Global IRS Interest Netting Refunds

The Problem

Example:

From 1/1/2003 through 12/31/2003 a corporation owed the IRS $150,000 from 2000. From 1/1/2003 through 12/31/2003 the IRS owed the same corporation $150,000 from 2001. Thus, the actually owed during 2003 is zero ($150,000 - $150,000). The amount of interest owed on zero should be zero also, but that isn't how the IRS is going to compute interest (at least to begin with).

2003 interest on 2000 underpayment of $150,000: $10,439

2003 interest on 2000 underpayment of $150,000: $3,399

The difference is $7,040. Without using the Interest Netting rules, the corporation will overpay the IRS by $7,040.

IRS Interest Rates

For all taxpayers from January 1, 1987 through December 31, 1998 the IRS used higher interest rates on underpayments than it did on overpayments. This difference was usually 1%. For non-corporate taxpayers, after December 31, 1998 the overpayment and underpayment interest rate is the same.

For "small" corporate overpayments or refunds the interest rate is 1% lower than the non-corporate interest rate. A small corporate overpayment is $10,000 or less.

For "large" corporate overpayments the interest rate is 2.5% lower than the non-corporate interest rate. A large corporate overpayment is over $10,000.

For "large" corporate underpayments the interest rate is 2% higher than the non-corporate interest rate. A large corporate underpayment is over $100,000.

Some taxpayers who paid interest on underpayments for one period and received interest on overpayments on an overlapping period may get a break. If the statute of limitations has not run, you may be able to get the difference back.

Situations that result in Global Interest Netting refunds:

1. The taxpayer paid interest on underpaid taxes;
2. The taxpayer received interest on overpayments of taxes;
3. The interest rate on underpayments was different than the interest on overpayments;
4. The periods of underpaid interest and overpaid interest must overlap; and
5. The statute of limitations has not run on either returns.

The Remedy

Revenue Procedure 99-43 (rev proc 99-43), Revenue  Procedure 2000-26 (rev proc 2000-26) and Internal Revenue Code Section 6621(d) offers a solution to the overlapping interest problem.

The interest for the overlapping periods will be zero to the period and amount of overlapping interest.

This program can be used for most interest netting situations.

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