20.2.5. Interest on Underpayments

(1) Underpayment interest is sometimes referred to as debit interest or deficiency interest. The Office of Servicewide Interest provides policy, training materials, interest tools, and manual interest procedures, when applicable, for overpayment and underpayment interest purposes. It is essential that managers, senior management officials, personnel, and examiners working with computations of underpayment interest correctly understand and follow technical guidance and information for interest rates and methods of computation.

(1) These procedures are covered under the following authority:

• IRC 6601, Interest on Underpayment, Nonpayment, or Extension of Time for Payment, of Tax

• IRC 6611, Interest on Overpayments,

• IRC 6621, Determination of Date of Interest,

• IRC 6622, Interest Compounded Daily,

• Rev. Rul. 99-40

(1) The Office of Servicewide Interest is responsible for the content of this IRM, answering related questions, and inputting any work requests.

(2) The program manager of Office of Servicewide Interest is responsible for oversight of the Interest programs.

(3) The Director, Business Support Office is the executive responsible for policy and procedures.

(4) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see Taxpayer Bill of Rights.

(1) Nearly every function in the IRS has a role in proper interest administration. It is essential that each function conduct its operations with an emphasis on mitigating risk of inaccurate interest computations. Appropriate reviews should be conducted to ensure interest accuracy, consistency, and fairness.

(2) To promote the goals of accuracy, consistency, and fairness in the interest program, the Complex Interest Quality Measurement System (CIQMS) Staff, a section within OSI, conducts reviews of interest computations, forwarding their findings to program partners/stakeholders. OSI also prepare reports of significant issues, such as corrections to computer programming that affect taxpayers.

(1) In accordance with IRC 6601, the payment of interest is required on underpayments of tax unless otherwise specified by law.

(2) IRC 6621, provides the interest rates on overpayments and underpayments of tax, which are tied to the Federal short-term interest rate. Interest rates are determined quarterly based on changes to the Federal short-term rate.

(3) Interest is statutory. It cannot be reduced or abated due to reasonable cause, nor can it be negotiated. See IRM 20.2.7, Abatement and Suspension of Debit Interest, for situations in which interest can be lawfully reduced or abated.

(1) See IRM Exhibit 20.2.1-2, Definition of Terms, for the definitions of interest terms.

(1) For additional information, such as the latest interest news, job aids, interest tool updates, training material, list of the analysts, etc., see the Interest Knowledge Base at https://irsgov.sharepoint.com/sites/ETD-KMT-KB022.

(1) Payments are generally applied to liabilities in effective date order. When a taxpayer does not designate how a payment is to be applied (i.e., undesignated payment/remittance), it is first credited, on its effective date, to the earliest taxable year for which there is a liability, typically in the following order:

1. Tax

2. Tax Motivated Transaction (TMT) tax

3. Penalties and fees

4. Non-TMT interest

5. TMT interest

(2) Since undesignated payments/remittances are first credited to the earliest outstanding liability, there are occasions when the above order of payment application is altered. For instance, when a carryback liability of tax has a later due date than a penalty and/or interest charge that precedes it.

(3) For additional information concerning undesignated remittances, see Rev. Proc. 2005-18 which provides procedures to make, withdraw, or identify deposits to suspend the running of interest on potential underpayments of tax.

(4) Interest accrues on unpaid liabilities of tax, penalty, additions to tax, additional amounts, and interest until they are fully satisfied.

(1) 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.

(2) 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 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.

(3) 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 at http://serp.enterprise.irs.gov/databases/irm.dr/current/6209/section-8c-2-2.html.

(4) The input of TC 290 or TC 300 for zero and Priority Code 5 will post unrestricted failure to pay (FTP) penalty accruals.

(5) 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 21.5.2.4.8.3, Clearance Tolerances, for further discussion of accounts in Master File Status Code 12.

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(1) To compute interest to a specific date after a tax underpayment and penalties have posted:

(2) 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.

