allowed (with interest) for a different type of tax. For example, a taxpayer may net an overpayment on a Form 941 against an underpayment on Form 1120 for the same taxpayer.

  3. The net rate can only be applied based on interest (that has been or will be) allowed on an overpayment and charged on an underpayment.