20.2.9. Interest on Carryback of Net Operating Loss

(1) Interest (charged) on underpayments and (paid) on overpayments is mandatory, unless otherwise provided by law. 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) The following list of Internal Revenue Code (IRC) sections are specific to the Carryback Program:

• 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

• IRC 172, Net Operating Loss Deduction

• IRC 6411, Tentative Carryback and Refund Adjustments

• IRC 39, Carryback and Carryforward of Unused Credits

(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) Taxpayer Bill of Rights 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 and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer 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 prepares reports of significant issues, such as corrections to computer programming that affect taxpayers.

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

(2) In accordance with IRC 6611(a), interest is allowed and paid on any overpayment of tax at the overpayment rate established under IRC 6621.

(3) 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.

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

(1) For additional information, such as the latest interest news, job aids, interest tool updates, training material, list of analysts, etc., see the Interest Knowledge Base Interest Knowledge Base.

(1) When the 45-day period is in jeopardy, consideration should be given to issuing a manual refund when the overpayment to be refunded is $5,000 or more.

(2) When issuing a carryback manual refund, consider previously assessed failure to file, failure to pay penalties and interest, that will be affected by the adjustment actions. Any decrease in penalties or interest already paid must be included in the overpayment amount. In addition, unassessed accruals of penalty and/or interest may reduce the overpayment amount.

(3) For additional details, including information on the various circumstances requiring the issuance of a manual refund, please refer to IRM 21.5.9.5.8, Carryback Manual Refund.

(1) When the interest-free period for refunding an overpayment resulting from a carryback allowance is missed, interest must be paid on the refund - see IRM 20.2.9.3, 45-Day Rule, and IRM 20.2.9.4, Determining the Overpayment Interest Period.

(2) The interest accrual rate or rates on the carryback overpayment is based on whether the taxpayer is an individual or corporation - IRC 6621(a)(1).

(3) The overpayment rate for individuals is the federal short-term rate plus 3 percentage points. This is the "Fed - Federal" rate in ACT/InterestNet (DMI) and the standard overpayment rate for Command Code (CC) COMPA. See IRM 20.2.1.3.2, Rate, and IRM 20.2.1.5.2, Command Code COMPA.

(4) The overpayment rate for corporations is the federal short-term rate plus 2 percentage points, except when the overpayment exceeds $10,000 for a taxable period and the rate is the federal short-term rate plus 0.5 of a percentage point. These are the "Fed - Federal Corporate" and "GATT" rates in ACT/InterestNet (DMI), and the corporate and GATT rates for Command Code (CC) COMPA. See IRM 20.2.1.3.2, Rate, IRM 20.2.1.5.2, Command Code COMPA, and IRM 20.2.4.10, Special Overpayment Interest Rules for Corporations.

(5) Please remember that, while the IRS currently approves and supports the use of CC COMPA and ACT/InterestNet (DMI) to perform manual interest computations, ACT/InterestNet (DMI) is the preferred interest computational tool. There are few instances when CC COMPA should be solely used. See IRM 20.2.1.5, Interest Computational Tools and Reports: Manually and Systemically Calculated Interest.

(1) Underpayment interest, at the underpayment rate, is charged on an outstanding liability from the due date of the unpaid liability to the date fully paid – IRC 6601(a).

(2) A reduction in tax by a net operating loss carryback, net capital loss carryback, credit carrybacks, and foreign tax credit carrybacks does not affect the computation of underpayment interest until the filing date for the taxable year in which the carryback arises – IRC 6601(d)(1), IRC 6601(d)(2), and IRC 6601(d)(3). The term "filing date" means the last date prescribed for filing the return (determined without regard to extensions) – IRC 6601(d)(4) and IRC 6611(f)(4)(A).

(3) Underpayment interest related to the amount of the carryback recapture is owed from the filing date for the year in which the carryback arose until the date on which the taxpayer repays the excessive amount. See IRS Notice 88-119, 1988-2 C.B. 453, Interest on Underpayments Following Allowance of Carryback-Related Overpayment.

(4) The interest accrual rate for underpayments, carryback-related or otherwise, is generally the federal short-term rate plus 3 percentage points – IRC 6621(a)(2). This is the "FED - Federal" rate in ACT/InterestNet (DMI) and the standard underpayment rate for Command Code (CC) COMPA. See IRM 20.2.1.3.2, Rate, and IRM 20.2.1.5.2, Command Code COMPA.

