20.2.11. Miscellaneous Interest Provisions

(1) 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 estate, excise, employment, and foreign tax issues 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 to 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) IRM 20.2.11, Miscellaneous Interest Provisions, provides Servicewide policy for the administration of interest on the "not so common" types of returns.

(2) All reference materials involving interest must be consistent with the procedures in the IRM and must receive approval from the Office of Servicewide Interest (OSI) prior to distribution.

(3) Overall responsibility for the interest program resides with OSI. OSI coordinates policy and procedures concerning the administration of the interest programs.

(4) All actions, including actions by examiners, are to be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

(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 is computed accurately, consistently, and fairly.

(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 interest issues, such as corrections to computer programming that affect taxpayers.

(1) Refer to Exhibit IRM 20.2.1-2, Definitions of Terms for interest related terms.

(1) For additional information, such as the latest interest news, job aids, interest tools, alerts, training materials, list of OSI analysts, etc., see the https://irsgov.sharepoint.com/sites/ETD-KMT-KB022 Interest Knowledge Base on OSI’s Virtual Library.

(1) Determination of liability for PHC tax may be established by IRC 547(c).

• A decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction which has become final;

• A closing agreement under IRC 7121 (Form 866, Agreement as to Final Determination of Tax Liability); or

• An agreement entered into by the Secretary with the taxpayer, relating to the PHC tax (Form 2198, Determination of Liability for Personal Holding Company Tax).

(2) If a deficiency is determined, IRS furnishes Form 976, Claim for Deficiency Dividends Deductions by a Personal Holding Company, Regulated Investment Company, or Real Estate Investment Trust, to the taxpayer.

(1) Form 976, Claim for Deficiency Dividends Deductions by a Personal Holding Company, Regulated Investment Company (RIC), or Real Estate Investment Trust (REIT), is used to claim the deficiency dividend deduction.

(2) To qualify for the deduction the taxpayer must have:

• Filed a timely return (i.e., return received by its due date or extended due date, including consideration of the 7-day grace period),

• Committed no fraud,

• Distributed the dividend within 90 days after the determination, and

• Filed the claim (Form 976) after such distribution and within 120 days after the determination date.

(1) When filed, Form 976 suspends the running of the statute of limitations on assessment and collection for a period of two years after the date of the determination.

(2) See IRC 547(f) and IRC 860(h), which state if a claim is filed within 120 days after the determination the running of the statute of limitations provided in IRC 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collection, in respect of the deficiency and all interest, additional amounts, or assessable penalties in respect thereof, shall be suspended for a period of 2 years after the date of the determination.

(1) Overpayment interest is not allowed if:

• The deficiency dividend deduction results in an overpayment, and

• The original tax is assessed and paid prior to the determination of an overpayment.

(2) If either of the above conditions are met, prevent the systemic calculation of allowable interest by inputting a TC 770 for zero. See IRC 547(b)(2) and section 7 of Rev. Proc. 60-17.

(1) The taxpayer is liable for the interest due on the PHC tax that was eliminated by the dividend deduction. Interest is charged from the normal (unextended) due date of the Form 1120, U.S. Corporation Income Tax Return, until the received date of the Form 976. The interest must be manually computed and input with a TC 340. Use a non-restricting TC 340 if conditions permit. See IRM 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340.

(2) The taxpayer may also be liable for interest on any underpayment that exceeds the dividend deduction, including the following:

• Tax underpayment in excess of the deduction;

• Penalties assessed; or

• Interest on tax, penalties, and/or interest.

(3) When the established deficiency exceeds the amount attributable to the dividend deduction, the difference is assessed. Interest on excessive tax amount is generally computed from the normal (unextended) due date of the Form 1120 until the earlier of the full payment date, a filed waiver date plus 30 days [IRC 6601(c)], or the notice and demand date (23C date), whichever is applicable. Interest on the tax amount eliminated by the dividend deduction is computed under the rules of IRM 20.2.11.2.5 (1) above. Input Transaction Code (TC) 971 with Action Code (AC) 697 with the amount of the dividend deduction to identify the TC 340 as a RIC/REIT interest adjustment.

(1) The following procedures apply to a claim filed on or before the 55th day after a final Tax Court decision or judgement establishes the liability:

1. If the PHC deficiency is identical to the tax on the approved deficiency dividend deduction, assess and collect underpayment interest only, computed on the full deficiency from the normal (unextended) due date of the tax to the date the deficiency is satisfied by a credit/payment, whichever is earlier.

2. If the PHC deficiency exceeds the tax on the approved deficiency dividend deduction, assess and collect the excess of the PHC tax, along with interest computed from the normal (unextended) due date of the tax or the date of the overpayment if satisfied by a credit/payment.

