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20.2.7.6
(08-01-2006)
Section 6404(g) Interest Suspension - Background
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IRC section 6404(g) suspends interest if the IRS
fails to provide taxpayer with a timely and adequate notice of liability and
the basis for the liability. IRC section 6404(g)(1)(A) applies
only to timely filed individual income tax returns
for
taxable years ending after July 22, 1998.
-
Revenue Ruling 2005-4; 2005-4 IRB 1 extends the scope of IRC section
6404(g) to include additional liability reported on amended returns and also
on correspondence submitted by the taxpayer (liability increases
other than Automated Under Reporter and TC 30X audit adjustments).
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The interest suspension applies to an increase
in liability for FICA tax, excise tax, or household employee taxes on a Schedule
H, reportable in a Form 1040. The provision also applies to an individual's
liability, which is a result of an adjustment from a flow-through entity,
TEFRA, or disallowed carryback.
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Section 903 of the American Jobs Creation Act of 2004 amended IRC section
6404(g) by limiting the interest suspension period for taxpayers participating
in a tax shelter. For listed transactions (i.e. Son of Boss, IRS Announcement
2004-46, etc.) and certain reportable transactions, interest suspension period does not continue after October 3, 2004. The continuation
of interest accruals after October 3, 2004, requires manual computation and
restriction of interest.
20.2.7.6.1
(08-01-2006)
Exclusion from Section 6404(g) Interest Suspension
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Interest suspension under IRC section 6404(g)
specifically excludes:
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suspension of any penalty imposed under section 6651;
Note:
Although interest
on a reported, but unpaid liability can be suspended under IRC Section 6404(g),
the failure to pay penalty imposed on that liability and interest accruing
on that penalty will continue to be charged and are not subject to suspension.
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any interest, penalty, addition to tax, or additional amount in a case
involving fraud;
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any interest, penalty, addition to tax, or additional amount with respect
to any tax liability shown on the original return;
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any interest, penalty, addition to tax, or additional amount with respect
to any gross misstatement (applicable to taxable years beginning after December
31, 2003);
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any interest, penalty, addition to tax, or additional amount with respect
to any reportable transaction to which the requirement of IRC section 6664(d)(2)(A)
is not met and any listed transaction as defined in IRC section 6707A(c);
Note:
Exclusion of reportable or listed transactions from 6404(g) interest
suspension shall apply with respect to interest accruing after October 3,
2004;
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any criminal penalty.
20.2.7.6.2
(08-01-2006)
18-Month Period (Notification Period)
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The 18-month period is the length of time the Service has to notify
a taxpayer of additional liability and provide a basis for the liability.
The 18-month period starts on the later of the following:
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the due date of the return, if filed on or before
the return due date, or
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the filing date of the return, if filed timely under
a valid extension
Note:
For consistency purposes throughout the Service, we will
use the date shown on the transcript (CC TXMODA or IMFOLT) field
RET-RCVD-DTor RECEIVED-DATE as the start of our
18-month period.
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For IRC section 6404(g) purposes, the 18-month period is calculated
by adding 18 months to the "Start"
date and subtracting
one day.
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If the close of the 18-month period falls on a Saturday, Sunday or legal
Holiday, the next business day becomes the "End Date"
of
the 18-month period. For example:
A 199812 original tax return
filed on or before the return due date. The 18-month period "
Starts"
on the return due date April 15, 1999and "Ends"
on Monday, October 16, 2000. For
this example, the close of the 18-month period is Saturday, October 14, 2000;
therefore, the next business day, Monday is the 18-month period End Date.
A 200012 original tax return filed on or before
the return due date. The 18-month period "Starts"
on the
return due date, April 15, 2001and "Ends
"
on Tuesday, October 15, 2002. For this example,
the close of the 18-month period is Monday, October 14, 2002, a legal Holiday;
therefore the next business day is the 18-month period End Date.
A 200212 original tax return received by the Service on June 19, 2003, with
a valid extension of time to file by August 15, 2003. The 18-month period "Starts"
on June 19, 2003, the return
received date and "Ends"
on Monday, December
20, 2004. For this example, the close of the 18-month period is Saturday,
December 18, 2004; therefore the next business day is the 18-month period
End Date.
Note:
Interest accrues during the 18-month period
for 6404(g) purposes.
20.2.7.6.3
(08-01-2006)
Interest Suspension Period
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The "Interest Suspension Period"
is the length of
time the Service must suspend interest for untimely notification of the taxpayer.
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Interest suspension starts the next day after the 18-month period end
date. Interest is suspended on tax, penalties (except as described in IRM
20.2.7.6.1) and additions to tax reflected on notice or amended return.