(5) If, however, the liability is deemed to be a "Large Corporate Underpayment" (LCU), the rate of interest is the federal short-term rate plus 5 percentage points - IRC 6621(c). This is the "LCU" rate in ACT/InterestNet (DMI) and Command Code (CC) COMPA. See IRM 20.2.1.3.2, Rate, and IRM 20.2.1.5.2, Command Code COMPA.

(6) Please remember that, while the IRS currently approves and supports the use of CC COMPA and ACT/InterestNet (DMI) to perform manual interest computations, ACT/InterestNet (DMI) is the preferred interest computational tool. There are few instances when COMPA should be solely used. See IRM 20.2.1.5, Interest Computation Tools and Reports: Manually and Systemically Calculated Interest.

(1) Compute overpayment interest as follows:

• For interest accruing on or before October 3, 1982, allow interest from the first day of the year following the year in which the credit arose.

• For interest accruing after October 3, 1982, allow interest from the due date or the delinquent received date of the year in which the credit arose.

(2) Assess a deficiency that is the result of an excessive or erroneous investment credit carryback any time before the statute expiration date of the taxable year that released the credit.

(1) A taxpayer may claim investment credit in one year and pay recaptured tax in another year. An NOL carryback could release an investment credit. Because the investment credit is no longer in use, the taxpayer does not owe the recaptured tax. Interest is only paid on the overpayment, when the 45-day interest-free period for the carryback application or claim is missed. See IRM 20.2.9.4, Determining the Overpayment Interest Period, to establish whether the 45-day interest-free period has been met. Additionally, refer to the 45-day interest-free chart on SERP as an additional resource.

(1) When Form 2285 is used to compute an overpayment and/or underpayment of tax, compute interest on that tax by using a "running module balance" with current TXMOD or Master File information.

1. Apply all interest considerations (for example, Rev. Rul. 99-40, Rev. Proc. 94-60) in recomputing the tax module.

2. Apply carryback allowances with the loss year filing date for years after October 3, 1982.

3. When applying carryback recaptures, consider Rev. Rul. 99-40 and within module netting procedures as appropriate. Allow overpayment interest on general adjustment decreases to the due date of the loss year return for the carryback recapture(s).

(1) IRC 6501(a): If a deficiency exists on a tax module that is not attributable to a carryback allowance (net operating loss carryback, capital loss carryback, credit carryback) on the same tax module, the statutory period of time to make the assessment is generally the later of the following:

• Three years from the return due date,

• Three years from the date the return was filed, or

• Exceptions found under IRC 6501(c).

(2) IRC 6501(h) and IRC 6501(j): If a deficiency exists on a tax module that is attributable to a carryback allowance (net operating loss carryback, capital loss carryback, credit carryback) on the same tax module, the statute for assessment of the deficiency generally is the later of the following:

• Three years from the due date of the loss year return in which the carryback allowance originated,

• Three years from the date the loss year return in which the carryback allowance originated was filed, or

• Exceptions found under IRC 6501(c).

(3) IRC 6501(k): If the statutory periods outlined in paragraph (1) above have expired, a deficiency that is not attributable to a tentative carryback allowance (net operating loss carryback, capital loss carryback, credit carryback) on the same tax module may be assessed up to the amount of the tentative carryback allowance, less any amount assessed per paragraph 2 above by the later of the following:

• Three years from the due date of the loss year return in which the carryback allowance originated, or

• Three years from the date the loss year return in which the carryback allowance originated was filed.

(4) The examples below are for Paragraph 3 above:

(5) For this example, the adjustments would be input and posted on the 201712 tax period using the following transaction codes and adjustments:

(6) For this example, the adjustments would be input and posted on the 201512 tax period using the following transaction codes and adjustments:

(1) The net increase or decrease in tax is shown on line 11, column (h) of Form 2285. Ensure that the net increase or decrease in tax matches what is shown in the audit report.

(2) If there is a discrepancy, contact Technical Services to prepare a "corrected" Form 2285. Technical Services should likewise be contacted when any tax component of the net increase or decrease comprising line 11, column (h), does not match the audit report; for example, a conflicting availability, Taxable Year Ended, date assigned to a carryback allowance or recapture.

(3) Upon receipt of the corrected Form 2285 from Technical Services, use the running module balance computational method to adjust the interest on the impacted tax module(s) accordingly - see IRM 20.2.1.4.2, Manual Calculation of Interest, IRM 20.2.4.12, Manually Computing Overpayment Interest, and IRM 20.2.5.2.3, Steps to Compute Interest.

(4) When interest is manually computed and adjusted, documentation showing how and why the interest was manually computed must be included with the adjustment source document - see IRM 20.2.1.4.2.1, Manual Calculation of Interest - Documentation.