(2) If the claim is not filed before the 55th day after the court decision became final, assess the full amount of the deficiency along with underpayment interest from the normal (unextended) due date of the tax to the date of assessment or the date the deficiency is satisfied by a credit payment, whichever is earlier.

(3) If a claim is filed between the 55th and 60th day after the decision became final, abate that part of the assessment that equals the tax on the approved PHC deficiency dividend deduction.

1. Collect any excess tax along with the proportionate interest previously assessed.

2. Compute and collect interest only on that part of the tax equal to the amount attributed to the approved deficiency dividend deduction, from the normal (unextended) due date of the tax to the date of assessment or the date the deficiency is satisfied by a credit payment, whichever is earlier.

(1) If the tax decrease determined under IRC 1383 for the prior taxable year is more than the tax for the current taxable year, the excess:

• Is considered a payment of tax on the prescribed date for making payment (generally, the normal unextended due date) for the current taxable year, and

• Will be refunded or credited as if it were an overpayment for the current taxable year.

(2) Overpayment interest is allowed on the overpayment from the prescribed date for making payment (generally, the normal unextended due date) for the current taxable year, rather than from the actual date of overpayment in the prior year.

(3) The amount of overpayment is shown on line 9, Column (b) of Form 2285, Concurrent Determinations of Deficiencies.

(1) Interest on the imputed underpayment is initially calculated from the day after the normal (unextended) due date of the partnership return for the reviewed year, determined without including any extensions, to the earliest of the following dates using the standard underpayment rate (short term quarterly federal rate plus 3%, IRC 6233):

1. The date prescribed for payment in the first notice and demand for payment issued to the partnership;

2. The due date of the partnership return (without regard to extension) for the adjustment year; or

3. The date the imputed underpayment is fully paid.

(2) Interest on any penalties determined to apply at the partnership level such as the accuracy related penalty is calculated from the reviewed year normal (unextended) due date to the notice and demand date using the standard underpayment rate per IRC 6233. If not paid on the filing date it continues to accumulate.

(3) No failure to pay penalty will be assessed at the time of the first notice and demand letter (FTP is a future event that can only occur after the first notice and demand letter).

(4) Applicable grace period = 21 calendar days if the amount due is less than $100,000 or 10 business days if equal to or greater than $100,000. Per IRC 6601(e)(3), interest on the amount of the notice that is paid within 21 calendar (or 10 business) days stops the notice and demand date, (IRC 6601(e)(2)).

(5) If the partnership pays the imputed underpayment and all related penalties and interest included in the balance due shown in the notice and demand letter within the applicable grace period, no additional charges will apply. This concept applies to the first notice and demand letter and all subsequent notices as well, if paid within the grace period, no additional charges should be assessed.

(6) If the audited partnership fails to pay within the applicable grace period under IRC 6601(e) after the first notice, additional interest on the balance due will continue to run at the standard underpayment rate for the first 10 calendar days after the notice and demand date. If an amount is still not paid 10 days after notice and demand interest on the balance due should be calculated using "5 percentage points" for "3 percentage points" when applying IRC 6621(a)(2)(B) (i.e. at an extra 2% rate) until it is paid in full.

(7) If the audited partnership has not paid the balance due within the applicable grace period after the first notice, the failure to pay penalty can be assessed and billed in a second notice and demand letter. The failure to pay penalty is only calculated on the imputed underpayment, not the penalties determined at the exam level such as the accuracy related penalties.

(1) Under IRC 6226, a partnership may elect to have its partners take adjustments into account in lieu of being liable for an imputed underpayment itself. Under Treas. Reg. 301.6226-3(e), a pass-through partner of the partnership may be liable of an imputed underpayment, as well as any penalties, additions to tax, additional amounts, and interest with respect to the adjustments, where it fails to provide statements required under that section.

(2) For purpose of IRC 6226, Pass-Through Partners are: a partnership required to file a return under IRC 6031(a) (Form 1065), an S corporation (Form 1120-S), as well as a trust (other than a wholly-owned trust disregarded as separate from its owner for Federal income tax purposes), and a decedents estate (Form 1041). For purposes of IRC 6226, a pass-through entity is not a wholly-owned entity disregarded as separate from its owner for federal income tax purposes.

(3) Interest on the Pass-Through Partners imputed underpayment is calculated from the normal (unextended) due date (without extensions) of the pass-through partners first affected year return to the date all amounts due are paid in full using the standard underpayment interest rate under IRC 6621(a)(2) plus 2% (i.e. substituting 5 percentage points for 3 percentage points under IRC 6621(a)(2)(B)). IRC 6226(c)(2). Treas. Reg. 301.6226-3.(c).

(4) Interest on any penalties determined at the partnership level such as the accuracy related penalty is calculated from the normal (unextended) due date of the pass-through partners first affected year return, until the date all amounts are paid in full using the standard underpayment interest rate under IRC 6621(a)(2) plus 2% (i.e. substituting 5 percentage points for 3 percentage points under IRC 6621(a)(2)(B)). Treas. Reg. 301.6226-3(c)(2).

