The Office of Servicewide Interest provides policy, training materials, interest tools, and manual interest procedures when applicable for overpayment and underpayment interest purposes. It is essential that managers, senior management officials, personnel, and examiners working with estate, excise, employment, and foreign tax issues correctly understand and follow technical guidance and information for interest rates and methods of computation.

These procedures are covered under the following authority:

Additional authorities can be found in the table located in IRM 20.2.5.6.1.

IRM 20.2.10 provides servicewide policy interest procedures for overpayment and underpayment interest purposes.

All reference materials involving overpayment and underpayment interest must be consistent with the procedures in the IRM and must receive approval from the Office of Servicewide Interest (OSI) prior to distribution.

Overall responsibility for the interest programs resides with OSI. OSI coordinates policy and procedures concerning administration of the interest programs.

All actions, including actions by examiners, need to be followed in accordance with IRC 7803(a)(3), the Taxpayer Bill of Rights (TBOR), adopted in June 2014 and available at https://www.irs.gov/taxpayer-bill-of-rights.

Nearly every function in the IRS has a role in proper interest administration. It is essential that each function conduct its operations with an emphasis on mitigating risk of inaccurate interest computations. Appropriate reviews should be conducted to ensure interest accuracy, consistency, and fairness.

To promote the goals of accuracy, consistency, and fairness in the interest program, the Complex Interest Quality Measurement System (CIQMS) Staff, a section within OSI, conducts reviews of interest computations, forwarding their findings to program partners/stakeholders. OSI also prepare reports of significant issues, such as corrections to computer programming that affect taxpayers.

In accordance with IRC 6601(a) and IRC 6611, the payment of interest is required on underpayments of tax and overpayments of tax, respectively, unless otherwise specified by law.

IRC 6621 provides the interest rates on overpayments and underpayments of tax, which are tied to the Federal short-term interest rate. Interest rates are determined quarterly based on changes to the Federal short-term rate.

Interest is statutory. It cannot be reduced or abated due to reasonable cause, nor can it be negotiated. See IRM 20.2.7, Abatement and Suspension of Debit Interest, for situations in which interest can be lawfully reduced or abated.

For additional information, such as the latest interest news, job aids, interest tool updates, training materials, list of the analysts, etc., see https://portal.ds.irsnet.gov/sites/vl022/lists/interestinsider/landingview.aspx

If all or a portion of an assessment (deferred amount) is paid in installments, compute and assess interest as shown below.

If an extension of time to pay an estate tax deficiency assessment has been granted under IRC 6161(b)(2), compute interest on the entire balance due from the due date of the return to the date of payment using the normal interest rate.

If an extension of time to pay the tax shown on the return (deferred amount) has been granted under IRC 6161(a)(2) or IRC 6163:

If the time for payment of estate tax is extended under IRC 6166 and a deficiency is assessed after the estate has made one or more timely interest payments:

Refer to IRM 4.25.2 for more information.

Death taxes paid to any state, the District of Columbia, or a foreign country, are allowed as a deduction or credit against federal estate tax owed for estates of citizens or residents of the United States. Death taxes include estate, inheritance, legacy, or succession tax. The tax must actually be paid to be taken as a deduction or credit. See IRC 2058 and IRC 2014.

This section explains the effect of the deduction and credit on interest computations.

Interest is computed based on the tax adjustment information shown on Form 1366, Tax Analysis Worksheet for Overassessments of Estate Tax Involving Restricted Interest.

The deduction allowed under IRC 2058 must be claimed within 4 years after the filing of the estate tax return, except if:

The credit allowed under IRC 2014 must be claimed within 4 years after the filing of the estate tax return, except if:

If the claim is timely filed, allow any refund of overpaid estate tax based on the IRC 2058 deduction or the IRC 2014 credit for taxes actually paid within the 4-year period, but do NOT allow interest on the refund.

If the executor or other person representing an estate recovers any state or foreign death tax claimed as a credit, he/she must notify the IRS within 30 days of the receipt of a refund, pursuant to Treas. Reg. 20.2016-1 by filing an amended return. If the IRS computes the amount of the redetermined federal estate tax (without regard to the statute of limitations provided in IRC 6501) it will be due upon notice and demand.

