8.17.6. Interest Issues in Settlement Computations

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

(2) Normally, restricted interest is assessed on potential deficiencies (before allowance of carrybacks) within the period of limitations applicable to the tax even though the deficiency in tax is eliminated by a carryback. When an unassessed deficiency that is barred by the statute of limitations is offset by a carryback, see IRM 20.2.9.7.2, Interest on Barred Assessments, for further information.

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

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

2. To notify the taxpayer of the applicability of restricted interest.

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

(5) The TCS will complete Form 2285 (as outlined below in IRM 8.17.6.4.2), and the Form 5403 Worksheet, and return the case to the requestor.

(1) Form 2285 is used in individual, corporation, and fiduciary income tax cases requiring restricted interest computations.

(2) Section I of Form 2285:

1. Section I of Form 2285 is generally completed by the TCS.

2. Section I shows various tax adjustments that would result if separate examinations were made for the general adjustment and for each of the carryback adjustments. The columns and lines on Section I of Form 2285 are arranged to facilitate the application of adjustments in a predetermined order prescribed for concurrent determinations of tax liability. APS computes a running module working from the left to the right side of the form in column order.

3. Form 2285 is divided into eight columns (a through h) and eleven lines. The general adjustment amount shown in column (a) reflects tax determined without carrybacks. Columns (c), (d), (e), (f), and (g) show the year(s) involving a carryback from the subsequent years. Column (b) is generally used if there are six carryback years, or other unusual situations such as the suspended research credit.

4. Line 11 in each column, shows the amount of deficiency and/or overassessment subject to interest. Column (h) shows the net deficiency to assess or net overassessment to abate.

(3) Section II of Form 2285:

1. Section II of Form 2285 can be used to enter other notations or comments, such as the information shown below in paragraph (4).

2. The information in the lower right hand corner (870 date, 23C date, LCU date, etc) may be entered by APS if applicable. The TCS is not required to enter any of this information.

(4) On Form 2285 or a separate attachment to Form 2285 it is recommended that you notate the following:

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

• Prior assessments and abatements for columns (b) through (g), line 10.

• Prior Form 2285's that were in error, if available.

• Any other information that helps APS recompute the module.

(5) The Excel version of Form 2285 found on the Appeals Technical Support Sharepoint site contains formulas in some of the cells to aid in the completion of the form.

(1) Follow these guidelines when computing additions to tax or penalties on cases involving carrybacks:

1. Generally, compute additions to tax and penalties before applying carrybacks.

2. Additions to tax and penalties already assessed are generally not decreased because a carryback is applied (with the possible exception of failure to pay when it accrues beyond the effective date of the carryback).

3. Additions to tax and penalties are due even when all the tax is eliminated as a result of the carryback.

4. It is not necessary to include information regarding the additions to the tax or penalties on Form 2285.

(2) See IRM 20.2.5.3, Interest on Penalties and Additions to Tax, paragraph (4) for information about interest on penalties due to a carryback recapture.

(1) When Form 2285 has been prepared and restricted interest applies, annotate either Form 3610 (if prepared) or the tax computation form using a statement similar to the one shown below:

"Restricted Interest applies for __(enter tax year) ".

(2) The restricted interest code sections are no longer required.

(1) All of the following conditions must be present in order for the LCU rate to apply:

1. The taxpayer must be a "C" Corporation.

2. A "threshold underpayment" of over $100,000 in tax must exist.

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

4. The amount shown on a proposed deficiency of tax by either a 30/90 Day Letter is not paid within 30 days from the notice date OR the amount shown in a notice and demand (if deficiency procedures do not apply) is not paid within 30 days of the date of notice and demand (whichever is earlier).

   Exception: See IRM 20.2.5.8.5, Special Application of 2% Interest for Periods Before and After December 31, 1997, for LCU rules for dates prior to December 31, 1997.

(2) See Treas. Reg. 301.6621-3(d) for comprehensive examples for applying the LCU rate.

(1) When the LCU rate applies, annotate either Form 3610 (if prepared) or the tax computation form using a paragraph similar to the ones shown below:

• "It is determined the deficiency for the taxable year __is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax is two percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code."

