It May Actually Pay (More Interest) To Be Correct When Filing.

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I am doing some work with Les on Chapter 6 of Saltzman and Book on overpayment interest.  I was familiar with the 45 day grace period for the Service on overpayment interest under Section 6611(e), and I was also familiar with the notion that the Service could cease paying interest some time before cutting the check for the taxpayer under Section 6611(b).  I was surprised to see how the provisions work together when the Service issues a refund based on Service adjustments, not based on taxpayer calculations or claims.

Section 6611(b)(2) states that interest will be paid “from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days…”  This allows the Service to cease paying interest while the check is being written and placed in the mail.

When a refund is due to a taxpayer and is reflected on the initial return, the language of the Section 6611(e)(1) indicates, “if any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax…or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed…”    For amended returns and claims for credits that result in refunds, there is a similar rule under Section 6611(e)(2), stating, “[if] such overpayment is refunded within 45 days after such claim is filed, no interest shall be allowed on such overpayment from the date the claim is filed until the day the refund is made.”  The rule is simple, if the Service issues the refund promptly on an initial return, no interest is due.  For an amended return, if the refund is paid within 45 days of the taxpayer filing the amended return, no interest is due during that 45 day period.  If the refund is paid on the 46th day, interest is due during the 45 day period, but the Service might be able to use Section 6611(b)(2) to reduce the amount of days interest must be paid.

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When the Service, however, determines there is an overpayment and issues a refund, the Code is drafted differently.  Section 6611(e)(3) provides interest is reduced by an amount that would have been accrued for 45 days regardless when the refund occurs, and states, “interest on such overpayment shall be computed by subtracting 45 days from the number of days interest would otherwise be allowed with respect to such overpayment.”  Here, it does not matter when the Service issues the refund; the Service is simply allowed to reduce the interest by the amount due for 45 days. This is, arguably, less of an incentive to promptly issue the refund.

I’m not certain the policy reason behind this difference.  Perhaps it is because knowing exactly when the Service makes its adjustment would be difficult, or Congress wanted to be sure the Service had sufficient time to thoroughly review the matter.  Maybe it is just a reward for finding the error.  The Joint Committee report did not provide any insight.  Both subsections (e)(2) and (e)(3) were enacted at the same time, and the Committee report simply indicates the Service should be entitled to the same 45 day period as with initial returns.  The full language is found at the bottom of this post.

Without giving it much thought, I assumed that the Service’s ability to stop interest under Section 6611(b)(2) ran at the same time as the 45 day interest holiday under Section 6611(e)(3), but the IRS takes the position that the two provisions run consecutively not concurrently.  In internal guidance, the Service indicated that “would otherwise be allowed” under Section 6611(e)(3) was a reference to, or at least included, Section 6611(b)(2).  See SCA 199917002 (Oct. 21, 1998). The concept is that the interest otherwise allowed would be reduced by Section 6611(b)(3), which I believe is thirteen days for individuals and nine for businesses.  These are the time frames of less than 30 days the Service has selected under its authority found in Section 6611(b)(3).   The idea that the two periods run consecutively is also reflected in the Manual, although without the reasoning, at IRM 20.2.4.7.5.5(5).

The Committee Report is again not instructive in the reasoning for the difference.  Perhaps more in depth research of the history would provide more insight.  Saltzman and Book Chapter 6, which deals with interest, only highlighted that the interest was reduced by 45 days.  Bittker and Lokken, Section 114.1, note 45 highlights Section 6611(e)(3), and states “[p]resumably, the latter rule means that the overpayment bears no interest for the 45 days preceding the date of the refund.”  This understates the amount of time the Service believes it does not have to pay interest. I do not think the BNA portfolio touches on the topic.

It seems strange to have two separate policies in largely the same case.  Although at first my knee-jerk reaction was that the Service was overreaching, from reviewing the statute, the Service position seems correct.  So, no call to arms or reason to challenge the statute, but an interesting anomaly which must come up somewhat frequently.

Here is the majority of the committee report from the 1993 changes to Section 6611, which enacted (e)(2) and (e)(3):

Present Law.

No interest is paid by the Government on a refund arising from an original income tax return if the refund is issued by the 45th day after the later of the due date for the return (determined without regard to any extensions) or the date the return is filed (sec. 6611(e)).

There is no parallel rule for refunds of taxes other than income taxes (i.e., employment, excise, and estate and gift taxes), for refunds of any type of tax arising from amended returns, or for claims for refunds of any type of tax.

If a taxpayer files a timely original return with respect to any type of tax and later files an amended return claiming a refund, and if the IRS determines that the taxpayer is due a refund on the basis of the amended return, the IRS will pay the refund with interest computed from the due date of the original return.

Reasons for Change.

The committee believes that it is inappropriate for the payment of interest on tax refunds to be determined by the type of tax involved; all types of taxes should be treated similarly. The committee further believes that it is appropriate to alter the interest rules to provide a 45-day processing period with respect to amended returns, claims for refund and IRS-initiated adjustments.

Explanation of Provision.

No interest is to be paid by the Government on a refund arising from any type of original tax return if the refund is issued by the 45th day after the later of the due date for the return (determined without regard to any extensions) or the date the return is filed.

A parallel rule applies to amended returns and claims for refunds: if the refund is issued by the 45th day after the date the amended return or claim for refund is filed, no interest is to be paid by the Government for that period of up to 45 days (interest would continue to be paid for the period from the due date of the return to the date the amended return or claim for refund is filed). If the IRS does not issue the refund by the 45th day after the date the amended return or claim for refund is filed, interest would be paid (as under present law) for the period from the due date of the original return to the date the IRS pays the refund.

A parallel rule also applies to IRS-initiated adjustments (whether due to computational adjustments or audit adjustments). With respect to these adjustments, the IRS is to pay interest for 45 fewer days than it otherwise would.

About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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Comments

  1. =This allows the Service to cease paying interest while the check is being written and placed in the mail.=

    Of course the Treasury has been threatening for years that it will soon stop issuing and mailing checks. All federal payments, including tax refunds, will be deposited directly to a bank account or to a debit card that may require fees for withdrawal. Oddly enough, while great efforts are made to encourage taxpayers to use direct deposit for tax refunds, there is no line on Form 1040X (amended return) for requesting this.

    In practice, the bigger issue with interest payments is the starting date, not the ending date of the computation period. I get around this by advising my clients that their refund may or may not include interest. (If the amount involved were six figures instead of three or four, I might do some research.)

    For example, today an actual client is filing a 2010 original return claiming a refund of about $800. Yes, not every nonfiler is a tax protester; many of them are just shooting themselves in the feet. If IRS issues the refund within 45 days of receiving the return, then no interest will be included. But what if furloughs, government shutdowns and computer breakdowns cause a 60-day delay? Is interest paid from April 15, 2011, or from the date the return is received? Fairness and logic would dictate the latter, but I seem to recall being surprised on several occasions by the former.

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