4.10.26. Net Rate Netting Procedures for LB&I Cases

(1) Purpose: This section provides guidance to field examiners who receive formal or informal requests for Net Rate Netting (NRN). NRN requests will not be subject to formal claims procedures during examination consideration. The purpose of this guidance is to ensure that LB&I field examiners properly handle cases with NRN requests so that case processing functions in SB/SE or Appeals can properly compute interest after the case is closed. These procedures do not apply to NRN requests worked in case processing units.

(2) Audience: LB&I examiners

(3) Policy Owner: Assistant Deputy Commissioner Compliance Integration

(4) Program Owner: LB&I Policy Office

(5) Primary Stakeholders: Stakeholders include Centralized Case Processing (CCP) and Office of Servicewide Interest.

(1) Field examiners are more likely to encounter NRN requests in cases with complex returns than in cases with less complex returns.

(2) In such cases, the field examiner will determine if it is beneficial to discuss NRN with the taxpayer during the planning stage of the examination. If so, such discussions should clarify the following points:

1. NRN is performed after offsetting.

2. NRN is frequently confused with offsetting. See IRM 4.10.26.3, Offsetting Distinguished from Net Rate Netting, for more information.

3. Offsetting can occur when there is an outstanding overpayment and underpayment for which interest is allowed or charged over the same period of time between two or more tax modules.

   Example: An overpayment of tax exists in one year and an underpayment of tax exists in another year. Offsets can occur between tax years of the "same" or different taxpayers.

4. NRN can occur when there is an overpayment(s) and underpayment(s) where interest will be/has been allowed or charged during the same time period. Interest being allowed or charged during the same time period, is referred to as an "overlapping period". The overlapping periods for overpayment(s) and underpayment(s) can be for different tax years and different tax modules including employment tax, income tax, etc., for the "same" taxpayer.

   Example: An overpayment of income tax for 201512 was refunded to the taxpayer on October 15, 2016 resulting in a module balance of zero. In 2016, an examination of tax year 201412 resulted in additional tax owed by the "same" taxpayer. There was an overlapping period of overpayment interest for 201512 and underpayment interest for 201412 from the due date of the 201512 return until the October 15, 2016 refund date.

5. Offsetting can be performed systematically by Master File or manually by the campus after a case closes. Offsets between different taxpayers must be done manually.

   Note: Both NRN and offsetting require special case processing instructions on Form 3198, Special Handling Notice for Examination Case Processing. See IRM 4.10.26.7 for specific instructions.

(1) If a taxpayer requests a “net” balance during an examination, it may be a request for either “offsetting” or “net rate netting”. NRN is not the same as offsetting between tax years.

(2) NRN equalizes/eliminates the interest rate differential between overpayments and underpayments of two or more tax modules for the "same" taxpayer during overlapping periods so that the interest rate differential is netted to zero. See IRM 20.2.14.6, Net Rate Interest Netting, for more information. The taxpayer must provide a written request for NRN. Use NRN in the following situations at the taxpayer’s request:

1. An examination underpayment that overlaps with previously refunded overpayment(s) on different year(s) or different tax module(s).

2. An examination overpayment that overlaps with previously paid tax assessment(s) on different year(s) or different tax module(s).

(3) Offsetting is transferring credit from an overpaid tax module to an underpaid tax module. The IRS generally offsets unsettled modules through Master File programming, however, it can be done manually by processing personnel. An unsettled module is a module with either a credit (refund due taxpayer) or debit (taxpayer owes) balance. See IRC 6402(a) and IRM 20.2.5.13, Underpayment Interest on Liabilities Paid by Credit/Offset.

(4) Offsetting is done before any NRN adjustments. The following are examples of offsets that will be done before processing a NRN request:

1. Overpayment(s) and underpayment(s) closing during the same time

2. Overpayment(s) closing with an outstanding underpayment(s) on different tax year(s).

3. Underpayment(s) closing with a current overpayment(s) on a different tax year(s).

(1) Requests for NRN may be received by either the campus or the field examiner.

(2) When the campus receives a NRN request, the campus will follow the procedures in IRM 20.2.14 (outlined below in IRM 4.10.26.4.1, Requests for Net Rate Netting Received by the Campus, and IRM 4.10.26.4.2, Requests for Net Rate Netting Received by CCP).