(5) If a pass-through partner is assessed an imputed underpayment and related interest, it has 10 business days if the amount due is at least $100,000, or 21 calendar days if it is less, to pay the amount stated in the notice and demand made to the pass-through partner without incurring additional interest from the date of notice and demand.

(6) Pass-through partners that are assessed an imputed underpayment can also be assessed a failure to pay penalty if the imputed underpayment is not paid by the extended due date of the adjustment year return of the audited partnership. The failure to pay penalty is only calculated on the imputed underpayment and not on the penalties determined at the audited partnership level.

(7) If a pass-through partner fails to timely file the partnership adjustment tracking report under IRC 6226(b)(4)(A)(i), then the pass-through partner can be assessed a failure to file penalty under IRC 6698.

(8) Interest on failure to pay penalties should be calculated at the standard underpayment rate.

(9) Interest on failure to file penalties under IRC 6698 should be calculated at the standard underpayment rate.

(1) If an audited partnership or pass-through partner fails to pay an imputed underpayment within 10 days of the notice and demand, IRC 6232(f) applies. If IRC 6232(f), applies, partners may be assessed their proportional share of the balance due from the partnership or pass-through partner.

(2) "Balance due" for the purposes of the IRC 6232(f) assessments on the partners is defined here as the unpaid balance due from the notice and demand letter.

(3) The proportional share is determined by using the year-end percentages shown on the adjustment year K-1’s, or if the entity ceased to exist after a final determination was made, the K-1’s of the former partners (which former partners is an issue subject to regulatory or other guidance).

(4) After partners are assessed their share of the balance due, they will have an applicable grace period under IRC 6601(e) (10 days if the amount due is at least $100,000, or 21 calendar days if it is less) to pay their share of the balance without incurring additional interest charges.

(5) If a partner does not pay within the applicable grace period, interest should be calculated at the short-term federal rate plus 5% from the notice and demand date until paid in full.

(6) Partners that receive a direct proportional assessment under IRC 6232(f) should not be charged an additional failure to pay penalty going forward if they fail to pay the assessment.

(7) Partners who have been assessed will receive credit for their share of any amounts subsequently paid by the partnership to the extent of the partners outstanding liability, and a partnership’s outstanding liability will be reduced by any amounts paid by the partners. In this way, a duplicate collection of interest should be avoided.

(1) Interest on the imputed underpayment resulting from an AAR is calculated from the reviewed year normal (unextended) due date return, determined without including extensions, to the date the imputed underpayment is paid using the underpayment rate under IRC 6601(a)(2) (short term quarterly federal rate plus 3%), IRC 6233.

(2) Where penalties are determined to apply as a result of adjustments in an AAR, interest on such penalties is calculated from the reviewed year normal (unextended) due date, including extensions, to the date they are paid using the standard underpayment rate under IRC 6601(a)(2). See IRC 6233.

(3) If an AAR results in an imputed underpayment for which the partnership is liable, and payment is not made at the time of the AAR filing, the imputed underpayment may be assessed and a notice and demand letter sent.

(4) A failure to pay penalty under IRC 6651(a)(2) may be asserted with respect to the imputed underpayment and included in the first notice and demand letter as the imputed underpayment was required to be paid at the time the AAR was filed. See IRM 4.31.9.9.3.3(5), Form 886-A: Interest and Penalties for more information.

(5) Pursuant to IRC 6601(e)(3), if the amount specified from the notice and demand is paid within 21 calendar days (or 10 business days where amount equal or exceeds $100,000), no interest should be imposed for the period after the date notice and demand was made.

(6) If the AAR partnership fails to pay within the period under IRC 6601(e)(3), additional interest on the balance due will continue to run at the standard underpayment rate under IRC 6621(a)(2) for the first 10 calendar days after the notice and demand date. After the 10th calendar day from notice and demand, interest on the balance due will be applied at an extra 2% rate (the rate under IRC 6621(a)(2), applying 5 percentage points instead of 3 percentage points for IRC 6621(a)(2)(B)) until it is paid in full. See IRC 6232(f)(1)(A).

(1) Under IRC 6227, a partnership may file a BBA AAR within 3 years after the later (1) the date of the filing the partnership return, or (2) the due date of the return without regard to extensions. Only partnerships may file a BBA AAR. A partner may file BBA AAR on behalf of the partnership if they are in acting capacity of a Partnership Representative (PR). A BBA AAR cannot be filed in a year where a notice of administrative proceeding has been mailed to the partnership for that year.