• A shorter statement may also be used, such as:
  "IRC section 6621(c) applies for __(enter tax year)."

(1) Enter the "Notice Date" on the Form 5403 Worksheet.

1. The "Notice Date" is the date of the letter/notice that activates the LCU rate.

   Caution: Refer to IRM 8.17.6.6.1.4.1 for information about incorrect LCU dates on IDRS.

(2) APS determines the applicable date by adding 30 days to the "notice date."

(3) The Form 5403 Worksheet is available on the Appeals TCS web site.

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

(1) IRC 6404(g) applies to increases in liabilities on timely filed individual income tax returns for taxable years ending after July 22, 1998.

(2) The IRC 6404(g) interest suspension applies to an increase in liability for any taxes reportable on a Form 1040, U.S. Individual Income Tax Return, and therefore would apply to an individual’s liability as a result of an adjustment to a flow-through entity, or TEFRA adjustment

(3) Per IRC 6404(g)(2), the IRC 6404(g)(1) suspension rules do not apply for:

1. Any penalty imposed under IRC 6651.

2. Any interest, penalty, addition to tax, or additional amount for any of the following:

• Fraud Case

• Tax Liability Shown on a Return

• Gross Misstatement (applicable to tax years beginning after 12/31/2003)

• Undisclosed Reportable Transaction with respect to which the requirement of IRC 6664(d)(3)(A) is not met and any listed transaction as defined in IRC 6707A

• Any Criminal Penalty

(4) IRC 6404(g) interest suspension also does not apply to the deficiency resulting from the disallowance of all or a portion of a tentative carryback (Form 1045 or Form 1139 recapture) since a carryback adjustment restores the liability to what was reported on the return.

(5) IRC 6404(g) refers to the suspension of interest, penalties, and additions to tax. However, its practical effect is only on the suspension of underpayment interest since there are no current penalties or additions to tax suspended by IRC 6404(g). Interest on both the tax and applicable penalties (except as described above) is suspended if the conditions of IRC 6404(g) occur.

(6) If tax has been abated as a result of an amended return or other signed written document filed by the taxpayer and later adjustments are made to those amended items, IRC 6404(g) does not apply to those adjustments.

(7) AO's or ATCL's must identify gross misstatements and provide this information on the TCS work request if requesting that TCS prepare the settlement computations. See IRM 8.17.6.9.1.1 for information which must be provided on the TCS work request for cases with listed transactions and undisclosed and reportable transactions.

(1) For taxable years ending after July 22, 1998, the IRS must provide adequate notice of a liability before the close of the 18 month period (extended to 36 months as explained in (2) below), which begins on the later of the following:

1. The due date of the return, if filed on or before the return due date, or

2. The filing date of the return, if filed timely under a valid extension.

(2) Section 8242 of the Small Business and Work Opportunity Tax Act (SWOTA) of 2007 extended the notification period from 18 months to 36 months for notices issued on or after November 26, 2007. (See Treas. Reg. 301.6404-4.) This amendment affects tax years where the 18-month period, starting from the return due date or the return filed date per (1) above, is still open as of November 25, 2007.

1. To determine which notification period applies if the notice was provided on or after November 25, 2007, 18 months is added to the return due date (or timely return filed date). See whether this date falls before or after November 25, 2007. If the date falls on or before November 25, 2007, the Service has 18 months to notify the taxpayer. But if the date falls after November 25, 2007, the Service has 36 months to notify the taxpayer.

Note: Chief Counsel calculates the "months" in the 36 (or 18) months notification period as "36 (or 18) months minus 1 day". If the 18 months minus 1 day falls on a Saturday, Sunday, or legal Holiday, the next business day is the "end date" of the 18 month period. If the 36 months minus 1 day falls on a Saturday, Sunday, or legal Holiday, the next business day becomes the "end date" of the 36 month period.

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

(4) The date when adequate notice is provided is referred to as the IRC 6404(g) notice date.