If an examination determination involves a combination of general adjustments and an adjustment of the deduction or credit claimed on the return for state death taxes under IRC 2058, or foreign death taxes under IRC 2014, the Examination function will flag the case file for the restricted interest examiner. The file will contain Form 1366, Tax Analysis Worksheet for Overassessments of Estate Tax Involving Restricted Interest.

Using Columns C and D of Form 1366, if a deficiency is shown in one column and an overassessment in the other, deduct the lesser amount from the greater amount to determine the net result.

In some instances, a redetermination is prepared after adjustments have been made to the amounts claimed as a state death tax deduction or foreign death tax credits and the resulting deficiencies or overassessments have been assessed or scheduled.

A taxpayer (either an individual or a corporation) computes its foreign tax credit under IRC 901 with respect to the foreign income taxes that it pays or accrues during the taxable year. In addition, a domestic corporation may claim a foreign tax credit for foreign income taxes that are paid or accrued by a controlled foreign corporation in which the domestic corporation is a United States shareholder and that the domestic corporation is deemed to pay under IRC 960.

The individual or corporation must provide the following information:

Under prior law, foreign tax redeterminations with respect to taxes paid or accrued by a foreign corporation that are deemed paid by a U.S. corporate shareholder under IRC 960 (IRC 902 was originally included but has since been repealed by the 2017 Tax Cuts and Jobs Act) are generally accounted for as prospective upward or downward adjustments to the foreign corporation’s pools of post-1986 undistributed earnings and post-1986 foreign income taxes at the end of the foreign corporation’s taxable year in which the redetermination occurs. The Tax Cuts and Jobs Act repealed IRC 902 effective for tax years of foreign corporations beginning after December 31, 2017 and for tax years of U.S. shareholders of such foreign corporations in which such tax years of the foreign corporations end.

For interest on adjustments to FTC:

Normal interest procedures means recomputing the entire module to incorporate all the adjustments on the tax year. See IRM 20.2.1.5.2(4).

When interest is included in the refund from the foreign government, two interest computations must be performed per Treas. Reg. 1-905-4T. The lesser interest amount is input with a TC 340. If it is determined that the lesser interest amount is from the first computation, input TC 340 for the interest computed to the applicable stop date with the TC 29X. Input a second TC 340 with cycle delay for the amount of overpayment interest paid that was included in the foreign refund. Input history item on AMS: the second TC 340 represents overpayment interest paid on the foreign tax refunded by the foreign government. This ensures that for any future interest updated, the original interest computation can be backed into.

If the lesser interest amount is using the return due date as the effective date, input FTC with a TC 290/300. Input TC 340 and/or TC 772 as computed under regular rules.

If underpayment interest is computed using the refund date, input the FTC with a TC 298/308 showing the refund date for each refund that has a different date.

The taxpayer must verify the date and the amount of the refund received from the foreign government.

A claim for credit or refund attributable to foreign taxes paid or accrued must generally be filed within 10 years from the due date of the return for the year in which the foreign taxes were actually paid or accrued.

A separate amended return must be filed for each year where a foreign tax credit is adjusted. The foreign tax credits from multiple years cannot be combined into one year to make the tax adjustment.

When enough information is not provided, it may be necessary to contact the taxpayer or power of attorney before either making an assessment or denying a claim. (See IRM 20.2.10.3.1 for the required information.)

.Taxpayers can carryback or carryover amounts by which the foreign taxes that they pay or accrue exceed the foreign tax credit limitation (“excess foreign taxes”). See IRC 904(c). However, taxpayers may not carryover or carryback excess foreign taxes that they are deemed to pay or accrue under IRC 960(d). If a carryback of foreign taxes paid or accrued to foreign countries or possessions of the United States results in an overpayment of tax, that overpayment is deemed not to have been made before the filing date for the taxable year in which such taxes were actually paid or accrued. See IRC 6611(f)(2).

No interest will be paid on carryback and carryover refunds if issued within 45 days of the date the claim is received by the IRS. See IRC 6611(e) and IRC 6611(f)(4)(B).

