IRS Underpayment Interest -- Teogatha Law

Underpayment Interest Overview

IRC §6621 provides the underpayment rate that the IRS charges taxpayers. Underpayment interest is charged from the due date of the liability until the date the liability is paid. The rate is set quarterly, although it may not change every quarter. It should also be noted that special rules can apply to large corporate underpayments and tax motivated transactions.

Statutory Period for Assessment and Collection of Interest

The IRS has the right to assess and collect interest at any time that they also have the right to collect the tax from which the interest accrues. As a general rule the statute of limitations allows the IRS to collect taxes for 10 years after the date of assessment.

Typically, a taxpayer has the right to file a claim or refund within two years from the date of payment, or three years from the due date of the return, whichever is later. If a taxpayer signs Form 872, extending the statute of limitations on assessment, the period for filing a claim of refund of overpaid interest is extended six months from the date of consent.

Interest on Penalties and Additions to Tax

The following penalties accrue interest from the due date of the return.

Failure to File Penalty
Gross Valuation Overstatement Penalty
Valuation Understatement Penalty for purposes of estate or gift taxes
Substantial Understatement Penalty, and penalties under IRC §§6651, 6659, 6660, and 6661 due to the recapture of carryback allowances. Interest accrues from the date of the loss year return
Later reversed extensions
Some miscellaneous penalties
Negligence Penalty
Fraud Penalty
Fraudulent Failure to File Penalty
Accuracy Related Penalty under IRC §6662

Notice and Demand and Debit Interest

Once a notice and demand is issued, the taxpayer has a limited amount of time to pay the amount shown before additional interest is charged. For amounts less than $100,000, the taxpayer has 21 calendar days before additional interest is charged. If the amount is $100,000 or more, the taxpayer has only 10 business days.

Application of IRC §7503

In general, a tax liability must be paid on or before its due date to avoid debt interest accruals. However, IRC §7503 provides that if the last day prescribed for performance rests on a Saturday, Sunday, or legal holiday, the performance of the act is required on the next workday in order to be deemed timely.

Revenue Ruling 99-40

Interest on underpayments can only be charged when the tax is both due and unpaid.

Credit Elects

A taxpayer may elect to apply an overpayment to the following year's estimated tax liability (credit elect). When a taxpayer chooses to do this, the credit is applied in a manner to eliminate, or reduce, an estimated tax penalty for the year the credit is applied.

Subsequent Assessment with a Credit Elect

If after the taxpayer makes a credit elect an underpayment is assessed on that year, a taxpayer may request that interest is computed according to Revenue Ruling 99-40.

Large Corporate Underpayment

The debit interest rate for C-Corporations is two percentage points above the prevailing underpayment rate when:

A) The notice of the underpayment or proposed deficiency is greater than $100,000 (determined without regard to interest, penalties, or additions to the tax); and

B) The balance due is not paid within 30 days of notice and demand if deficiency procedures do not apply, or

C) 30 days from the date the taxpayer was notified of a proposed deficiency of tax by either a 30 or 90 day letter.

Threshold

The threshold for the additional 2% interest rate charge is $100,000. Once this amount is reached, and the other criteria mentioned above is met, the additional interest is charged on the entire amount. Interest, penalties, and additions to tax should not be included in the threshold calculation.

Consideration of Payments

A cash bond is not included when determining if the underpayment is paid within 30 days or not. Furthermore, to avoid the additional 2% interest, all of the tax, penalties, interest, and additions to tax must be paid in full within 30 days of the IRS notice.

Start Date for the Additional 2% interest

The date of the 30-day letter, notice of deficiency (90 day letter), or the date of notice and demand is known as the notice date. The first notice date is used when determining the start date of the additional 2% interest. The applicable date is 30 days after the notice date.

Special Rules for Determining Due Dates of Payments

If the IRS imposes a jeopardy assessment against a taxpayer, the due date for payment is the date of the notice and demand. Furthermore, the IRS will immediately issue a notice and demand once there is a jeopardy assessment.

When determining the payment due date of a liability, the IRS disregards any extensions of time to file a return, or an installment agreement.

Unidentified Remittance Account Payments

Sometimes a taxpayer's payment is sent to the IRS's unidentified remittance account. When this payment is correctly identified and applied to the taxpayer's account, it is treated the same as any other payment. Both normal debit and credit interest rules apply.

Debit Interest on Liabilities Paid by Offset

IRC §6402(a) permits the IRS to credit a taxpayer’s overpayment to any outstanding liability. Debit interest stops on any portion of a liability satisfied by an offset of credit.

Debit Interest on Liabilities Paid by Offset from a Different Taxpayer

A taxpayer may choose to apply his/her overpayment to that of another taxpayer. The IRS will do this at the overpaid taxpayer's request.

Seized Property

If an individual's property, other than the taxpayer's property, is wrongfully levied upon by the IRS and is applied to satisfy the taxpayer's liability, and later returned to the individual; underpayment interest should be applied on the taxpayer during the entire period of time that the wrongfully levied property was credited.

Collection Costs

Collection procedures require that money derived from a sale or auction are first applied to lien and collection costs and that any remaining funds will be applied to the past due tax liability.

Statute of Limitations for Refund Claims

The statute of limitations for filing for a refund of overpaid debit interest is two years from the date of overpayment, or three years from the date the return was filed, or due, whichever is later (without regard to an extension of time to file).

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Page last revised : June 03, 2011