Computing Interest on Overpayments and Underpayments: How Difficult Can it Be? Very!
102 Journal of Taxation 273, May 2005
8 Pages Posted: 20 Mar 2017 Last revised: 14 Aug 2018
Date Written: May 1, 2005
Taxpayers often assume that the difficult part of a tax dispute is resolving the tax liability and penalties, while interest computation is fairly straightforward. In the authors' experience, however, interest determinations are as subject to controversy and prone to error as tax liability determinations. The Article explores some of the areas that taxpayers should review carefully in the process of finalizing interest computations. - Frequent Errors. The Article reviews twelve areas in which, even though the law is settled and the facts are usually clear, the Service's interest computations frequently include mistakes. Taxpayers need to be aware of these provisions, gather the necessary facts to support their legal positions, and review interest computations carefully to make sure the Code is applied properly. - Disputed Issues. The Article also discusses five Code provisions for which the courts have not yet reached definitive interpretations. The Service has won some initial victories, but several taxpayers are continuing to litigate these issues under alternative theories or in different jurisdictions. The decision whether to pursue an issue, and the choice of the particular legal theory and strategy to use, will depend on a taxpayer's particular facts and circumstances. At a minimum, taxpayers should carefully evaluate the issue so that a decision regarding a claim can be made before the statute of limitations expires. - Procedural Considerations. Finally, the Article discusses out a planning opportunity to maximize interest benefits, addresses statutes of limitations, and points out a potential problem from the interaction of interest computations with Tax Court Rule 155 computations. Just as it is rare for a large corporate tax audit to yield no change, it is equally unlikely the first evaluation of interest for a tax period will remain unchanged after careful scrutiny. It is always in the best interest of the taxpayer to review thoroughly the factual, computational, and legal basis for the interest computations presented. When the tax liability has been finally determined, the hard work of interest resolution has just begun.
Keywords: income tax, IRS, interest, computation
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