Global interest netting.

On March 12, 1998, Tax Executives Institute submitted letters to all members of the Senate Committee on Finance, urging them to support the inclusion of a proposal for global interest netting in pending legislation on restructuring the Internal Revenue Service. The letters were prepared under the aegis of the Institute's IRS Administrative Affairs Committee whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc.

On behalf of Tax Executives Institute, I am writing to urge you to support the inclusion in the Senate Finance Committee's bill to restructure and reform the Internal Revenue Service a measure to provide for the netting of interest on tax overpayments and underpayments. Such legislation is needed to give the IRS clear authority to implement meaningful interest netting rules and protect taxpayers from the adverse effects of the interest rate differential.

Background

Tax Executives Institute is the professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in North America. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

Discussion

Under current law, the Internal Revenue Code imposes a higher interest rate on tax deficiencies than it pays on tax refunds. TEI has long opposed the interest rate differential, which was first enacted in 1986, on the grounds that interest should be imposed, not as a penalty but simply for the use or forbearance of money. The differential is unfair to taxpayers who owe tax to the IRS at the same time they are owed refunds by the IRS, especially where the taxpayer is at all times a net creditor of the government. These periods of "mutual indebtedness" are a common occurrence for taxpayers, particularly for businesses, who often have overpayments and underpayments spanning several years because of the length of time it takes to audit their returns.

Congress did not intend the interest differential to be as draconian as it has become. In enacting the interest rate differential in 1986 and on two subsequent occasions, Congress clearly expressed its view that taxpayers should not be penalized during periods of mutual indebtedness. It thus instructed the IRS to implement...