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Interest suspension ends 21 calendar days after the
notice issue date or received date of the amended return/correspondence. Interest
resumes the next day or the 22nd day from the notice date or amended received
date. Examples of interest suspension period:
A 199812 tax return
filed on April 15, 1999. Examination Report, Form 4549 with 886-A, was issued
to taxpayer on September 6, 2001. Interest suspension starts on October 17,
2000, and ends September 27, 2001. Interest resumes September 28, 2001.
A 200012 tax return filed on April 15, 2001. Form 1040X with additional liability
received March 1, 2004. Interest suspension starts on October 16, 2002, and
ends March 22, 2004. Interest resumes March 23, 2004.
A 200212 tax return received June 19, 2003 with a valid extension of time
to file by August 15, 2003. On December 2, 2005, the Service sent the taxpayer
an Examination Report, Form 4549 with 886-A. Interest suspension starts on
December 21, 2004, and ends December 23, 2005. Interest resumes December 24,
2005.
20.2.7.6.4
(08-01-2006)
Section 6404(g) Notice
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A notice should be written and contain adequate
information regarding the adjustment to enable the taxpayer to challenge the
adjustment.
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The notice requirement applies separately to each item or adjustment. An adequate notice provided within the prescribed time period (18
months) prevents the suspension of interest only on those items or adjustments
described in that notice.
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In general, math error notices, Underreporter Program notices, an Examination
Changes Report with explanation of adjustments, Summary Report with Forms
4605-A, 886-A and 886-S (TEFRA cases, IRM 4.31.2.2.9.3), amended returns or
a signed taxpayer correspondence is adequate notice.
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For Examination, explanation of each item of adjustment by using one
of the following methods provides adequate notice:
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Using the standard paragraphs in IRM 4.2.8 (the
standard paragraphs are accessible in RGS)
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Using an attached Form 886-A, Explanation of Adjustments,
which references each adjustment and gives the reason(s) for each adjustment,
or
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Attaching copies of examination workpapers that
reference each adjustment and explains each item of adjustment and the basis
for the adjustment.
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For Automated Under Reporter (AUR) the CP-2000
is adequate notice.
20.2.7.6.5
(08-01-2006)
Multiple Section 6404(g) Notices
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An Examiner may issue more than one report for
a tax return during the course of an examination. If a subsequent report does notcontain new items or adjustments, there is one Section
6404(g) notice date. For example:
A 199812 tax return filed on
April 15, 1999. Examiner issued Form 4549 on December 1, 2000, with liability
of $4,000 due to disallowed charitable contributions deductions. Taxpayer
provided proof for part of deductions. Examiner revised and issued report
with liability of $2,500 on February 6, 2001.
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If a subsequent report contains new items or adjustments, there are
separate Section 6404(g) notice dates. For example:
A 199812 tax
return filed on April 15, 1999. AUR generated a CP 2000 notice on December
1, 2000, due to omission of interest income resulting in tax liability of
$4,000. Audit transferred to field office. Examination Changes Report; Form
4549, was issued on May 31, 2001, with a tax liability of $6,000, resulting
from omission of income plus $6,000 disallowance of charitable contributions.
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An examination report and an amended return issued/received for the
same tax return qualify as separate notices for 6404(g) purposes. For example:
A 199912 tax return, filed on April 15, 2000. The Service received a Form
1040X on May 3, 2002, with liability of $998, due to unreported income. An
examination report was issued on January 10, 2003, with a liability of $6,908
and accuracy penalty of $1,382 due to unreported income and Schedule A adjustments.
Both notices were issued after the "
18-month period or notification period"
therefore, the liability and
basis on both notices are subject to section 6404(g) interest suspension.Interest resumes on different dates depending on the liability
and basis shown on each notice.
20.2.7.6.6
(08-01-2006)
Section 6404(g) Interest Computation
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Interest is computed systemically if there is only one Section 6404(g)
notice date and the module is not restricted. If the account is not restricted,
IDRS/Master File would compute interest as follows (illustration
purposes only):
A 199812 tax return, filed on April 15,
1999. Notice with liability of $4,000.00 due to disallowed charitable contributions
deductions was issued on December 1, 2000.
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Interest is computed on $4,000.00 from 04-15-1999 to 10-16-2000 is $536.21. Note:The close of the 18-month period, 10-14-2000 was a Saturday,
therefore, the next business day is the 18-month end date, 10-16-2000.
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Suspend interest on $4,536.21 (tax and interest up to 10/16/2000) from
10-17-2000 (day after the 18-month end date) to 12-22-2000 (21 calendar days
after the 6404(g) notice date).