(2) Interest on the imputed underpayment is calculated from the normal (unextended) due date (without extensions) of the pass-through partners first affected year to the date all amounts due are paid in full using the standard underpayment rate under IRC 6221(a)(2). The extra 2% under IRC 6226(c)(2)(C) does not apply. See IRC 6227(b)(2) (stating do not make substitution under IRC 6226(c)(2).

(3) Interest on any penalties determined at the partnership AAR level such as the accuracy related penalty is calculated from the normal (unextended) due date of the pass-through partners first affected year return, until the date all amounts are paid in full using the standard underpayment interest rate under IRC 6621(a)(2).

(4) If a pass-through partner is assessed an imputed underpayment and related interest, it has 10 business days if the amount due is at least $100,000, or 21 calendar days if it is less, to pay without incurring additional charges.

(5) Pass-through partners that are assessed an imputed underpayment can also be assessed a failure to pay penalty under IRC 6651 if the imputed underpayment is not paid by the extended due date of the adjustment year return of the AAR partnership (the payment due date). The failure to pay penalty is only calculated on the imputed underpayment and not the penalties determined at the AAR level such as the accuracy related penalties.

(6) If a pass-through partner fails to timely file the partnership adjustment tracking report under IRC 6226(b)(4)(A)(i), then the pass-through partner can be assessed a failure to file penalty under IRC 6698. See IRM 4.31.9.9.3.3(6), Form 886-A: Interest and Penalties.

(7) Interest on the failure to pay and failure to file penalties should be calculated at the standard underpayment rate.

(1) If a BBA partnership that files an AAR, or pass-through partner of a BBA partnership that files an AAR, fails to pay an imputed underpayment (or any associated interest or penalties, if applicable) within 10 days of the notice and demand, IRC 6232(f) applies, partners may be assessed their proportional share of the balance due from the partnership or pass-through partner.

(2) "Balance due" for the purpose of the IRC 6232(f) assessments on the partners is defined here as the unpaid balance due from the notice and demand letter.

(3) The proportional share is determined by using the year-end percentages shown on the adjustment year K-1’s, or if the entity ceased to exist after a final determination was made, the K-1’s of the former partners (which former partners is an issue subject to regulatory or other guidance).

(4) After partners are assessed their share of the balance due, they will have the applicable grace period under IRC 6601(e) (10 days if the amount due is at least $100,000, or 21 calendar days if it is less) to pay their share of the balance without incurring additional interest.

(5) If a partner does not pay within the applicable grace period, interest should be calculated at the short-term federal rate plus 5% from the notice and demand date until paid in full.

(6) Partners that receive a direct proportional assessment under IRC 6232(f) should not be charged the failure to pay penalty if they fail to pay the partner level assessment.

(7) Partners who have been assessed will receive credit for their share of any amounts subsequently paid by the partnership to the extent of the partners outstanding liability, and a partnership’s outstanding liability will be reduced by any amounts paid by the partners. In this way a duplicate collection of interest should be avoided.

(1) If unable to determine the petition, discharge, or dismissal dates needed to compute the interest, see the Insolvency Knowledge Base Homepage https://portal.ds.irsnet.gov/sites/vl114/pages/default.aspx for the office where the bankruptcy was filed.

(1) When levy proceeds are returned, the delinquent tax is not forgiven. The taxpayer is still obligated to pay the amount owed, and IRS is obligated to collect it. However, the taxpayer will not be charged the failure to pay penalty and interest during the period that IRS held the money. The example below should only be followed if the account is already restricted from systemically calculating interest (e.g., -I freeze), or if for some other reason interest needs to be manually computed. Whenever possible, allow the IRS computer systems to systemically calculate interest, by not unnecessarily restricting a tax module. If the interest and penalties can be systemically computed, then this procedure is not necessary.

1. Compute a running module balance on $10,000 through April 10, XXX1.

2. Suspend interest on $2,500 for the period April 11, XXX1, through May 4, XXX2.

3. Resume interest on the running module balance plus the $2,500 on May 4, XXX2 computed to the 23C date. Input a TC 340 with the "COMP-INT-AMT" and "INT-TO-DT" fields completed. This will allow IDRS and Master File to systemically update interest after input of the non-restricting TC 340. The COMP-INT-AMT will be the balance owed as of the 23C date. Use the 23C date as the INT-TO-DT See IRM 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340.

(2) If property of an individual, other than the taxpayer, is wrongfully levied upon and the property or proceeds from the sale of the property is applied to satisfy a liability of the taxpayer, and later is returned to that individual, underpayment interest should be charged on the taxpayer's liability during the period that the wrongful levy amount was applied. Interest does not need to be manually computed if the credit is reversed using the same date. Otherwise, interest must be manually computed when refunding or offsetting using a different date.