If the erroneous application of a carryback under IRC 904(c) or IRC 907(f) results in a deficiency, that deficiency must generally be assessed within one year after the expiration of the period within which a deficiency may be assessed for the year of the excess taxes described in IRC 904(c) or IRC 907(f) which result in such carryback. See IRC 6501(i).
Example:

Overpayment interest on refunds attributable to the carryback of excess foreign taxes follow the same rules as would apply to a net operating loss (NOL) carryback. See IRM 20.2.9, Interest on Carryback of Net Operating Loss. . For purposes of computing overpayment interest:

The interest start date is never earlier than the due date of the return for the year in which the excess foreign taxes were generated. See IRC 6611(f)(2).

Interest on the underpayment of excise tax, unless otherwise provided, is charged from the due date of the return to the date the account is full paid.

Unless specifically stated otherwise, interest on the overpayment of excise tax is determined using the later of the:

to the date of the refund, less the appropriate back-off period. In the case of an offset to an outstanding liability with a future effective date, interest is paid FROM the later of the dates bulleted above TO the due date of the liability the overpayment is applied against. No interest is paid on an offset applied against unpaid liabilities due on or before the bulleted FROM dates above. See IRM 20.2.4.6, Offsets.

Use the claim received date when the taxpayer is filing a claim for refund using a form with no filing requirement.

For excise taxes applicable to corporate returns (e.g., fuel tax claims), the lower corporate and GATT (General Agreement on Tariffs and Trade) interest rates apply. Once the $10,000 threshold has been met for that module, then overpayment interest is computed at the GATT rate for all subsequent claims. See IRM 20.2.4.9, Special Credit Interest Rules for Corporations, for additional information, including calculation of the GATT threshold.

Many excise tax adjustments are statutorily made without interest. See IRM 21.7.8, Excise Taxes.

Chapter 33 of the Internal Revenue Code imposes an excise tax on amounts paid for certain facilities and services. Compute interest on any underpayment of excise tax from the date the taxpayer makes the payment for the facility or service to the date the tax is paid.

Compute underpayment interest to the date paid regardless of whether the taxpayer makes a delinquent payment of the tax to the collector or whether a direct assessment of the tax is made against the taxpayer by the IRS.

Ultimate Vendor Claims. Claims by registered ultimate vendors of undyed diesel fuel, undyed kerosene, gasoline, aviation gasoline, and kerosene used in aviation (Form 720, Schedule C; Form 8849, Schedule 2) are paid with interest if the refund is not issued within 45 days of receipt (20 days for electronic claims) of a processible claim. No interest is paid when the 20-day or 45-day period is met. When the 20-day or 45-day interest-free period is missed, interest is generally computed from date the claim was received in processible form to the refund schedule date (less the back-off period of IRC 6611(b)(2) , for computer-generated refunds. See IRM 20.2.4.7.1.1 , Systemic Refund Dates for IMF and BMF. Electronic claims processed and issued as a systemic refund (TC 846) within 20 and 45 days of receipt must have allowable interest manually computed and entered with TC 770 because Master File cannot systemically perform the interest calculation. See IRC 6427(i)(3)(B). For UV gasoline claims, the 20 day rule only applies if UV provides certification pursuant to § 6416(a)(4)(C).

Biodiesel, Alternative Fuel, and Mixture Claims. “Alcohol Fuel Mixture, Biodiesel Fuel Mixture, and Alternative Fuel Claims. IRC 6427(e)(1) and IRC 6427(e)(2) allow claims for certain fuel mixtures credits and the alternative fuel credit (Form 720, Schedule C; Form 8849, Schedule 3). These credits follow the same rules as claims by registered ultimate vendors described in paragraph (1) and in accordance with the above If and Then chart. See IRC 6427(i)(3)(B) (alcohol claims expired in 2011.)

For excise taxes applicable to corporate returns, the lower corporate and GATT interest rates apply. See IRM 20.2.4.9, Special Credit Interest Rules for Corporations, for additional information.

Once the $10,000 GATT threshold has been met for the tax module, overpayment interest is computed at the GATT rate, including all subsequent claims. See IRM 20.2.4.9.1, GATT Credit Interest-Computations on Overpayments, for more information.