1. No IRC 6404(g) suspension is allowable if the IRC 6404(g) notice date is PRIOR TO 18/36 months from the later of the original return due date, the date the return was filed (if filed under a valid extension) or a signed taxpayer document asserting an increase in tax liability.

2. If the IRC 6404(g) notice date is AFTER the 18/36 month date, interest is suspended beginning on the day after the close of the 18/36 month period. If the close of the 18/36 month period falls on a weekend or holiday, the next business day becomes the close of the 18/36 month period. Interest accrues from the due date of the return to the beginning of the suspension period for IRC 6404(g) purposes.

3. The suspension period ends on the 21st day after the notice is sent to the taxpayer. Interest resumes on the 22nd day after the IRC 6404(g) notice date.

(1) The notice requirement applies separately to each item or adjustment. An adequate notice provided within the prescribed time period prevents the suspension of interest only on those items or adjustments described in that notice.

(2) An adequate notice should be in a written format which includes the amount of the liability, the basis for that liability, and sufficient information or explanation regarding the adjustment to enable the taxpayer to challenge the adjustment.

(3) The following items are considered sufficient notice:

1. Math error notices

2. Underreporter Program (URP) notices such as the CP 2000

3. Revenue agent reports (RAR's)

4. 30-day letters with accompanying RAR's

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

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

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

(4) Examination reports such as Form 4549 and Form 1902-B are sufficient notice if they contain an explanation of each item of adjustment.

(5) For TEFRA cases, the notice requirements of IRC 6404(g) are met if notice is provided to the taxpayer as a partner under the TEFRA provisions. Generally, the following TEFRA related items meet the notice requirements of IRC 6404(g) or are referred to as IRC 6404(g) notices:

• Form 5701, Notice of Proposed Adjustment

• TEFRA entity Summary Report

• 60-day letter (The 60-day letter for TEFRA cases is the equivalent of a 30-day letter in deficiency proceedings. It gives the investors the opportunity to appeal the findings of the examiner.)

• Appeals settlement letter

• FPAA, Final Partnership Administrative Adjustment

(6) In the case of an adjustment resulting in an increased deficiency in a Tax Court proceeding, consult with the Counsel Attorney to determine when notice was provided to the taxpayer. See CC Notice N(35)000-172 for further information.

(1) There may be more than one notice for the same return and more than one IRC 6404(g) notice date.

1. For example, Compliance may issue more than one report for a tax return during the course of an examination. If a subsequent report contains no new items or adjustments and the proposed deficiency is equal to or less than the earliest report, there is one IRC 6404(g) notice date. The IRC 6404(g) notice date is the date of the earliest report.

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

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

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

3. See IRM 20.2.7.6.5.1, Multiple Section 6404(g) Notices, for examples of multiple notice dates.

4. When requesting that TCS prepare computations, the requestor (AO or Counsel) must provide all the notices and attached explanatory schedules for the TCS to be able to determine whether multiple notice dates apply.

(2) New issues can result in multiple notice dates. Since the IRC 6404(g) notice requirement applies separately to each item or adjustment, a new issue included in the settlement computation causes there to be more than one IRC 6404(g) notice date. The settlement computation containing the new issue has a separate IRC 6404(g) notice date.

1. The settlement computation must contain an explanation of adjustment for each new issue or it is not considered a notice.

(3) An amended return can cause more than one notice date. See IRM 8.17.6.9.5,

1. When requesting that TCS prepare computations, the requestor (AO or Counsel) must provide the TCS with all the applicable amended returns.

(4) If there is more than one IRC 6404(g) notice date, compute the portion of the liability attributable to each notice date and include the computation in the settlement computation. Clearly indicate the portion of the liability attributable to each notice date on the IRC 6404(g) Worksheet and attach it to the Form 5403 Worksheet.

(1) Rev. Rul. 2005-4 extends the scope of the IRC 6404(g) suspension rules to additional taxes voluntarily reported by taxpayers on amended returns. The IRC 6404(g) interest suspension also applies to liability increases based on any other written notice submitted by the taxpayer to the IRS. The ruling was made retroactive, so it is effective for tax years ending after July 22, 1998.