(1) Collection procedures stipulate that monies derived from a sale or auction, designated payment code (DPC) 06, are to be applied first against expenses of levy and sale (TC 694), then against any unpaid tax specifically imposed against the seized property, and then against the tax liability for which the levy was made. Surplus proceeds, if any, are credited or refunded to the person(s) legally entitled to it. See IRC 6342.

(1) Per IRC 6653, any person who willfully fails to pay or willfully attempts to evade or defeat the stamp tax can be penalized 50% of the underpayment of the tax. Interest on this penalty starts from the due date or extended due date (whichever is later) of the stamp tax. See IRM 20.1.11.3, IRC 6653 Failure to Pay Stamp Tax, for more information.

(1) A claim for the redemption of, or allowance for, stamps must be filed within three years from the date of purchase of the stamps from the government. See IRC 6805(c) and Treas. Reg. 301.6805-1(c).

(1) Interest is allowed on overpayments of stamp taxes under IRC 6611, regardless of whether the tax was paid by purchase of stamps or due to an assessment. See section 15.03 of Rev. Proc. 60-17.

(2) Do NOT allow interest on amounts paid in redemption of unused stamps.

(1) Generally, when transferee liability is imposed under state law, the transferee’s liability for the transferor’s debts is limited to the value of the assets transferred to the transferee. See Estate of Stein v. Commissioner, 37 T.C. 945, 961(1962). In these cases, the extent to which interest under IRC 6601 on the transferor’s liability is recoverable from a transferee depends upon the relationship between the value of the assets transferred and the transferor’s total liability for tax, penalties, and interest.

(2) If the value of the assets transferred is less than the amount of the transferor’s total liability at the time of the transfer, the transferee is liable for the transferor’s tax, penalty, and interest only to the extent of the value of the assets transferred. The transferee’s liability may include some of the transferor’s interest accrued under IRC 6601, depending on the value of the assets. In these cases, interest may accrue on the transferee’s liability under state law. The rate of interest and starting date are determined under the state law. Transferee interest under IRC 6601(b)(4) begins to accrue on the date of the statutory notice of liability and runs until the transferee liability is paid.

(3) After the date of the notice of transferee liability, the interest on the transferee’s liability runs pursuant to IRC 6601 (both the O'Sullivan and Estate of Stein court cases note this principle).

(4) In summary, consider the state law where the assets were transferred, the date the assets were transferred, and the date of the IRS notice of transferee liability. These two dates must be determined if computing interest in a limited liability situation.

(5) Seek Counsel advice as to the state interest rate (if applicable) and the effective dates of both state and federal rates. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 5.17.14.3.3.2.1, Fraudulent Transfers Under Federal and State Law.

(1) In some cases, the transferee’s liability is not limited to the value of the assets transferred. For example, if the transferee has assumed all of the transferor’s liabilities, such as in a corporate reorganization, or pursuant to a contract, then the transferee may be liable for the full amount of the tax, regardless of the value of the property transferred.

(2) If the fair market value of the property exceeds the transferor’s tax liability, then the transferee is liable for normal interest under IRC 6601 from the due date of the tax of the transferor. Lowy v. Comr., 35 T.C. 393 (1960) discusses this principle. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and Chief Counsel Directives Manual (CCDM) 35.8.4.7.2.1, General Guidelines on Interest Issues, for further information.

(3) If the value of the assets transferred exceeds the transferor’s total liability at the time of the transfer, the transferee’s liability includes transferor interest under IRC 6601 on the transferor’s underpayment and penalties. Generally, that means that the transferee will be liable for interest on the underpayment of tax beginning on the normal (unextended) due date of the transferor’s return. See IRC 6601(a). The transferee will be liable for interest on penalties and additions to tax imposed against the transferor as provided by IRC 6601(e). The transferee’s liability, including for IRC 6601 interest, is capped at the value of the assets transferred, except that state law interest may begin to run on the transferee’s liability if and when the value of the transferred assets is absorbed by the imposition of transferor interest, until the date of the statutory notice of liability. Transferee interest under IRC 6601(b)(4) begins to accrue on the date of the statutory notice of liability and runs until the transferee liability is paid.

(1) State law has no bearing on transferee liabilities (limited or unlimited) resulting from a transferor's estate/gift tax liability.

(2) IRC 6324(a) and IRC 6324(b) specifically govern the transferee's estate/gift tax liability and together with IRC 6901 provides that interest under IRC 6601 will apply from the due date of the tax of the transferor. See IRM 8.7.4, Appeals Estate and Gift Tax Cases, and IRM 4.25.11.6, Transferee Liability Cases, for more information on estate and gift cases.

(1) Form 1296, Assessment Against Transferee or Fiduciary, is used to make Non-Master File (NMF) transferee assessments by allowing the user to specify the amount of tax and penalty to be assessed (if any), on cases involving an unpaid transferor liability assessed against a transferee(s).

(2) Transferee liability assessments are made on Non-Master File (NMF) using the transferor's tax year.