Taxpayers could request a credit or refund of the telephone excise tax on nontaxable service that was billed after February 28, 2003, and before August 1, 2006, only on their 2006 federal income tax returns. For this purpose, the 2006 income tax return meant the income tax return for calendar year 2006 or for the first taxable year including December 31, 2006. Details were covered by IRB 2006-25 1141 (Notice 2006-50) and IRB 2007-5 405 (Notice 2007-11), which amplified, clarified, and modified IRB 2006-25. The refund statute was open for six years from July 26, 2006, to July 26, 2012. Detailed instructions for the special interest rules that applied to these claims can be found in IRM 21.6.3.5.13, TETR Interest-General Information, (September 3, 2013 revision) for individual master file (IMF) tax modules and in IRM 21.7.4.4.23.4, TETR Interest, (September 6, 2013 revision) for business master file (BMF) tax modules.

IRC 6416(b) identifies certain payments as overpayments subject to credit or refund without interest (Form 720, Schedule C, Form 8849, Schedule 6); price adjustments; specified uses and resales; tax-paid articles for further manufacture; tires; return of certain installment accounts; and truck chassis, bodies, and semitrailers used for further manufacturing. These overpayments are refunded without interest.

IRC 6420 provides for a payment (without interest) to the ultimate purchaser of gasoline, if the gasoline is used on a farm for farming purposes and the ultimate purchaser is an owner, tenant, or operator of a farm. The farm must be located in the U.S.

Annual excise tax claims are made on Form 8849, Schedule 6. The overpayment may be refunded or taken as an income tax credit as provided for in IRC 6420(g). Overpayment interest is not allowed for either the refund or the credit.

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IRC 6421 provides for a payment (without interest) if gasoline is used in an off highway business use; in inter-city, local or school buses; or sold to any person for an exempt purpose. IRC 6427 provides for a payment (without interest) if a tax has been imposed on the sale of fuel and the purchaser uses the fuel for a nontaxable purpose or resells the fuel. Claims are made on Form 720, Schedule C, Form 720-X, or Form 8849, Schedule 1. Depending on the type of taxpayer, the overpayment may be refunded or taken as an income tax credit as provided for in IRC 6421(i).IRC 6427 (k) .

Overpayment interest is not allowed on either type of credit.

If the claim amount needs to be offset for a balance due on another module, the credit transfer date will be the received date of the claim.

IRC 6419(b) identifies as an overpayment the tax on a wager that is laid off by the taxpayer (Form 8849, Schedule 6, or Form 730, line 5). These overpayments are refunded without interest.

IRC 4132(b) identifies as an overpayment any tax on a vaccine that is returned to the manufacturer or destroyed (Form 720, Schedule C, or Form 8849, Schedule 6). The tax shall be abated, credited or refunded without interest.

IRC 4483(d) identifies as an overpayment tax paid on the use of heavy highway vehicles when the vehicle is used for 5,000 miles or less (7,500 for agricultural vehicles) (Form 2290, Line 5). The credit or refund of the tax is made without interest.

“IRC 4662(d) identifies as an overpayment any tax paid on a taxable chemical that is used in the manufacture or production of any other substance that is a taxable chemical , and, in some cases, used as (or used in the manufacture of) qualified fuel, fertilizer, or animal feed. IRC 4662(e) exempts from the tax the export of taxable chemicals. The credit or refund of the tax is made without interest. The tax imposed by IRC 4661(a) expired after December 31, 1995.”

IRC 4682 identifies as an overpayment any tax paid on an ozone-depleting chemical that is under certain conditions, diverted or recovered as part of as part of a recycling process, used in further manufacturing, used as a feedstock, exported, or used as a propellant in a metered-dose inhaler (Form 720, Schedule C, or Form 8849, Schedule 6). The credit or refund of the tax is made without interest.

IRC 4081 imposes a tax on removal, entry, or sale of certain types of fuel. Underpayment interest is computed from the return due date (RDD) on any second tax assessed to the account.

IRC 4081(e) provides for a refund of those taxes in certain cases. Claims for refund made under this Code section must be filed on Form 8849, Schedule 5. See IRM 21.7.8.4.5.5, Form 8849 Schedule 5, IRC Section 4081(e) Claims, for processing procedures.