1. Using a current TXMOD or Master File transcript, compute a running module balance on the entire tax module.

2. Enter debits and credits on the appropriate dates.

3. Suspend and resume interest (on a specific amount if necessary) for waiver/suspension periods. See IRM 20.2.7.9.1, IRC 6601(c) Suspension Period Calculation, for how to compute a suspension amount.

4. 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.

   Note: Always balance your computation with the tax module balance adding or subtracting your adjustment.

   Reminder: 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 20.2.1.4.2, Manual Calculation of Interest. If you are unable to verify the TC 34X or TC 77X amount, secure the adjustment document or case file.

(1) Assessment and Collection - Interest may be assessed and collected at any time during which the tax to which it relates may be collected. See IRC 6601(g).

1. 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 25.6.1.12, Collection Statute Expiration Date (CSED) , for additional information on CSED.

2. Prior to November 6, 1990, the statutory period for collection was six years.

3. If underpayment interest is insufficiently charged or erroneously abated; resulting in a subsequent refund to be excessive, the additional interest may be assessed, provided the 10-year collection statute for the tax to which the interest relates is open. Follow the appropriate procedures to recover any erroneous refunds. See IRM 21.4.5.5, Erroneous Refund Categories and Procedures.

4. If underpayment interest is insufficiently charged or erroneously abated; resulting in a subsequent offset to be excessive, the offset can be reversed so long as the 10-year collection period described in IRC 6502 for the account to which the offset was applied has not expired. If a refund was issued from the account to which the offset was applied, and said refund included all or a portion of the offset, the offset reversal can be made. Follow the appropriate procedures to recover any erroneous refunds. See IRM 21.4.5.5 Erroneous Refund Categories and Procedures.

(2) Credit and/or Refund -IRC 6511(a)provides the general period of limitations for filing claims for credit or refund. A claim for credit or refund of underpayment interest must be filed by the later of the following dates:

1. Three years from the time the return is filed; or

2. Two years from the time the tax (including interest) was paid, whichever period expires later

3. If an agreement is made between the taxpayer and the IRS to extend the period of time for assessment (i.e.,Form 872, Consent to Extend the Time to Assess Tax), the request must be filed within 6 months of the extended Assessment Statute Expiration Date (ASED).

Note: If no return is filed by the taxpayer, the claim must be filed within two years from the time the tax was paid.

Note: Contact Chief Counsel if there are questions about whether an alternate period of limitation applies under IRC 6511(d),IRC 6511(f),IRC 6511(g), or IRC 6511(h). See IRC 6511 for details.

4. If the request is timely, determine the amount of tax that may be credited or refunded under IRC 6511(b).

5. If a request is filed during the 3-year period, the amount of credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the request, equal to 3 years, plus the period of any extension of time for filing the return.

6. If the request is not filed within the 3-year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the 2 years immediately preceding the filing of the request. For credit OFFSETS, add 2 years to the cycle date of the offset to determine the applicable 2-year period.

   Exception: If the offset is a misapplied payment, use the date of the payment to determine the applicable 2-year period.

7. If a Form 872 was signed by the taxpayer, 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 net rate request plus the portion of the tax that would have been open under the two or three year period of limitations described above, if a request had been filed on the date the agreement was executed.

   Note: See IRC 6511 and IRM 25.6.1, Statute of Limitations Processes and Procedures, for further details.

   Caution: 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.

(1) 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):

(1) 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.

(2) 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.

(3) When manually computing interest address the following:

1. Always attach the computation and the reason for the action taken to the adjustment source document. See IRM 20.2.1.4.2.1, Manual Calculation of Interest - Documentation, for a description of what documents to send to files.

Note: Correspondence Imaging Inventory (CII) interest adjustments are done as non-source documents (NSD). The CII image is the source document. A CIS-IND>1 will be present on TXMOD indicating the source document is available in CII. Use ESTABDO to request a hard copy of the pdf interest computation (document) from files if unable to access CII. For additional information see IRM 21.5.1.5.3, CII Source Documentation.