1. For example, if the transferor is XYZ Corporation with a fiscal year ending 09/30/YYYY, and the transferee is Joe Smith with a tax year ending 12/31/YYYY, the assessment against Joe Smith would be made on Non-Master File using a taxable period of 09/30/YYYY. Therefore, the transferee notice of liability would show the tax year for Joe Smith as 09/30/YYYY.

2. In the reverse situation, if the transferor is John Doe for a tax year ending 12/31/YYYY, and the transferee is ZZZ Company with a fiscal year ending 08/31/YYYY, the transferee notice of liability for ZZZ Company would show the tax year as 12/31/YYYY.

(3) The transferee assessment is made using a "dummy" taxpayer identification number (TIN) on NMF. The transferee's account is set up on NMF using the transferee's TIN with a "-D" (dummy) and "Transferee" after the name to indicate transferee status. See IRM 4.11.52.5(3), Administration Procedures, for further information.

(4) If transferee’s liability is not limited to the value of the assets received:

1. Prepare a separate Form 1296 for each taxable period and each kind of tax.

2. Use the tax period of the transferor as the tax period of the transferee.

(5) If transferee’s liability is limited to the value of the assets received:

1. If the value of assets received by the transferee is less than the unpaid liability of the transferor and more than one year is involved, do not allocate the transferee's liability to the various years. Instead, show the liability as one amount on the Form 1296 of the earliest unpaid liability year of the transferor without identifying it with any particular year of the transferee.

2. Prepare a single Form 1296. Show the total transferee liability on the right-hand side of Form 1296.

3. Annotate the interest starting date and the interest rate on Form 1296 or the attachment to Form 1296.

4. Itemize the liability of the transferor for each taxable year on an attachment, or in the remarks section of Form 1296, or on a separate Form 1296, depending upon the preference of the processing office.

(6) An example of a completed Form 1296 and the attachment are found in IRM Exhibit 8.7.5-3, Sample Form 1296, Assessment Against Transferee or Fiduciary. See IRM Exhibit 8.7.5-4, Attachment to Form 1296 - Transferee with Limited Liability – Multiple Years.

(7) In all cases, disregard previously assessed interest. If the distribution to the transferee was on or before the original due date of the tax:

1. Underpayment interest is generally computed (on the tax only) FROM the earlier of the due date of the assessment, or the 30th day after the filing of an agreement.

2. Compute interest TO the date of assessment or the date the deficiency is satisfied by a payment or credit, whichever is earlier.

(1) A required payment is required by a certain date, e.g., 5/15/YR1 to 5/15/YR2. Once the subsequent election year begins, a new "required payment" is computed and due. If a prior payment was not made, IRS does not attempt to collect it. Instead, interest and a penalty of 10% under IRC 7519(f)(4) is assessed. See IRM 20.1.10.19.1, Penalty Computation.

(1) Interest on any underpaid required payment is due from 5/15/YR1 to 5/15/YR2 plus any accrued interest on the interest until fully paid. The interest rate is established by IRC 6621(a)(2).

(2) Underpaid required payments are subject to a 10% penalty under IRC 7519(f)(4). Interest on the penalty is due from the date of notice and demand, which is usually the assessment date or the "23C" date until paid in full.

(1) A request to obtain a refund of an overpaid required payment under IRC 7519 is treated as a return of a deposit (IRC 6603 is not applicable). IRC 7519 requires a running deposit balance that is adjusted each year. An entity’s required payment may increase, decrease, or stay the same from any one year to the next, depending on the entity’s base year income and the applicable tax rates.

(2) No interest will be paid with any refund of a required payment. See IRC 7519(f)(3).

(3) The refund of excess required payments shown on Form 8752 is considered a return of a deposit. Because the required payments are considered deposits, the IRS doesn’t have the authority to apply any excess amount of a required payment to any other balance due account belonging to the taxpayer (i.e., IRS doesn’t have a right of offset). Excess required payments that are the result of tax adjustments can be held and applied at the request of the taxpayer to another Form 8752 module to pay penalty and interest. The excess required payment must be manually moved.

(1) Taxpayers required to account for long-term contracts entered into after February 28, 1986, (under either the percentage of completion-capitalized cost or the percentage-of-completion methods), must use Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to compute and report the look-back interest due or to be refunded, as determined in IRC 460(b)(2). See Treas. Reg. 1.460-6(f)(1).

(1) If the base look-back interest amount is owed to the government, the taxpayer must file Form 8697 with the related return on or before the due date (including extensions) of that return. The amount of base look-back interest owed to the government is treated as an increase in income tax for the filing year. Full paid and balance due original Forms 8697 are filed as an attachment to the related income tax return.