An employer who has underreported and/or underpaid FICA tax, RRTA tax or income tax withholding, must correct the error on the form that corresponds to the return being corrected (e.g., if the original return filed was a Form 941, corrections are reported on Form 941-X). See Exhibit 20.2.10-1 , Which Form to File. The adjusted return on which the correction is shown must provide:

An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. See Treas. Reg. 31.6205-1(a)(4).

If all of the above information is provided and the adjustment is reported by the due date of the return for the return period in which the error is discovered (ascertained), input the adjustment with the appropriate blocking series, using a Transaction Code (TC) 298 or 308 and an interest computation date (INT-CMPTN-DT) equal to the received date of the adjusted return. If the underpayment is paid in full by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , no interest is due. If the underpayment is not paid in full by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest will be computed from the interest computation date and the failure to deposit (FTD) may apply. See IRM 20.1.4.21.5(7), Adjusted Returns (Forms 941-X, 943-X, 945-X, and CT-1X). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

When an adjusted return is not received by the due date for filing the return for the return period in which the employer discovered the error, the adjustment is not considered to have been timely reported. In this instance, interest is due on the underpayment from the due date (without regard to an extension of time for filing) of the original return for the period in which the error occurred.

Once the following notices have been sent out to the taxpayer, any additional underpayment adjustments are not eligible for an interest-free period after the earlier of the following:

The amount must then be paid with normal interest as described in IRC 6601. See Treas. Reg. 31.6205-1(a)(6).

These same rules apply to adjustments made by IRS. If it is determined that the taxpayer is eligible for the interest-free provisions of IRC 6205(a)(2), then Form 3198, Special Handling Notice for Examination Case Processing, needs to be marked. TC 308 will be input using the agreement date as the interest computation date on the closing document. If the taxpayer full pays with the agreement, then there will be no additional interest due. See IRM 4.23.8.3, Interest-Free Adjustments- In General. Otherwise, interest will start on the agreement date for the unpaid amount until full paid. Failure to deposit penalty may also apply.

An underpayment interest suspension period based on IRC 6601(c), also known as an "870 waiver," does not apply to employment tax returns, including Schedule H. To prevent an erroneous interest suspension, an agreement date should not be entered on the closing document or Form 2859, Request for Quick or Prompt Assessment.

Combined annual wage reporting (CAWR) proposed assessments may result in an interest-free adjustment for FICA tax reported on Form 941.

After receipt of notice and demand for payment based on a CAWR assessment, no interest-free adjustment of such tax can be made by filing an adjusted return or by agreeing to the assessment by signing Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment.

For complete instructions on the input of CAWR assessments, see IRM 4.19.4, CAWR Reconciliation Balancing.

The interest-free provisions for adjustments on BMF employment taxes also cover errors of household employment taxes reported on IMF Form 1040 Schedule H, Household Employment Taxes. If an employer discovers an error on a Form 1040 Schedule H that was filed with Form 1040, U.S. Individual Income Tax Return, Form 1040-NR, U.S. Nonresident Alien Income Tax Return, or Form 1040-SS, U.S. Self-Employment Tax Return, the employer will file a Form 1040X, Amended U.S. Individual Income Tax Return, and attach a corrected Form 1040 Schedule H. If an employer discovers an error on a Form 1040 Schedule H that was filed with Form 1041, U.S. Income Tax Return for Estates and Trusts, the employer will file an amendedForm 1041 and attach a corrected Form 1040 Schedule H. If an employer discovers an error on a Form 1040 Schedule H that was filed as a stand-alone return, the employer will file another stand-alone Form 1040 Schedule H with the corrected information. See IRM 21.6.4.4.8, Schedule H, Household Employment Taxes, for more information.

Underpayment adjustments are interest-free if reported by the due date of the return for the return period in which the error was discovered and payment is made by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

If the corrected Form 1040 Schedule H is filed by the due date of the return for the period in which the error was discovered, but payment is not made by the time the corrected Form 1040 Schedule H is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest is computed from the received date ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the corrected Form 1040 Schedule H. See IRM 20.2.10.5.5.1 .