(3) When the field examiner receives a NRN request during an examination, the field examiner will follow the procedures in IRM 4.10.26.4.3 below.

(1) The field examiner must review the NRN request to determine whether the request includes more than one TIN. (A net rate adjustment cannot be made between different taxpayers.) If so, the field examiner must make a determination whether the TINs are the "same" taxpayer for purposes of IRC 6621(d) and whether IRC 6621(d) applies.

(2) The field examiner must determine whether the required information is present on the NRN request. See IRM 20.2.14.6.1.1(5) and Rev. Proc. 2000-26.

(3) The NRN request may not be surveyed or excluded from an examination plan. Risk analysis factors will not apply.

(4) The field examiner will document all activity and appropriately index all workpapers related to a NRN request.

(5) The field examiner will ascertain the facts surrounding the relationships between TIN holders and analyze the facts in terms of applicable law.

(6) If the field examiner determines that the multiple TINs are the "same" taxpayer for NRN purposes, the field examiner will:

1. Check "Net Rate Netting" under the "Special Interest Features" on Form 3198, Special Handling Notice for Examination Case Processing.

2. Determine if the NRN request is sufficient for processing (perfected) – See IRM 4.10.26.8.2, Letter 4127, Perfection of Net Rate Netting Request.

3. Document the facts, law and conclusion in the workpapers used to determine "same" taxpayer.

4. Document all activity and appropriately index all workpapers related to a NRN request.

5. Inform the taxpayer that the resolved periods will be processed and the information for the unresolved periods will be retained. See IRM 4.10.26.2.1, Identification of Net Rate Netting Requests for Processing. If the NRN request is received within 90 days of closing an agreed case, inform the taxpayer the NRN request will be processed after closing.

6. Notate any conclusions reached on the NRN request in the examination plan.

7. Forward all perfected NRN requests to CCP using a Form 3198, Special Handling Notice for Examination Case Processing, unless it is determined that the case will close agreed in 90 days or less. If the case will close agreed in 90 days or less, the field examiner will hold the NRN request and close it out with the administrative file at the conclusion of the examination. See IRM 4.10.26.7, Processing Net Rate Netting Requests by Field Examiners, for specific instructions.

8. Indicate on Form 4665, Report Transmittal, that the NRN request involves the "same" taxpayer (for cases sent to Appeals).

(7) If the field examiner determines that the multiple TINs are not the "same" taxpayer, the field examiner will:

1. Determine if the NRN request is entirely between different taxpayers. If so, mark through the date stamp on the request and initial it.

2. Issue Letter 4128, Net Rate Netting Request Involving More than One TIN, to the taxpayer indicating the IRS is unable to process the request. See IRM 4.10.26.8.3, Letter 4128, Net Rate Netting Request Involving More Than One TIN, for specific instructions.

3. Determine if any tax period(s) for the taxpayer who submitted the request are subject to netting. If so, indicate the periods on the letter, however, information related to other taxpayers may not be disclosed.

Note: If the field examiner determines that any portion of the request should be denied because the multiple TINs are not the "same" taxpayer, the taxpayer has the right to elevate the issue to Appeals.

(8) If there are other issues that require Appeals consideration, the field examiner should notate the NRN request on Form 4665, Report Transmittal, and explain the facts and law surrounding the NRN issue.

Example 1: Corporation A files a NRN request with multiple TINs. Corporation A has overpayments for periods 1, 2, and 3 and an underpayment for period 4. Subsidiary B has underpayments for periods 1, 2, 3, and 4. Subsidiary B joined the consolidated group at the beginning of period 2. Subsidiary B cannot net its underpayment with the overpayment of parent A for period 1, but the overpayments and underpayments of periods 2 and 3 can be netted.

Example 2: Parent Corporation A files a NRN request for overlapping periods of underpayment and overpayment interest involving Corporation A and its subsidiaries B and C. These three entities have separate TINs. The IRS determines that Corporation A is not the same taxpayer as Corporations B and C for purposes of interest rate netting because Corporation A’s underpayment was incurred before Corporations B and C became members of a consolidated group with Corporation A as the parent. Therefore, Corporations B and C are not jointly liable with Corporation A for the income tax underpayment. However, the IRS determines that Corporation B can file a net rate request for its own underpayment of employment taxes and its own overpayment of excise taxes. Similarly, the IRS determines that Corporation C can file its own net rate request. The IRS will advise Parent Corporation A (the entity that filed the net rate request) that its request will not be approved, but that Corporations B and C should file their own requests for their own overlapping periods.