2. Provide the reason on the adjustment source document when interest is abated.

3. Provide the reason on the adjustment source document when a TC 340 for zero amount is input.

Note: 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 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340. Ensure that TC 190, TC 191, TC 340, TC 341, TC 770, and TC 772 are used appropriately.

(4) 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.

(5) 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.

(6) 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 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340, for input details.

(7) Any time 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.

(8) 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 20.2.7.9, IRC 6601(c), Suspension of Interest on Deficiencies and its subsections.

(9) 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.

1. Calculate interest to the 23C date of the following cycle.

2. 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.

3. 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).

4. Post a hold code that only holds the notice.

(10) 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.

1. TC 342 may NOT be input without first securing the source document for the TC 340/341 that created the interest freeze.

   Exception: The TC 342 may be input if the TC 340/341 restriction was unnecessary or if a TC 340 for zero was systemically generated on an original filed return because of the combat zone indicator.

2. 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.

3. 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 20.2.14.6.9, Identifying Modules Involved in Net Rate Adjustments, for more information.

   Note: There are additional reasons why a TC 340 for zero may be input as shown in the table below. These adjustments should not be released by the input of TC 342. This list is not all inclusive.

   Additional Adjustment Types:
   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.

4. 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.

5. 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).

   Example:

   Combat zone indicator
   TC 150 - $1,000.00
   TC 806 - $500.00
   TC 270 - $0.00
   TC 340 - $0.00
   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.

(11) 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 20.2.1.2.2, 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.

1. 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.

2. Use Letter 3535, Interest Computation Cover Letter, as a cover letter when providing all manual interest computations to the taxpayer as required by IRC 6631.

Reminder: In accordance with the purpose of the Office of Management and Budget (OMB) Memorandum M-07-16, Safeguarding Against and Responding to the Breach of Personally Identifiable Information, use only the last four digits of a taxpayer’s SSN on the documents mailed to the taxpayer.

3. The requirements of IRC 6631only apply to notices which "include an amount of interest required to be paid" by the taxpayer.

(12) All manual interest computations must include documentation supporting the interest computations and attached with the input document that is either sent to Files or CII. Documentation is required even if a copy of such documentation is retained in the area. See IRM 20.2.1.4.2.1, Manual Calculation of Interest - Documentation, for more information.

(1) 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:

1. Multiple waiver dates

2. Combination adjustments involving carrybacks (Form 2285, Concurrent Determinations of Deficiencies).

3. Disaster area adjustments

4. Abatements due to a delay or error in a ministerial or managerial act

5. Combat zone participants

6. Multiple IRC 6404(g) notice dates

7. Rev. Rul. 99-40

8. 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

(2) 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 Using ADJ54.

1. 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."

2. 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 20.2.5.6.2(5) for the date to use in this field when computing a manual TC 340.

   Example: 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.

Reminder: 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.

Caution: The COMP-INT-AMT is limited to 13 characters, including commas and periods. If the entry is more than 13 characters, it will have to remain restricted.

(3) The non-restricting TC 340 should not be used in situations where normal programming cannot correctly update the interest. Some examples are as follows:

1. Tax motivated transaction interest (TMT) (120% interest)

2. BBA (Bipartisan Budget Act) interest

3. Complex large corporate underpayment (LCU) interest (2% interest)

4. 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)

5. Net rate interest netting cases

(1) When an overpayment is refunded without overpayment interest, which is permitted under IRC 6611 if certain conditions are met - seeIRM 20.2.4, underpayment interest on a subsequently determined deficiency runs from the date of the refund check on that part of the deficiency that is equal to or less than the overpayment and from the original due date on the remainder.

(2) The IRS computer is programmed to handle Revenue Ruling 99-40 as it relates to the interest-free periods defined in IRC 6611. Do not restrict interest unless there are other conditions on the module that require the restriction of interest.

(3) When it is necessary to apply Revenue Ruling 99-40 in a manual computation of interest, follow the procedures below.

1. Compute a running module balance (which includes the subsequent underpayment), from the return due date to the date the overpayment was refunded.

