Interest on federal tax deficiencies and overpayments revisited.

• Author: Heffernan, James V.

Interest on Federal Tax Deficiencies and Overpayments Revisited

The examples included at the end of my article on "Interest on Federal Tax Deficiencies and Overpayments" in the January-February 1990 issue of The Tax Executive were designed to provide clarification by illustrating the principles discussed in the article. Regrettably, for readers inclined to scrutinize the illustrations, Illustrative Example No. 4: Deficiency with Restricted Interest (on page 76) may generate confusion rather than enlightenment, because: (1) the amount shown in the illustration as the amount of interest on the tax deficiency after the carryback is not correct, and (2) there should be additional interest on the restricted interest.

The first point of potential confusion is attributable to my having entered in my computer the wrong date as the end of the interest period. As shown in the illustration, the correct date for the end of the interest period is 8/23/87; unfortunately, a wrong date was entered - 8/23/88. Interest for the resulting erroneous period from 3/15/84 to 8/23/88 is $318,826.64, as shown in the illustration, but interest for the correct period from 3/15/84 to 8/23/87 is $235,595.37. The second point of potential confusion is attributable to my having failed to compute and include interest on the restricted interest for the period from the date restricted interest on the extinguished deficiency ceases to run (3/15/87) to the date 30 days after the Form 870 was filed (8/23/87).

A corrected Illustrative Example No. 4 is, as follows:

4. Deficiency with Restricted Interest

A calendar-year corporation reported and paid a tax of $2,573,728 for 1983. In 1986, it had a net operating loss shown on a timely-filed return that is carried back to 1983. On audit of the 1983 tax return, it was determined that there was a tax deficiency for 1983 of $543,276 taking account of the 1986 loss carryback to 1983, and that the deficiency would have been $728,716 if it were not for the 1986 loss carryback. A Form 870 for the $543,276 deficiency was filed on July 24, 1987, and the notice and demand was thereafter issued on September 30, 1987. The notice and demand should be for the tax deficiency of $543,276 and assessed interest of $308,503.86, computed as follows:

Base amount for restricted interest:

Deficiency without carryback $ 728,716.00 Deficiency after carryback 543,276.00 Extinguished deficiency $ 185,440.00 (Base amount)

Interest period:

3/15/84 - 3/15/87

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