Proposed reduction of interest rate on corporate tax refunds.

• Position: Tax Executives Institute's IRS Administrative Affairs Committee

As part of its package to finance the Uruguay Round agreement of the General Agreement on Tariffs and Trade (GATT), the Department of the Treasury has proposed a reduction in the interest rate paid on certain tax refunds. As approved by the Senate Committee on Finance (and presented by the Administration to the Committee on Ways and Means), the interest rate on corporate tax refunds in excess of $10,000 would be reduced by one-and-a-half percent--to the federal short-term rate plus one-half a percentage point.

For the reasons set forth below, Tax Executives Institute strongly opposes the proposal and urges the Ways and Means Committee to reject it. As you know, TEI is the principal association of corporate tax executives; our nearly 5,000 members represent the largest 2,500 corporations in North America.

Background

Under section 6621(a)(1) of the Internal Revenue Code, the interest rate on tax refunds (or overpayments) is the federal short-term rate (sometimes called "applicable federal rate" or "AFR") plus two percentage points. In contrast, pursuant to section 6621(a)(2), the interest rate on tax underpayments is the federal short-term rate plus three percentage points, except in respect of so-called large corporate underpayments, where the interest rate is the federal short-term rate plus five percentage points. The Treasury proposal would reduce the interest rate on tax refunds to the federal short-term rate plus one-half a percentage point, thereby introducing a two-and-a -half point differential between the affected tax refunds and tax underpayments--and a four-and-a-half percentage point differential where the underpayment amount exceeds $100,000 and the "hot interest" provisions of section 6621(c) come into play.

TEI has long opposed the interest rate differential as both unfair and perverse and has previously testified in favor of taxpayer rights legislation that would eliminate the difference between the refund rate and the underpayment rate. Rather than vindicating taxpayer rights, the Treasury proposal would exacerbate the differential--and the ensuing unfairness.

Discussion

The interest-rate differential was enacted in 1986 as a result of Congress's concern that the interest rate prescribed in the Internal Revenue Code may have caused taxpayers "either to delay paying taxes as long as possible to take advantage of an excessively low rate or to overpay to take advantage of an excessively high rate." In addition, Congress pointed...