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

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

(3) The following are examples of IRC 6404(g) and amended returns under Rev. Rul. 2005-4.

Example 1: An individual filed an income tax return for the 2002 tax year on the due date of April 15, 2003. On October 4, 2004, within 18 months after the due date, the individual reported (but didn’t pay) additional tax due for 2002 on an amended return. The IRS hadn’t notified the individual of the amount or the basis for any additional tax that was reported on the amended return. Because the amended return was filed within the applicable 18 month notification period, interest wasn’t suspended on the additional tax reported on the amended return. The IRS didn’t have to notify the taxpayer of the amount and basis of the additional tax reported on the amended return.

Example 2: The facts are the same as in Example 1, except that the individual files the amended return on November 26, 2004, more than 18 months after the due date of the individual’s return, and remits payment with the amended return. Here, because the IRS didn’t provide the individual with the required notice on or before October 14, 2004, the date on which the applicable 18 month notification period expired, interest was suspended starting on October 15, 2004 and ending November 26, 2004, the date on which the additional tax was paid.

Example 2 Note: If only tax was paid with the amended return, there is still interest accruing on the tax that qualifies for 6404(g) interest suspension. In Example 2, if only tax had been paid then accrued interest would be suspended starting on October 15, 2004, and ending on December 17, 2004. December 17, 2004 is 21 days after the date that the individual filed an amended return (on November 26, 2004).

Example 3: The facts are the same as in Example 2, except that the individual didn’t remit payment with the amended return. Here, interest was suspended starting on October 15, 2004, and ending on December 17, 2004.

(4) When requesting that TCS prepare computations, the requestor (AO or Counsel) must provide the TCS with the amended return information or other written notice if applicable.

(1) A timely filed Form 1040 or Form 1040X requires posting the IRC 6404(g) notice date to Master File if notification of a liability is not made within the 18/36 month period. Campus inputs TC 971 with Action Code 064 on Master File to record the 6404(g) notice date. Master File systemically computes the interest when there is only one 6404(g) notice date. Cases with multiple 6404(g) notice dates require manual interest computation and restriction. (TC 340).

(2) Effective January 1, 2004, the liability amount shown on the notice or amended return must also be input by the Campus along with the IRC 6404(g) notice date.

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

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

(3) When IRC 6404(g) applies, use the following procedures:

1. Annotate IRC 6404(g) applies on the Form 5403 Worksheet.

2. If Form 3610 is prepared, include a statement on Form 3610 in both docketed and non-docketed cases. For Rule 155 cases include a statement on the Rule 155 face sheet. Use language from the following table for the statement:

If ...	Then ...
The entire deficiency has the same notice date -	Use "IRC 6404(g) applies, and notice was provided on (enter date)."
There is more than one IRC 6404(g) notice date -	Use "IRC 6404(g) applies, see attached schedule." .
Any portion of the tax liability involves adjustments that are based on gross misstatements for which no interest suspension is allowed (for returns due after 12/31/2003) -	Use the statement: "IRC 6404(g) applies, see attached schedule."
Interest suspension is not allowed on part of the deficiency because a portion of the tax liability involves adjustments that are based on undisclosed reportable or listed transactions -	Use the statement: "IRC 6404(g) applies, see attached schedule."

3. The applicable language from the above table may be shown on the tax computation form (Form 5278 , Form 4549, Form 4549-A , etc.) instead of on Form 3610. The "schedule" referred to in the table can be the IRC 6404(g) Worksheet, or another computational schedule.

4. Any computations used to determine the portion of deficiency attributable to gross misstatements, and undisclosed reportable or listed transactions must be attached to the IRC 6404(g) Worksheet as a separate schedule or exhibit.

5. The Appeals Officer is responsible for ensuring that the IRC 6404(g) Worksheet is attached to the Form 5403 Worksheet, and that both documents are attached to the inside left flap of the administrative file folder when the case is closed.

(1) The employee preparing the settlement computations is responsible for determining if May/Sequa applies. If Sequa applies, the TCS is responsible for preparing the Sequa Worksheet.

