IRS Overpayment Interest

What is an Overpayment

Tax Refund Ahead Sign An overpayment is any of the following:

An amount that is erroneously assessed and collected by the IRS.
A payment that is assessed and collected after the applicable statute of limitations expired.
A credit that s refundable to the taxpayer and exceeds the tax liability against which the credit is allowed.
Withholding tax credits that are greater than the tax liability against which the tax was withheld for.
An amount paid in response to a proposed examination that is later determined to be greater than the tax liability, penalty, and interest due for the tax year.

Credit Interest

Credit interest is interest that the IRS pays to the taxpayer as the result of an overpayment.

Overpayment Interest Overview

Overpayment Interest is allowed to be paid at the overpayment rate that is established under IRC §6621. The code also provides that credit interest may be paid on the overpayment if it is offset against a liability or refunded to the taxpayer.

Availability Dates for Overpayments

Payments made by a taxpayer before the due date of the return are deemed to be paid as of the due date of the return whether the return is timely or late. Interest allowed on overpayments based on payments made before the due date of the return can only accrue interest from the due date of the return. For a return that is filed late, interest is allowed from the date the IRS receives the return. Payments made after the due date of the return are available for refund or offset on the date the payment is received, or the return is filed, whichever is later.

Mailbox Rule

If a return is postmarked on or before its due date, then the return is considered timely filed even though the IRS received the return late.

Substitute for Return

A substitute for return prepared by the IRS does not provide for the allowance of overpayment interest. Interest is not allowed until a delinquent return, or signed waiver is received by the IRS.

Unprocessible Returns

A return is not considered filed for interest calculation purposes until the return is received by the IRS in processible form. For a return to be in processible form it must:

1) Be filed on a permitted form

2) Contain the taxpayers name, address, and identifying number

3) Has the required signatures

4) Contain sufficient information to allow for the mathematical verification of the tax liability shown on the return.

Applying Overpayments as Credits

IRC §6402(a) allows the IRS to credit an overpayment against outstanding liabilities. Revenue Procedure 83-58 provides that if there is an overpayment that is applied as a credit to an unpaid liability for the same taxpayer, during the same period, and for the same tax type, interest is allowed from the availability date to the due date of the liabilty that the overpayment is applied to.

Offsets

An overpayment and credit interest may be applied as an offset against any outstanding tax liability, interest, additions to tax, or penalty on another tax period.

Interest on Offsets

As a general rule, when there is an offset interest is allowed from the availability date of the overpayment until the due date of the outstanding liability to which the overpayment is applied.

Rules for Applying Offsets

Generally, the overpayment is applied to the oldest outstanding liability. The IRS should not credit an overpayment against a tax liability that will occur in the future unless the taxpayer has requested it in writing.

Different Taxpayers and Offsets

An overpayment and the interest accrued from the overpayment may be applied to the liability of a different taxpayer with the overpaid taxpayer’s consent. Credit interest accrues to the overpaid taxpayer until the assessment date of the transfer.

Refunds

If there is an overpayment remaining after all the taxpayer's outstanding balances are satisfied, the overpayment along with all accrued interest will be refunded to the taxpayer.

45-Day Rule

The 45-day rule provides the IRS with a 45 day grace period for processing certain items during which credit interest is limited in some situations. Please see IRC §6611(e).

45-Day Rule and Income Tax Returns

If the IRS refunds an overpayment within 45 days of the due date of the return, or the date the return was filed, whichever is later, no overpayment interest is paid.

45-Day Rule for Amended Returns and Claims

In 1995 the 45-day rule was expanded to include both amended returns and claims for credit or refund. When a taxpayer makes a claim or refund and this claim results in an overpayment, the IRS has 45 days from receiving the processible claim or amended return before it must pay overpayment interest.

45-Day Rule and IRS Initiated Adjustments

If the IRS initiates an adjustment on its own accord, without the taxpayer’s request, and this adjustment results in a refund or credit, 45 days are subtracted from the number of days that interest is otherwise allowed. This 45 day rule for IRS initiated adjustments is applied to offsets.

Non-Negotiable Refund Checks

If the IRS issues a refund check that is non-negotiable then interest is allowed to the date the replacement check is issued.

Cash Bond

A cash bond is a payment by the taxpayer to stop interest on tax only. This occurs when the taxpayer does not agree with a deficiency notice and makes the payment to the IRS simply to stop interest while the taxpayer argues the merits of the deficiency notice.

Credit interest is not provided on a cash bond deposit, or any portion of a cash bond deposit that is offset against other tax liabilities or returned to the taxpayer, before assessment. However, if an assessed amount was paid by a cash bond deposit and later abated, interest is allowed on the overpayment amount from the original assessment date until the date the funds were refunded or offset.

When an amount is accepted by the IRS as an advanced payment of a liability and is later refunded, interest is allowed on the overpayment from the received date to the offset or refund schedule date.

Unidentified Remittances

Credit interest is allowed once an unidentified remittance is applied to the correct tax account and an overpayment results.

Electing a Credit to be Applied to Estimated Tax

When a taxpayer elects that an overpayment reported on a return is applied to estimated tax for the following year, credit interest is not allowed on that overpayment.

Special Credit Interest Rules for Corporations

In 1999 Debit and credit interest rates were equalized for all returns except corporations. A special corporate overpayment rate is established for returns deemed to be corporations.

GATT Special Interest Rates

The General Agreement on Tariffs and Trade ("GATT") provides a lower credit interest rate than debit interest rate for large corporate overpayments. The GATT rate provides that credit interest rate is one and half points lower than the normal credit interest rate. The GATT rules are applicable to taxpayers who file Forms 1120, 990C, or 990T.

Seized Property

If wages or a bank account is wrongfully levied upon an individual, interest is paid when the levied amount(s) are returned to the individual. If property of an individual is wrongfully seized and sold, interest is paid from the date of the sale of the property to the refund schedule date.

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Disclaimer: Teogathalaw Law does not guarantee the accuracy of the material contained on this website, or webpage. None of the material presented on this website concerning tax matters may be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the taxing authorities.

Page last revised : June 03, 2011