   Note: The refund date of the overpayment for systemic refund is typically the 23C date of the TC 846, whereas the date for manual refunds (TC 840) is the date the check was mailed, or wire transferred. To determine the date a manual refund was mailed, or wire transferred, use the Julian date of the TC 840, which is the sixth, seventh, and eighth digits of its document locator number (DLN).

2. 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.

   Note: When a module is downloaded to ACT/InterestNet, 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 20.2.5.7.4, Revenue Ruling 99–40 and Carrybacks.

   Caution: Always verify the suspension dates when using the import function on ACT/InterestNet.

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

(4) Refunds issued with interest also receive special underpayment interest consideration. See IRM 20.2.14.4, Within Module Interest Netting Under Revenue Procedure 94-60.

(1) 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 date 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 20.2.5.7.2.1 on how to compute the interest.

(2) 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.

(3) 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.

(4) 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.

(5) 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 to zero with a general tax abatement. However, Rev. Rul. 99-40 may still be applicable when a carryback with a later effective date reduces the tax. A carryback is typically treated like a payment, and is not available to reduce tax until the normal (un-extended) due date of the loss year return.

(6) 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.

(7) 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.

(8) 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 21.8.2.9.3, Payment of Tax Due - Form 1120-F, and IRM 20.1.3.4.1.1.4, Foreign Corporations. If the credit elect is not needed, the corporation still receives one year interest-free.

(9) When reviewing a filed claim requesting Rev. Rul. 99-40, check for the following:

1. If the claim also requests an adjustment to tax, existing claim procedures will be followed.

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

(1) 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.

(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, 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.

(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 the subsequent assessment 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 the 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 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.

4. 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.

5. 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.

   Example: 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.

(3) See IRM 20.2.9, Interest on Carryback of Net Operating Loss, for rules concerning carrybacks.

(4) 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.

(1) In order for the large corporate underpayment rate to apply, the following criteria must be met:

1. The taxpayer must be a "C" corporation. See IRM 20.2.5.8.1.1,Definition of a "C" Corporation.

2. A "threshold underpayment" of tax must exist. See IRM 20.2.5.8.1.2 ,Threshold Underpayment for LCU.

3. A preliminary notice of proposed deficiency (30-day letter), statutory notice of deficiency (90-day letter), or notice and demand for payment (under non-deficiency procedures) must have been issued that, when unpaid, trigger an “applicable date”. See IRM 20.2.5.8.2, Applicable Date for LCU Interest Rate.

(1) The "start" date for charging the LCU rate is referred to as the "applicable" date or "trigger" date, once a threshold underpayment is established. See IRM 20.2.5.8.1.1 and IRM 20.2.5.8.1.2 .

(2) The applicable date is set when either a letter of proposed deficiency (30-day letter), statutory notice of deficiency (90-day letter), or notice of assessment (bill), whichever is earlier, is issued for a liability and the amount set forth in the letter or notice is not fully paid within 30 days of the date notification is sent to the taxpayer.

(3) 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).

(4) Certain account indicators can be used to identify when a 30- or 90-day letter has been issued:

1. Master File Status Code 30 (30-day or 90-day letter)

2. AIMS Status Code 13 (30-day letter)

3. AIMS Status Code 24 (90-day letter)

(5) 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.

(6) An applicable date is seldom voided but the letter or notice that set the applicable date may be disregarded if:

1. The amount shown in the letter or notice is paid within 30 days of the letter or notice date.

Reminder: Cash bonds and IRC 6603 deposits are not considered for purposes of determining whether the underpayment shown in the letter or notice is paid within 30 days.

2. As a result of an administrative error, the letter or notice is issued to the wrong taxpayer or for the wrong taxable period.

3. The tax assessment or proposed assessment for which the letter or notice was sent is subsequently abated in full.

4. The notice of deficiency is rescinded under IRC 6212(d).

(7) The legal provisions for setting an applicable date vary, depending on when the letter or notice was issued. See items 8 through 12 below.