(1) An imperfect NRN request is one where the taxpayer has not provided adequate information as required by Rev. Proc. 2000-26. See IRM 4.10.26.8.2. However, if the NRN request is imperfect due to unresolved tax period(s), it is not an imperfect request. See IRM 4.10.26.2.1 for the definition of an unresolved tax period.

(2) NRN requests are not refund claims for the purposes of IRC 7422. Accordingly, field examiners will not disallow a NRN request using the formal claim disallowance process. Instead, they will return any imperfect request to the taxpayer.

(3) Pursuant to IRC 7422, taxpayers may file a claim for refund and receive judicial review by a United States District Court or Court of Federal Claims if the accounts involved are first paid in full. See Flora v. United States, 362 U.S. 145 (1960).

(4) When a field examiner determines that a taxpayer’s NRN request does not have the required information (see IRM 4.10.26.8.2 (1) below) or the information provided is not accurate, the field examiner will:

1. Cross out the date stamp on the original NRN request and initial it.

2. Prepare Letter 4129, Return of Net Rate Netting Request, to the taxpayer explaining the reasons for this decision.

3. Maintain a copy of Letter 4129 and the original NRN request with the crossed-out date stamp and initials in the case file.

4. Issue Letter 4129 to the taxpayer and enclose the original NRN request with the date stamp crossed out and initialed.

(5) If the taxpayer later files a perfected request, the perfected request will be date-stamped and used to determine all applicable statute of limitations dates.

(6) The field examiner will document all activity and appropriately index all workpapers related to a NRN request.

(7) The field examiner will forward all perfected NRN requests to CCP using a Form 3198, Special Handling Notice for Examination Case Processing, unless it is determined that the case will close agreed in 90 days or less. If the case will close in 90 days or less, the field examiner will hold the NRN request and close it out with the administrative file at the conclusion of the examination, see IRM 4.10.26.7 for specific instructions.

(8) An Appeals Officer will not work a NRN request that was returned to the taxpayer. If the NRN request was returned and the date crossed out, the taxpayer must file another NRN request to be considered by Appeals. However, if the taxpayer has paid the interest and files a NRN request, even if imperfect, it could be considered an informal claim. See IRM 25.6.1.10.2.6, Claims for Credit or Refund – Form and Content.

(1) For perfected NRN requests where the associated case will not be closing within 90 days, the field examiner will forward the request to CCP on a Form 3210, Document Transmittal.

(2) For perfected NRN requests where the associated open case will close agreed within 90 days, the field examiner will:

1. Check "Net Rate Netting" under the "Special Interest Features" on Form 3198, Special Handling Notice for Examination Case Processing.

2. Identify statute of limitation issues that may impact allowance of the NRN request in the "Other Code Section" on Form 3198 under "Special/Restricted Interest Features".

3. Index and identify the workpapers for the NRN request on the examination leadsheet and in the examination plan.

4. Inform the taxpayer that the resolved tax periods will be worked when the case is closed and the unresolved tax periods will be retained until they are resolved. See IRM 4.10.26.2.1 for definitions of resolved and unresolved tax periods.

5. Determine if the case involves unagreed issues not related to the NRN request. If so, indicate on Form 4665, Report Transmittal, that there is a NRN request to be processed, the date received, and where to find the NRN request and related workpapers.

(1) Field examiners will use form letters to acknowledge, perfect, or return NRN requests.

(2) These letters are intended for the exclusive use of field or office examiners and Appeals Officers. They may be used by tax examiners or other campus employees involved in the processing of the requests. Separate procedures for campus staff may be found in IRM 20.2.14, Netting of Overpayment and Underpayment Interest.

(3) General Instructions for NRN Letters. Complete the following fields:

1. Date the letter is prepared

2. Person to contact

3. Employee Identification Number

4. Contact address

5. Contact fax number

6. Contact telephone number

7. Taxpayer name

8. Taxpayer Identification Number (last 4 digits)

9. Tax period(s)

10. Date received, date the NRN request was received

11. Taxpayer name and address