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Resume interest on $4,536.21 from 12-23-2000 to one of the stop dates
(waiver plus 30 days, 23C assessment date or payment date, whichever is the
earliest).
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Interest must be restricted if there are multiple 6404(g)
notice dates.
A 199812 tax return, filed on April 15, 1999.
AUR generated a CP 2000 on December 1, 2000, due to omission of interest income
resulting in tax liability of $4,000.00. Case transferred to field office.
An examination report, which included omission of
interest income plus disallowed contributions, was issued on May 31, 2001,
with tax liability of $6,000.00. Taxpayer paid in full on July 27, 2001.
Note:To illustrate the interest routine that occurs when there
are multiple 6404(g) notices, we will separate the liability according to
their notice dates.
Interest on liability & basis
on the first 6404(g) notice (CP 2000) is as follows:
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04-15-1999 to 10-16-2000 on $4,000.00 = $536.21.
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10-17-2000 to 12-22-2000 on $4,536.21 = .00 (Suspend interest)
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12-23-2000 to 07-27-2001 on $4,536.21 = $230.30 (Resume interest)
Interest on liability & basis on the second 6404(g)
notice (examination report) is as follows:
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04-15-1999 to 10-16-2000 on $2,000.00 = $268.10
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10-17-2000 to 06-21-2001 on $2,268.10 = .00 (suspend interest)
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06-22-2001 to 07-27-2001 on $2,268.10 = $ 16.28
Total tax liability is $6,000.00 with interest (TC
340) of $1,050.89
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Revenue Ruling 2005-4 (effective 01-07-2005) expanded section 6404(g)
interest suspension relief to include liabilities reported on amended returns
filed for tax years 199812 and subsequent. A 6404(g) Recovery
Project(identified with TC 971, AC 199) was conducted to correct underpayment
interest charged on amended return adjustments (not AUR or Exam) that posted
to Master File on or before January 7, 2005. Due to the volume of cases identified
in the ‘extract’, an interest program was developed to systemically
compute the correct amount of interest due. Systemic computation of interest
on the 6404(g) Recovery Project follows the above computations with one exception:
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Interest suspension on reportable or listed transaction
cases end on 10-03-2004, as amended by Section 903 of the American
Jobs Creation Act of 2004. Interest on reportable or listed transaction cases
resumed on 10-04-2004. Examiners must correctly flag these cases before sending
them to Centralized Case Processing to close.
20.2.7.6.7
(08-01-2006)
Recording Section 6404(g) Notice Date
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Examiners must note on Form 3198 (or equivalent),
whether or not section 6404(g) applies. Examiners will record the section
6404(g) notice of delivery date and liability amount as follows:
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Examining officers must note on Form 3198 (or equivalent), whether or
not section 6404(g) applies.
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Under examination and AUR situations, the date "adequate
notice"
is provided is the section "6404(g) notice date.
"
The received date of an amended return received later than 18 months
from the original return due date or file date is also deemed the "
6404(g) notice date."
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For additional information on recordation of section 6404(g), see IRM
4.10.8.12.
20.2.7.6.8
(08-01-2006)
Input of section 6404(g) Notice Date on Master File
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Section 6404(g) notice dates must be entered on
Master File if notification is
not made within
the 18-month period
. Case Processing function will be responsible
for the input of the section 6404(g) notice date as provided to them by the
examining officer on Form 3198 and/or Examination Changes Report.
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Transaction Code (TC) 971 with Action Code 064
will be input to record the untimely notification date on Master File. The
6404(g) notice date is entered in the TRANS-DT field of CC FRM77. Effective
January 1, 2004, the liability amount applicable to the 6404(g) notice is
entered in the FREEZE-RELEASE-AMT field of CC FRM77. Transaction Code 972
with Action Code 64 reverses the transaction.
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After input of the TC 971, Master File uses the
notice date to determine if taxpayer notification occurred within the 18-month
period. If notification occurred after the 18-month period, Master File suspends
interest
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Effective January 1, 2005, for amended returns to provide for systemic
calculation of interest when the suspension applies and there are no prior
TC 290 blocked 500-519, 550-589, 600-619, 650-679, or TC 30X posted to the
module, follow existing procedures for processing the amended return and enter:
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the received date of the amended return in the AMD-CLMS-DT field of CC
ADJ54
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the received date of the amended return TRANS-DT field of CC FRM77, for
TC 971, AC 064. Master File program will calculate interest factoring in the
applicable suspension period when the Amended Claims Date and TC971, AC064,
notice date are the same.
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