(8) Pre 1/1/1998 Letters/Notices: The applicable date for the period January 1, 1991 to December 31, 1997 (pre-98), is set the 30th day after the IRS sends the taxpayer either 1) an initial letter of proposed deficiency (30-day letter), 2) a statutory notice of deficiency (90-day letter), or 3) a notice or letter of assessment or proposed assessment, and full payment for the amount set forth in the letter remains unpaid after 30 days.

(9) Additionally, under the pre-98 rules, the amount shown in the letter or notice is irrelevant and did not need to state an amount of unpaid tax. And so, while an applicable date can be triggered on any amount shown in the letter or notice, the LCU rate cannot be charged until a threshold underpayment exists.

(10) Post 12/31/1997 Letters/Notices: 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 the first notice or letter 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.

(11) Pre 1/1/1998 and Post 12/31/1997 Letters/Notices: Special consideration must be given when a tax module is affected by both pre-98 and post-97 LCU interest rules. Interest must be manually computed and restricted when a module is affected by pre and post rules. Prior to January 1,1998, IRC 6621(c) specified 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, TRA ‘97 added section IRC 6621(c)(2)(B)(iii) detailing the letter or notice must show an amount exceeding $100,000. The addition of the TRA 1997 amendment can result in there being more than one applicable date if letter/notices were issued after December 31, 1997 and before January 1, 1998.

(12) 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 a threshold underpayment determined but the amount "ultimately" assessed impacts whether the LCU rate is charged.

(1) 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.

(2) 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.

(3) Generally, modules requiring the LCU interest rate must have interest manually computed and restricted, especially if there is more than one "applicable" date.

(4) 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.

(5) 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.

(6) 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.

(1) Once it is determined that the LCU interest rate 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 applicable date (notice date plus thirty days).

2. 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.

   Note: When using ACT/DMI, the LCU applicable date must be entered in the "Edit Selected Module" screen

   .

(1) 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.

(2) See IRM 20.2.5.9.5.2 for an example of a TMT interest calculation.

(3) 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).

(1) 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.

  Note: Once assessed, interest continues to accrue at the 120% rate even though the unpaid TMT tax liability drops below $1,000.

• The 120% interest rate MUST be manually computed and input with TC 340 due to Master File limitations.

  Caution: DO NOT input a non-restricting TC 340 on a tax module that includes TMT interest.

(1) 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.

1. Use the TMT interest rate to compute the 50% interest portion of the negligence or fraud penalty associated with the TMT underpayment. See IRM 20.2.5.3 for further details on how to compute the 50% interest portion of the negligence or fraud penalty.

2. After the penalties are assessed, normal interest rates apply to the interest accruals on the penalty amounts.

Note: Interest on the tax motivated underpayment continues to accrue at 120%.

(1) 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).

(2) 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).

(3) 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:

• 080–099

• 180–199

• 200–299

• 680–699

• 750–769

• 780–789

• 980–999

(4) 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):

(1) 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:

1. non-TMT tax;

2. TMT tax;

3. any penalties or fees;

4. non-TMT interest; then,

5. TMT interest.

(1) IRC 6402(a) allows IRS to offset an overpayment only against the liability of the person who made the overpayment. The accrual of underpayment interest ends as provided in IRC 6601(f).

(2) A liability of one taxpayer may be paid by the overpayment of another taxpayer at the overpaid taxpayer’s request. Rev. Proc. 65-20, 1965-2 C.B. 1003. See archived IRM 4.4.3.2, (dated 09-16-2011), Transferring Payments and Credits Between Related Taxpayers. A credit is deemed to be a payment at the time the credit is allowed. The allowance occurs on the date when the certifying officer signs the schedule of overassessments. See IRM 25.6.1.7.2, Time When Payments and Credits Are Considered to be Made, at (5).

(3) Research may be needed to determine if the overpayment and the liability involve 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.

(4) Compute underpayment interest on the liability satisfied by the offset of the credit as follows:

1. 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.

2. Apply the offset as a payment using the current 23C date.

3. 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.