(2) Three criteria must be present for Sequa to apply:

1. There must be an underpayment of tax,

2. There must have been a "credit elect" applied to the succeeding year which originated from the year having the underpayment, and

3. The filers of such returns are required to make estimated tax payments.

   Note: In general, the provisions of 6654 and 6655 apply to taxes reportable on income tax returns and to similar taxes for certain tax exempt organizations.

   Caution: Sequa could apply even if the taxpayer doesn't make estimated tax payments. For example, consider a case where a taxpayer’s Form 1040 showed an overpayment in 2005 that was applied to 2006. 2005 is now in Appeals and has an underpayment. The taxpayer did not need to make estimated tax payments in 2006 because the taxpayer had no tax in 2006. Sequa would still apply in this case since all three criteria are present. The taxpayer's underpayment is attributable to taxes reportable on a Form 1040 return, and filers of these returns need to make estimated tax payments to pay their tax liability.

(3) Sequa does not apply to employment tax returns (such as Form 940, Form 941, Form 943, Form 945) or 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. Filers of these returns are required to make federal tax deposits, but federal tax deposits are not considered estimated tax payments.

(4) Sequa also does not apply to excise tax returns. Excise tax returns have required federal tax deposits like the deposits made for employment tax returns. Federal tax deposits are not considered estimated tax payments. Since filers of excise tax returns are not required to make estimated tax payments, Sequa does not apply.

(5) Definitions:

1. "Underpayment" - Generally, for purposes of Sequa, there is an underpayment of tax when the finally determined tax is greater than the tax on the original return, when considering only general adjustment tax, (i.e. tax liability determined before adjustments to tax due to carrybacks).

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

(6) For information on how to determine if there is an underpayment or credit elect, see IRM 8.17.6.10.1.1 and IRM 8.17.6.10.1.2.

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

1. See Exhibit 8.17.6-2 for a sample of a completed Sequa Worksheet.

2. Excel versions of the Sequa Worksheet are available on the Appeals Technical Support SharePoint site, which is reached by the "Spreadsheets Sharepoint" link on the TCS web site. Sequa worksheets for individuals are located in the "Individual" spreadsheets folder, and the Sequa Worksheets for corporations in the "Corporate Spreadsheets" folder

3. It is very important to use the correct worksheet for the year involved. Instructions for completing the Sequa Worksheets are contained within the Excel workbook.
   
   • Individuals - The Sequa worksheet for individuals has an Input tab so that the year can be input correctly.
   • Corporations - Use the worksheet corresponding to the subsequent year for the year of the underpayment of tax. For example, for a 2007 year tax underpayment, you will need to complete the Sequa worksheet for the 2008 year.

(2) Use the Sequa Worksheet to help determine the following:

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

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

Note: Per IRM 20.2.5.7.2, the Sequa benefit is allowed even if there is a penalty for failure to make timely estimated tax payments on the succeeding tax period.

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

(4) The following information is needed to complete the worksheet:

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

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

   Caution: Consider all credits (other than the credit elect) and payments dated no later than the last installment due date.

3. Tax reported for the succeeding year.

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

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

(5) Some items to be aware of when preparing the Sequa worksheets are discussed below:

1. Subsequent Year Return Not Filed:
   Sequa does not apply if the subsequent year tax return has not been filed. (See discussion in IRM 8.17.6.10.1.2.)

2. Timely Filed vs. Non Timely Filed Returns:
   The return does not have to be timely filed for Sequa to apply. There is no requirement that the return be timely filed for a taxpayer to make an election to have their overpayment applied to the next year as a credit elect. Treas. Reg. 301.6402-3(a)(5) expressly authorizes that taxpayers may make an election to credit an overpayment on an amended return.

3. Prior Year Tax Liability - Individuals:
   For individuals, if the taxpayer did not file a prior year tax return but was required to, a zero should be entered in the prior year tax liability.

4. Prior Year Tax Liability - Corporations:
   For corporations, the prior year tax liability should be left blank if:
   • A tax return was not filed for the prior year, or
   • The tax for the prior year was zero, or
   • It was a short year return.