Employment tax regulations effective January 1, 2009, require payment of employment tax increases (including Form 1040 Schedule H) for income tax withheld and social security and Medicare taxes at the time the adjusted return or Form 1040 Schedule H is filed (FUTA taxes are not affected). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

If the employer discovers the error before the return is filed, the employer has to report and pay the correct amount of tax with the return. THIS IS NOT AN ADJUSTMENT. If the employer does not report and pay the correct amount by the due date of the return, the error cannot later be corrected through an interest-free adjustment. Interest is computed from the normal due date (without regard to an extension of time for filing) of the original return for the tax period in which the error occurred.

If the employer discovers the error after the return is filed, the error can be corrected by reporting the additional amount due on an adjusted return for the period in which the error occurred. The adjusted return is made on the form that corresponds to the return being corrected. See Exhibit 20.2.10-1 .

If the adjusted return is filed timely (by the due date for filing the return for the return period in which the employer discovered the error), but payment is not made at the time of filing ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest is computed on any unpaid amount from the received date≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the adjusted return until paid in full. Plus, the failure to deposit penalty may apply when payments are not made timely. If the correct interest computation date (INT-CMPTN-DT) is used with TC 298 or TC 308, Master File will correctly compute the interest unless underpayment interest on the module otherwise requires restriction. The interest computation date is the received date of the adjusted return for the period in which the error occurred. See IRM 20.2.10.5.1 .

If the adjusted return is not filed by the due date for filing the return for the return period in which the error was discovered, interest is due on the underpayment from the due date of the original return for the period in which the error occurred.

Generally, the correction of an error may be made under the above procedures during an audit of the return, provided the employer corrects the error before notice and demand or Letter 3523 is issued. See Treas. Reg. 31.6205-1(a)(6).

Interest will be assessed on such adjustments in accordance with IRC 6601.

. See Treas. Reg. 31.6205-1(a)(7).

Corrections on a return prepared under IRC 6020(b) do not typically qualify for an interest-free adjustment. Interest on this type of return is computed from the due date of the original return. IRC 6020(b) gives the IRS the authority to file a tax return for a business when it does not file a required return.

An original return that was previously not filed may qualify for the interest-free provisions of IRC 6205 if:

See Treas. Reg. 31.6205-1(b)(2)(ii) and (iii).

Rev. Rul. 99-40 (i.e., May/Sequa), as it relates to credit elects to determine interest start dates of unpaid installments or deposits, does not apply to employment taxes. See IRM 20.2.5.7, Revenue Ruling 99-40 (Modifies and Supersedes Revenue-Ruling 88-98) Use of Money, for more information on Rev. Rul. 99-40. However, it does apply to refunds without interest because the IRS had the use of the taxpayer’s money. This includes, but is not limited to, Form 941, Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, Employer’s ANNUAL Federal Tax Return, and Form 945, Annual Return of Withheld Federal Income Tax.

If no income tax or less than the correct amount of income tax is withheld and the error is discovered before the return is filed for the period in which the wages were paid, the employer shall report and pay the correct amount of tax required to be withheld on the return. THIS IS NOT AN ADJUSTMENT. If the employer does not report and pay the correct amount of tax by the time the return is filed, he cannot later correct the error through an interest-free adjustment. Interest is computed from the due date of the original return for the period in which the error occurred.

If the under withholding of income tax is discovered after the return has been filed, the error can be corrected by reporting the additional amount due on an adjusted return (e.g., Form 941-X), for the return period in which the wages were paid. The adjusted return is eligible for interest-free treatment if:

If the employer discovers an error resulting in an underpayment of income tax withheld in the same calendar year in which the wages or compensation was paid, reports the underpayment by the due date of the return for the quarter in which the error is discovered, and all required tax is paid by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , NO INTEREST IS DUE on the underpayment. See Treas. Reg. 31.6205-1(c)(2).

The adjustment is made on the form that corresponds to the return being corrected. See Exhibit 20.2.10-1.

If the over collection and overpayment is discovered after the return is filed, the employer (after repaying or reimbursing the employee) may correct the overpayment of both the employer and the employee's share of the FICA tax or RRTA tax by filing an adjusted return for the period in which the error occurred. The overpayment will be applied as a credit to the current tax period. The adjusted return must be filed before the expiration of the period of limitations as described in IRC 6511. This "adjustment" is made without interest. See IRM 20.2.10.5.6 (6).

