Beware of hot interest.

• Author: Blattner, Dave
• Position: Corporate underpayments of tax liabilities

Effective Jan. 1, 1991, Sec. 6621(c) authorized an additional 2% interest (known as "hot interest") for large corporate underpayments if certain triggering events occur. A "large corporate underpayment" is an underpayment exceeding $100,000 due in tax liability only for one tax period; i.e., several tax periods or accounts are not aggregated to reach the $100,000 threshold. Even though the $100,000 threshold only consists of tax due, if the higher rate is triggered, it applies to tax, penalties, interest and any additions to tax. Hot interest applies if the following criteria are met:

1. The company must be a C corporation for at least some part of the tax period. The tax period depends on the type of tax liability and the requirement for filing the returns. For example, income taxes are filed and paid on a yearly basis, while withholding taxes are feed and paid on a quarterly basis.

2. There must be an underpayment of tax exceeding $100,000 on any type of tax (e.g., income, excise or employment tax) but for one tax period only. In other words, it is possible to have hot interest on the Form 941, Employer's Quarterly Federal Tax Return, for the quarter ended Dec. 31, 1996, and not on the Form 1120, U.S. Corporation Income Tax Return, for the year ended Dec. 31, 1996.

3. There must be a notice or letter establishing the trigger date. A trigger date occurs when a notice or letter is issued by the IRS regarding an underpayment not paid in full within 30 days. The amount to be paid in full includes all tax, penalties and interest. If the amount is not paid within 30 days, any portion of the underpayment shown in the notice or letter is subject to the additional 2% interest rate. There can be one or more potential trigger notices or letters issued on a specific tax year, but there can be only one applicable trigger date. In such a case, the earliest notice or letter establishes the trigger date for the additional 2% interest rate.

   Example: The Service issues a notice to X Corp. after an original Form 1120 is processed for the tax year ending Dec. 31, 1995. The notice is dated Nov. 15, 1996; X does not pay the amount shown on the notice within 30 days (as there is a question about the estimated tax credits). Ultimately, X agrees and pays the additional amount on the notice. If the IRS subsequently audits that return and issues a 30-day letter on this same tax period, the date of the earlier notice will be the applicable trigger date for purposes of...