(2) If the base look-back interest amount owed to the government is not paid with Form 8697, compute underpayment interest from the Form 8697 received date to either the payment date or notice and demand date (23C date), whichever is earlier.

(3) If the Form 8697 is attached with the timely filed return, then underpayment interest starts on the base look-back interest amount owed to the government from the received date of the Form 8697, which most of the time would be the return due date. However, when the form is timely received with an extended return, then a TC 298 for the look-back interest can be used with the INT-COMP-DT equal to the received date of the Form 8697. This way underpayment interest doesn’t need to be restricted.

(4) If the result of an examination adjustment includes a base look-back interest amount owed to the government, underpayment interest is computed from the return due date of the related return (determined without regard to any extension of time for filing that return.)

(5) Normal underpayment interest rates apply to the base look-back interest owed to the government, including, when applicable, the large corporate underpayment (LCU) rate.

(6) Look-back interest owed to the government is assessed and collected as tax. If there is an adjustment (increase or decrease) made to look-back interest owed to the government, it is just part of the tax adjustment and interest on that tax adjustment is computed accordingly. Look-back interest owed to the government is reported on the income tax return as part of the tax owed (TC 150). Look-back interest owed to the government can later be adjusted as part of the overall adjustment to tax. However, look-back interest owed to the taxpayer has nothing to do with an income tax adjustment. Look-back interest owed to the government is subject to the limitations on assessment and collection provided in IRC 6501 and IRC 6502.

(7) Look-back interest owed to the government is part of the tax adjustment and interest on that amount is subject to netting. This is the case when look-back owed to the government is initially reported as part of the TC 150 or if it’s adjusted as part of TC 29X or TC 30X.

(1) Taxpayers that are owed look-back interest must file Form 8697 separately with the Philadelphia (IMF) or Cincinnati (BMF) campuses on or before their income tax return due dates for the filing year (including extensions). See the Form 8697 instructions. Effective January 1, 2005, Form 8697 is processed on Master File. Prior to that date, the form was processed on NMF. Research both IDRS and NMF when working these cases.

(2) Look-back interest owed to the taxpayer is a standalone interest adjustment that does not relate to any overpayment of tax. Look-back interest owed to the taxpayer is not attributable to any amount previously paid by or collected from a taxpayer. Look-back interest owed to the taxpayer is a general, non-tax claim against the federal government.

(3) Look-back interest owed to the taxpayer accrues add-on interest. The term add-on interest is used to describe the amount of interest allowable on the base look-back interest amount that is owed TO the taxpayer. Add-on interest is computed using the normal overpayment interest rules, including, when applicable, the reduced rate on a corporate overpayment exceeding $10,000 (i.e., GATT). The base look-back interest amount is not taken into account when determining if the GATT threshold is met.

(4) The rules comparable to the overpayment interest rules set forth in IRC 6611 apply to add-on interest. Therefore,

1. Add-on interest generally begins to accrue FROM the earlier of the normal (unextended) due date of the federal income tax return for the filing year and the date the return is filed with any tax paid TO the refund schedule date less the applicable back-off period of IRC 6611(b)(2) for computer-generated/systemic refunds. See IRM 20.2.4.7.1.1, Systemic Refund Dates for IMF and BMF.

2. If a taxpayer files a claim for look-back interest late, the accrual period will not begin prior to the date when the claim is actually filed.

3. If IRS pays look-back interest within 45 days after the claim is received and processible, no add-on interest will be paid from the claim received date until the date the refund is made. Interest is, however, allowed from the return due date to the received date of the claim. For more information on the 45-day rule on claims, see IRM 20.2.4.7.5.3, 45-day Rule and Amended Returns and Claims, OBRA 1993.

4. Add-on interest will not be allowed for any period prior to the time the taxpayer has filed a processible Form 8697.

(5) Look-back interest owed to the taxpayer and add-on interest allowed on the base look-back amount cannot be netted. Therefore, the base look-back amount (owed to the taxpayer) and add-on interest should be removed to a sub-module, if ACT/DMI is used for the interest computation.

(6) A taxpayer’s claim for look-back interest previously paid is a claim for credit or refund of an overpayment of tax subject to the limitations provided in IRC 6511.

(7) The six-year periods of limitations under Title 28 USC section 2401 and Title 28 USC section 2501 of the United States Code begin to run on the day when the taxpayer’s claim for look-back interest accrues (i.e., the earlier of the due date of the taxpayer's return for the filing year, or the date the return is filed with tax paid).

(8) IRS may offset look-back interest owed to a taxpayer against the taxpayer’s tax liability under common law right of offset principles. However, offsets against other tax year(s) or tax type(s) of the same taxpayer must be made within the applicable statute of limitations of the liability. Offsets against a liability for the same tax year, the same tax type, and the same taxpayer is generally not barred by the statute of limitations.