An error is discovered when the employer has sufficient knowledge of the error to be able to correct it. See Treas. Reg. 31.6413(a)-2(a)(4).

The adjusted return is made on the form that corresponds to the return being corrected. See Exhibit 20.2.10-1.

If the employer elects to file a "claim for refund" instead of an adjusted return and apply the credit to the current tax period, overpayment interest is allowed from:

(whichever is later), to the refund schedule date minus any applicable back-off period. See IRM 20.2.4.7, Refunds.

When allowing overpayment interest on employment tax returns, take into consideration the special return due date rule. Form 941, Form 943, Form 944, and Form 945 may be filed on or before the 10th day of the second calendar month following the end of the tax period, if timely deposits are made in full payment of the amount of tax reported. See Treas. Reg. 31.6071(a)-1(a)(1). These returns should not be considered late filed.

To file a claim for refund of an overpayment of FICA or RRTA tax, the employer must repay or reimburse the employee's share of FICA or RRTA tax to the employee or secure the written consent of the employee for allowance of the refund or credit. However, if after reasonable efforts, the employer cannot locate the employee or the employee, once contacted, will not provide the requested consent, the employer is not required to repay or reimburse the employee. If the employer cannot locate the employee or if the employee, once contacted, will not provide the requested consent, the employer can file a claim only for the employer’s share of FICA or RRTA taxes.

The claim for refund is made on the form that corresponds to the return being corrected (e.g., Form 941-X). See Exhibit 20.2.10-1.

The regulations under IRC 6413 provide a 90-day rule under which an overpayment adjustment is not permitted if the adjusted return would be filed within 90 days of the expiration of the period of limitations. See Treas. Reg. 31.6413(a)-2(d)(2). The employer must choose the claim for refund option on the appropriate "X" form. See Exhibit 20.2.10-1.

If an employee worked for two or more employers during a year, the employee may have had too much FICA or Tier 1 RRTA tax withheld. The employee can claim the excess FICA or Tier 1 RRTA tax as a credit against the employee’s income tax on Form 1040.

If any one employer withheld too much FICA or Tier 1 RRTA tax, an employee cannot take the excess as a credit against the employee’s income tax. The employer should adjust the tax for the employee. If the employer does not adjust the over collection, the employee can file a claim for refund using Form 843, Claim for Refund and Request for Abatement.

If a non-resident alien receives a refund of erroneously withheld FICA taxes (e.g., students arriving on F, J or M visas who may be exempt from paying FICA taxes), refer to IRM 21.8.1, IMF International Adjustments, IRM 21.8.2, BMF International Adjustments, or IRM 21.7.12, Non-Master File (NMF) Adjustments. IRS is required to withhold taxes from the employer computed at the applicable treaty rate prior to issuing a refund to a non-resident alien. The net interest amount (if any) is refunded at the non-corporate rate. See IRM 21.8.2.7.3, Processing Employee Claims, for adjustment procedures.

The trust fund recovery penalty (TFRP) was created to encourage prompt payment of trust fund taxes (IRC 7501) and to ensure ultimate collection of such taxes from a secondary source in any event. This includes payment of employment taxes (income tax withholding, social security taxes, Medicare taxes, or railroad retirement taxes), or collected excise taxes. The employer or collector holds withholdings or collections in trust for the United States until it is paid (usually by making Federal tax deposits) regardless of whether any funds were placed in a segregated account or were simply part of a general account. This penalty is imposed when trust fund taxes cannot be immediately collected from the employer or collector. See IRC 6672. The following is suggested to make it clear that tracing rules don’t apply; see Begier v. IRS, 496 U.S. 53 (1990).

The TFRP is assessed on MFT 55 and posts as a Transaction Code (TC) 240, Reference Number 618. Any abatements of this penalty will post to the module with a TC 241, Reference Number 618 and will carry the same 23C date as the TC 240.

Credits posting to the module with a TC 241, Reference Number 697 or 699 are based on actual payments made on a related account.

Payments may also be posted with TC 670, 680 or 70X.

