IRS EXPLAINS CALCULATION OF INTEREST ON CERTAIN TAX UNDERPAYMENTS.

Rev. Proc. 94-60

SECTION 1. PURPOSE

This revenue procedure describes how interest on an underpayment will be calculated by the Service when a taxpayer has previously received a tax refund with interest for the same tax year. For the calculation of interest when a taxpayer has previously received a tax refund without interest, see Rev. Rul. 88-98, 1988-2 C.B. 356.

SECTION 2. BACKGROUND

.01 Section 6601(a) of the Internal Revenue Code provides that if any amount of tax is not paid on or before the last date prescribed for payment, interest at the underpayment rate established under section 6621 must be paid on the amount from that last date to the date paid.

.02 Section 6611(a) provides that interest must be allowed and paid upon any overpayment at the overpayment rate established under section 6621.

.03 Section 6611(b)(2) provides that in the case of a refund, interest must be allowed from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days.

.04 Section 6611(e)(1) provides that if an overpayment of income tax is refunded either (1) within 45 days after the last date prescribed for filing determined without regard to extensions of time for filing, or (2) in the case of returns filed after the last date prescribed for filing, within 45 days after the date the return is filed, no interest is allowed on the overpayment.

.05 For refund claims made by taxpayers on or after January 1, 1995, section 6611(e)(2) provides that if the overpayment is refunded within 45 days after the claim is filed, no interest shall be allowed on the overpayment from the date the claim is filed until the day the refund is made.

.06 In the case of any refund or credit of an overpayment, made on or after January 1, 1995, which is attributable to an adjustment initiated by the Internal Revenue Service, section 6611(e)(3) provides that interest on such overpayment shall be computed by subtracting 45 days from the number of days for which interest would otherwise be allowed.

.07 Section 6621(a) establishes an interest rate for underpayments that is one percentage point higher than the interest rate allowed for overpayments, effective for purposes of determining interest for periods after December 31, 1986. For periods after December 31, 1990, section 6621(c) provides that, for periods after the 30th day following the date on which a notice of proposed deficiency, statutory notice of deficiency, or other similar notice is sent to the taxpayer, the interest rate for large corporate underpayments is three percentage points higher than the interest rate on overpayments.

SECTION 3. PROCEDURE

When a taxpayer receives an excessive tax refund (i.e., a refund of tax that creates or increases an underpayment of that tax for the same tax year (the tax underpayment)) and interest is paid on the excessive tax refund, interest will be calculated by the Service in the following manner. For the period for which the taxpayer was paid interest on the excessive tax refund, the Service will charge interest at the same rate on the portion of the tax underpayment that does not exceed the excessive tax refund. Also, for any period for which interest is not paid on the excessive tax refund, the Service will not charge interest on the portion of the tax underpayment that does not exceed the excessive tax refund. Interest at the underpayment rate will be charged on the portion of the tax underpayment that exceeds the excessive tax refund from the original due date of the tax return, and on the entire tax underpayment from the date of the refund check. In computing the interest charged for any period, previously accrued interest will be treated in the same manner as the portion of the tax underpayment to which such interest relates.

SECTION 4. EXAMPLES

.01 Example 1. A, an individual, files A's federal income tax return on a calendar year basis. In 1990, A made timely federal estimated tax payments of $100,000. On April 15, 1991, A filed a Form 4868, Application for Automatic Extension of Time to File U. S. Individual Income Tax Return, and received a 4-month extension of time to file A's 1990 return. On July 1, 1991, A filed Form 1040, U. S. Individual Income Tax Return, showing a tax liability of $80,000 and requesting a tax refund of $20,000. The Service issued a tax refund check dated September 22, 1991. Because the refund was made more than 45 days after A's return was filed, A received interest of $760 on the $20,000 overpayment. During 1993, the Service examined A's 1990 return and determined that A's correct tax liability was $90,000 resulting in a tax deficiency of $10,000.

The amount of interest charged on the $10,000 tax deficiency for the period beginning on April 15, 1991, and ending on September 22, 1991, is $380, an amount equal to the interest paid to A by the Service on the $10,000 excessive tax refund. From September 22, 1991, until the date A pays the deficiency, A is charged interest at the underpayment rate on $10,380.

.02 Example 2. The facts are the same as in Example 1, except that A's correct tax liability for 1990 is $110,000 resulting in a tax deficiency of $30,000.

In this Example 2, only $20,000 of the $30,000 tax deficiency is attributable to the excessive tax refund. Therefore, interest at the underpayment rate on $10,000 of the deficiency is charged for the period beginning on April 15, 1991, and ending on the date A pays the deficiency. The amount of interest charged on $20,000 of the deficiency for the period beginning on April 15, 1991, and ending on September 22, 1991, is $760, an amount equal to the interest paid to A by the Service on the $20,000 excessive tax refund. From September 22, 1991, until the date A pays the deficiency, A is charged interest at the underpayment rate on $20,760 (in addition to the interest charged on $10,000 of the deficiency).

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective for all taxable years for which an excessive tax refund with interest was paid or credited after December 31, 1986.

DRAFTING INFORMATION

The principal author of this revenue procedure is Forest Boone of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Boone on (202) 622-4960 (not a toll free call).