(1) The IRS is authorized to assess only court ordered interest (and penalties) on MFT 31. Use a TC 340 to assess and restrict the interest amount specified on the court order only without any interest accrual.

(2) For other unusual interest rules, such as TETR credit (CRN 253) on 2006 returns, see IRM 20.2.10, Interest.

(1) Payments for RBA assessments are made to the federal court and then forwarded to Revenue Accounting Control System (RACS) in Kansas City. The payments are applied or transferred to the MFT 31 accounts after the modules are established. These payments can be identified with Designated Payment Code (DPC) 26 or, if made prior to January 2012, DPC 08. DPC 26 can only be input on the MFT 31 module. A TC 570 is input to hold the payments from refunding until the RBA is assessed.

(2) Per IRM 3.8.45.3, Deposit Procedures (General), a payment effective date is the date IRS receives the payment. RACS in Kansas City uses the earliest received date when posting the payments to the modules. If there is a posting date error, then contact RACS in Kansas City for it to be corrected. Delays by the court in sending the payments into IRS is not a managerial or a ministerial act per IRC 6404(e)(1).

(3) Payments made to a duplicate assessed IMF or BMF module will be cross-referenced by Compliance Services Collection Operation (CSCO) with credit reference number (CRN) 337. Such payments will post on the transcript as TC 766 showing the payment date.

(4) When there are multiple assessments, undesignated payments should be applied in effective date order. An undesignated payment made to a module with a tax due date of 1/31 will be applied to that tax before it is applied to a tax with a 4/15 due date. Fraud and failure to file penalties are due on the later of the return due date or extended due date of the related tax period. Payments and credits should be applied first to the earliest due date of the related tax period. Generally, payments will be applied to the fraud and failure to file penalties before they are applied to a penalty with a later notice and demand effective date (usually the 23C date), such as the failure to pay penalty. See IRM 20.2.5.2.1, Application of Payments, and IRM 5.19.23, Restitution-Based Assessments Processing.

(1) Qualifying Therapeutic Discovery Program (QTDP) grants received under the Affordable Care Act (ACA) are not includible in gross income. See IRC 48D(f)(3). Likewise, any returns amended due to receiving these grants are not entitled to any special interest-free consideration for underpayments determined to be due.

(2) Neither section 9023 of the ACA, IRC 48D, nor Notice 2010-45 allow for a restriction or abatement of the underpayment interest. To the extent the reduced expense deduction creates an underpayment in 2009 or 2010, or a deficiency if an amended return is not filed, underpayment interest will be charged under IRC 6601. Interest is charged from when the tax was due (generally, the due date for filing the original 2009 or 2010 return, without regard to extensions) to the date paid.

(3) Excess grant money received must be repaid. This can be done by either filing an amended Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, within 15 days after the close of the applicant’s tax year or reporting it as a recapture by filing Form 4255, Recapture of Investment Credit, when the following year return is filed. Interest is charged from when the tax was due until the date it is paid.

(1) Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, is used for reporting tax per IRC 4965, IRC 4971, IRC 4972, IRC 4973(a)(3), IRC 4975, IRC 4976, IRC 4977, IRC 4978, IRC 4979, IRC 4979A, IRC 4980, and IRC 4980F. Assessments are made on MFT 76.

(2) The return due date varies depending on the code section. The various code sections will have different abstract numbers that will post with the tax.

(3) If there is only one abstract, then a TC 290 with the return due date input as the Interest Computation Date (INT-COMP-DT) will be sufficient.

(4) Multiple abstract assessments with different return due dates will require either interest to be manually computed or the assessments to be cycled with a post delay code. The due date for each abstract is entered in the INT-COMP-DT field (date interest starts).

(5) To ensure only one notice is sent to the taxpayer, Hold Code 2 with a post delay code (PDC) is entered for all but the last assessment. The last assessment will use Hold Code 0.

(6) For accounts with a TC 973 and a -I freeze, interest is restricted from systemically computing and must be manually computed and input with a TC 340. The debit interest to date will be the last 23C date for all the assessments made. If the account doesn’t need to remain restricted, use a non-restricting TC 340 whenever possible. See IRM 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340.

(7) Interest must be manually computed if an IRC 6601(c) waiver or agreement to a proposed deficiency is applicable.

(8) See IRM 21.5.11.14, General Form 5330 Processing, for more information.

(1) Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, is used for reporting tax per IRC 6058A.

(2) The return is due on the last day of the seventh month after the end of the plan year. Unlike MFT 76 interest always starts on this date, so an interest computation date is not required when making adjustments to MFT 74.

(3) TC 973 doesn’t prohibit systemic interest from posting. If the module has been erroneously restricted, either a non-restrictive TC 340 or a TC 342 with PC 5 can be input to allow systemic interest to post. See IRM 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340 and IRM 20.2.5.2.2, Assessment of Interest Accruals.