In a Technical Advice Memorandum, IRS has determined that where a taxpayer had an overpayment resulting from an IRS-initiated general adjustment that was preceded by a net operating loss (NOL) carryback and tentative refund that was later disallowed, interest was payable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
Background. A taxpayer who receives a refund or a credit is entitled to interest at the rate prescribed under Code Sec. 6621 on the amount of the overpayment. (Code Sec. 6621(a)) For refunds, interest starts running from the date of the overpayment to a date (set by IRS) which is not more than 30 days before the date of the refund check. (Code Sec. 6621(b)(2)
The date of the overpayment is generally the point in time when a payment (or payments) of tax first exceeds the liability. (Reg. §301.6611-1(b)) If the payment that results in an overpayment is made before the last day prescribed for payment, then it's treated as made on the due date. (Code Sec. 6513(a)) If the overpayment results from an NOL carryback, the date of the overpayment is deemed to be no earlier than the filing date for the tax year in which the NOL is claimed. (Code Sec. 6611(f)(1))
IRS administratively establishes an end date of less than 30 days for interest computation purposes under the Internal Revenue Manual (IRM). For instance, for individual master file (IMF) accounts, overpayment interest stops 13 days before the refund, whereas for business master file (BMF) accounts, it stops nine days before.
When an overpayment is credited to another tax liability, interest on the overpayment runs from the overpayment date to the due date of the liability to which the overpayment is credited. (Code Sec. 6611(b)(1)) The due date for the liability credited is the last day by law or regs for the payment of the tax without regard to extensions (Reg. §301.6611-1(h)(2)), typically the unextended due date of the return on which the tax is required to be reported. (Code Sec. 6151(a))
However, when an overpayment results from an IRS-initiated adjustment, interest thereon is computed by subtracting 45 days from the period for which interest is allowable. (Code Sec. 6611(e)(3)) Additionally, no interest is payable from the date the refund claim is filed until the day the refund is made if the overpayment is refunded within 45 days after the taxpayer filed a credit or refund claim. (Code Sec. 6611(e)(2))
Facts. Taxpayer timely filed a federal income tax return for tax year 1 (TY1) and paid the liability shown thereon (Amount 1) prior to the due date of the return. Sometime after the due date, IRS issued taxpayer a tentative refund resulting from an NOL carryback from TY2. The requested amount was paid within 45 days of taxpayer's request, so no overpayment interest was paid under Code Sec. 6611(e)(2).
In a later examination, IRS disallowed the entire NOL carryback, assessed the amount that was previously refunded, and also made a general adjustment reducing taxpayer's TY1 liability. Around that time, IRS also abated an additional amount for TY1 resulting from a TY3 carryback. In the end, the combined amount of the general adjustment decrease and other abatement was slightly more than the disallowed NOL carryback.
IRS allowed overpayment interest arising from the general adjustment for the period beginning on the due date of the TY1 payment through the due date for the TY2 liability. Taxpayer argued that the overpayment interest on that amount should run until the date that IRS issued the tentative refund.
Taxpayer-favorable ruling. The TAM concluded that because the overpayment was attributable to IRS's general adjustment to taxpayer's TY1 liability, and the overpayment was effectively refunded to taxpayer, overpayment interest is allowable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
The overpayment began, and interest was therefore allowable, beginning on the date that Amount 1 was considered to have been paid, and continuing until a date not more than 30 days before the overpayment was refunded to taxpayer. (Code Sec. 6611(b)(2)) In computing interest for that period, 45 days must be subtracted under Code Sec. 6611(e)(3) since the overpayment resulted from an IRS_initiated adjustment. The TAM clarified that since Code Sec. 6611(b)(2) was controlling, Code Sec. 6611(b)(1) didn't apply (because the overpayment wasn't credited to a liability), nor did the rules for determining the interest period in cases of NOL carrybacks. Rather, the actual overpayment was based on an adjustment to taxpayer's liability, and wasn't the result of an NOL.
The TAM analyzed and ultimately rejected the two cases cited in the request for advice—AT&T Corp. & Subsidiaries v. U.S., (Ct Fed Cl 10/18/2004) 94 AFTR 2d 2004-6444, and Marsh & McLennan Cos. v. U.S., (CA Fed Cir 9/6/2002) 90 AFTR 2d 2002-6216 —as factually distinguishable, notably based on the fact that both of those cases involved Code Sec. 6611(b)(1).
References: For the end of the interest period on overpayment, see FTC 2d/FIN ¶T-8031; United States Tax Reporter ¶66,114; TaxDesk ¶807,019; TG ¶70905.