Domestic corporations that employ U.S. citizens or residents in their foreign affiliates may enter into agreements under IRC 3121(l) whereby FICA coverage is extended to those citizens or residents. Under these agreements, the corporations pay the amounts equivalent to FICA taxes imposed by IRC 3101 and IRC 3111. Whether the amount is overpaid or underpaid, adjustments are without interest.

Special Rule for Overpayment Not "Adjusted" - A domestic corporation may file a claim for refund of any overpayment made under an agreement under IRC 3121(l). The law provides a special two-year limit from the date of the overpayment for claiming such a refund. The claim must be plainly marked "Claim under IRC 3121(l)" on the applicable amended form. See Exhibit 20.2.10-1. Adjustment documents for such overpayments should bear a similar notation.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides an employee the right to elect to continue paying health care premiums to their employer when due to a "qualifying event" the employee has lost coverage under the employer’s group health plan. A federal subsidy of 65% if the COBRA premium is available to assist in paying the premium for eligible individuals for up to 15 months. Employers are allowed a credit against their employment tax for the amount of premium assistance provided to the employee.

The American Recovery and Reinvestment Act of 2009 (as modified by the Department of Defense Appropriations Act of 2010) provides premium assistance for COBRA continuation coverage for certain individuals and their families who lose health plan coverage due to an involuntary termination of employment occurring between September 1, 2008 and February 28, 2010.

A federal subsidy of 65% of the COBRA premium is available to assist in paying the premium for eligible individuals for up to 15 months. Employers are allowed a credit against their employment tax for the amount of premium assistance provided to the employee.

The credit is reported on Form 941, Form 943, or Form 944, and is treated as a deposit made on the first day of the return period (year or quarter). Employers can apply the credit to offset their federal tax deposits, generate a refund, or both. If refunding, normal overpayment interest rules per IRC 6611 apply.

A COBRA premium assistance credit is input using credit reference number (CRN) 299 (which generates TC 766) and a credit effective date of the first day of the tax return period. If reversing or reducing the credit, the credit reference number is input as a negative (-) amount.

Recapture of COBRA credits are eligible for an interest-free adjustment per IRC 6205.

See IRM 21.7.2.5.19, Premium Assistance for COBRA Benefits, for more information.

Under the Hiring Incentives to Restore Employment (HIRE) Act of 2010 enacted March 18, 2010, a tax benefit was made available to employers who hired certain previously unemployed workers (“qualified employees”) in their trade or business.

This credit adjusts the payroll tax exemption for wages paid to qualified employees from March 19 through 31, 2010 (HIRE refundable credit). It can be identified by CRN 296. If reversing the credit, then input as a negative (-).

CRN 296 can be input separately or with any combination of other transaction codes or credit reference numbers.

Master File programming was corrected in January of 2011 to recognize that reversals of HIRE refundable credits (CRN 296) are eligible for interest-free adjustments under IRC 6205. When a TC 298 is input along with a CRN 296 reversal, the Interest Computation Date generates a second date field (showing as “COBRA/TAX-HOL>” on IDRS) which the computer will use as the start date for interest accruals. Prior to the programming update, HIRE refundable credit reversal procedures included instructions to restrict penalty and interest calculations with TC 340 and TC 270 as appropriate.

See IRM 21.7.2.5.20, HIRE — Payroll Tax Exemption, for more information.

VOW to Hire Heroes Act of 2011 expanded the work opportunity tax credit (WOTC) to businesses that hire certain eligible unemployed veterans who began work before January 1, 2013. This law also made the WOTC available to certain tax-exempt organizations who hired qualified veterans who began work on or after November 22, 2011, and before January 1, 2013.

Subsequent legislation has extended the WOTC for qualified veterans until January 1, 2020.

The credit is reported on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. The credit cannot be claimed on an original employment tax return or on an amended Form 94X.

CRN 290 is used to adjust the WOTC claimed on Form 5884-C. Use a negative (-) when decreasing the credit. However, by law, this credit is NOT a refundable credit.

The credit is applied against the employer's share of the social security tax liability using the first day of the tax period. However, for purposes of calculating underpayment interest the credit is available on the normal return due date. For purposes of calculating overpayment interest, the normal provisions of IRC 6611 apply, including the 45-day rule.

This credit is not eligible for an interest-free period per IRC 6205.

See IRM 21.7.2.5.22, Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, for more information.