5. Short Year Returns:
   When there is a short year return, the number of required installment payments may be less than four, and you may need to manually adjust the installment due dates on your Sequa worksheet. If you have a short year return of less than four months, there are no installment payments required. Since the credit elect date cannot be greater than the Return Due Date (RDD), the RDD is used for your application of overpayment credit per Sequa. In addition, the taxpayer cannot use the preceding year tax if it was not a taxable year of 12 months and the prior year tax liability should be left blank in this situation.

6. 52-53 Week Year End:
   The installment due dates will not automatically be computed correctly on the Sequa worksheet when you enter your tax year beginning date for a 52/53 week tax period. Since the installment due dates will always be the 15th day of the 4th, 6th, 9th and 12th months, they will be the same as whatever month end was originally elected for the 52/53 week period.

7. Payments and Credits for Individuals:
   Some payments and credits that post to the transcript as a TC 766 are treated as a refundable credit which reduces the tax liability for both YR 1 and YR 2. The Sequa worksheet for individuals found on the SharePoint site has been revised to include the new refundable credits on lines 4 through 11 for the YR 2 tax amount. The tax amount entered for YR 1 (on line D of the Input tab of the Excel spreadsheet) should also be reduced by the refundable credit amounts. (See IRM 8.17.6.10.1.2 for definition of "YR 1" and "YR 2".) Backup withholding credits for individuals are included on the same line with the rest of their federal tax withholding.

8. Payments and Credits for Corporations:
   Some payments and credits that post to the transcript as a TC 766 for corporations, such as fuel tax credits and backup withholding credits are treated as a refundable credit which reduces the tax liability for both YR 1 and YR 2. If you are unable to determine whether a TC 766 is a fuel tax credit vs. another type credit, you should insert a footnote on your Sequa worksheet to explain.

9. Telephone Excise Tax Credit (TETR):
   TETR credits are also posted as a TC 766; however they are not considered a credit against tax for purposes of IRC 6654 and IRC 6655. (See Notice 2006-50, 2006-25 I.R.B. 1141, Section 5 paragraph (f) for more information.)

10. Refunds Issued Before the Succeeding Year’s Due Date for Corporations:
    In some instances, use of money on credit elect that is not applied to an estimated tax installment for the succeeding year will cease prior to the due date of that tax return. If a refund is issued before the normal due date, use of money under Rev. Rul. 99-40 will cease on the date of the refund, up to the amount of the refund. The corporate Sequa worksheet has been modified accordingly.

11. Annualized Method of Accounting:
    If you determine that the taxpayer used the annualized installment method, attempts should be made to secure the Form 2220/2210 for the subsequent year before preparing the Sequa worksheet. A Computer Condition Code (CCC) of 8 on a TXMODA for BMF returns could be an indicator that the annualized installment method was used. On TXMODA, it is listed as RCC>8 under the posted return information. (Note that IRM 3.11.16.8.1.29, CCC “8” – Waiver of Estimated Tax Penalty, lists other reasons why there might be a CCC 8 notated on a transcript, so a CCC 8 indicator could signify something other than the taxpayer using the annualized installment method.)

12. Merged and acquired corporations:
    For merged and acquired corporations, further research may be needed to determine the correct due date and payment dates.

(1) The employee who prepares the settlement computations is also responsible for completing the "Form 5403 Worksheet". Indicate if Sequa applies on the Form 5403 Worksheet.

(2) The Appeals Officer or ATCL is responsible for attaching the Sequa Worksheet to the Form 5403 worksheet.

(3) The Appeals Officer or ATCL is responsible for attaching all the documents to the inside left flap of the administrative file folder.

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

(1) If the taxpayer claimed research credits which are subject to the suspension periods required by Section 502(d) of the Tax Relief Act of 1999 (see IRM 8.7.1.4, Credit for Increasing Research Activities, IRC 41, for a full discussion). The suspended credits may not be taken into account in the May/Sequa computation before the expiration of their respective suspension periods. Thus:

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

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

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

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

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

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

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

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

Example:

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

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

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

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

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

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

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