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20.2.1.6
(07-18-2008)
Terminology
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The terminology used in this handbook is described in this section.
See Exhibit 20.2.1-2.
20.2.1.6.1
(07-18-2008)
Types of Interest
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The statutory requirements for calculating interest on underpayments
and overpayments are contained in IRC sections 6601
and 6611. The payment of interest on underpayments and overpayments
under these provisions is mandatory unless specifically prohibited by law.
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The two types of interest are:
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Credit Interest (overpayment) – Interest paid to the taxpayer by
the IRS on an overpayment of tax, and
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Debit Interest (underpayment) – Interest charged to the taxpayer
when tax, penalty, addition to tax, or interest is owed to the government.
Note:
Different interest rates may apply to underpayments
and overpayments. After December 31, 1999 the interest rates for non-corporate
taxpayers became equal for both underpayments and overpayments, while they
are still different for corporate taxpayers.
20.2.1.6.2
(07-18-2008)
Simple Interest
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The term "simple interest"
refers to interest that
is computed only on the principal amount owed. Simple interest accrued on
overpayments and underpayments of tax and penalties before January 1, 1983.
20.2.1.6.3
(07-18-2008)
Compound Interest
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The term "compound interest"
refers to interest
that accrues on both the principal amount and on any interest charged on the
principal (i.e., interest on interest).
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The IRS is required to compound interest daily, effective January 1, 1983.
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When it is necessary to manually compute interest, use Command Code (CC)
COMPA or the Automated Computational Tool (ACT/DMI).
20.2.1.6.4
(07-18-2008)
Normal Interest
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The term "normal interest"
refers to interest that
is computed without regard to any restrictions.
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On an underpayment, normal interest is computed from the date the liability
is due and unpaid to the date paid.
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On an overpayment, normal interest is computed from the availability date
of the overpayment to the date provided within IRC section
6611, depending on whether the amount is credited (offset) or refunded.
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Generally, it is not necessary to manually compute and adjust normal
interest. Master File programming will compute normal interest based on debits
and credits posted to the tax module.
20.2.1.6.5
(07-18-2008)
Restricted Interest
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The term "restricted interest"
refers to any interest
that is computed from other than the normal interest start and stop dates.
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The rules that govern restricted interest are more complex than those
for normal interest. The variables of time and rate may differ.
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In many instances, Master File programming cannot compute restricted
interest. Because of this, you must manually compute and adjust interest when
Master File limitations prevent systemic generation of interest.
20.2.1.6.6
(07-18-2008)
Annual Interest Netting
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The term "annual interest netting"
refers to a method
of computing interest which equalizes the difference between credit and debit
interest rates within a single tax module during periods of mutual indebtedness
(e.g., if a taxpayer received a refund with interest and it is later determined
that an underpayment exists in that module during the same time period, the
debit and credit interest rates will be netted or equalized within that tax
module during the overlapping period). It is not necessary to manually compute
interest to make an annual netting adjustment, if there is no reason to otherwise
manually compute and restrict interest.
20.2.1.6.7
(07-18-2008)
Net Rate Interest Netting
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The term "Net Rate Interest Netting"
refers to the
method of computing interest to equalize/eliminate the interest rate differential
between overpayments and underpayments (for the same taxpayer for the same
or different types of tax). The overlapping debit and credit interest computation
periods occur between different tax modules on equivalent amounts. See IRM 20.2.14 for instructions on making net rate interest
adjustments.
Note:
Modules requiring net rate interest adjustments
are always restricted from systemic computation and
require a manual calculation of interest. Use the Automated Computational
Tool (ACT/DMI), since IDRS interest computation command codes are not suited
to perform net rate calculations.
20.2.1.6.8
(07-18-2008)
Interest Rates
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The debit interest rate is applied under the authority of IRC section 6621 during the time period between when
the payment of tax, penalty and/or interest become due and when they are paid.
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The credit interest rate is applied under the authority of IRC section 6611 during the time period from the credit
availability date to the date an overpayment is either refunded (with the
applicable back- off period) or offset.
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The interest rates are determined quarterly. Although interest rates
are determined quarterly, they can change or remain the same from quarter
to quarter.
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