Technical clarification of interest-netting rules

Technical clarification of interest-netting rules – IRS Restructuring and Reform Act of 1998

July 12, 1999

On July 12, 1999, Tax Executives Institute submitted the following comments concerning interest netting rules to the House Committee on Ways and Means.

On behalf of Tax Executives Institute, I am writing to urge a technical clarification of the interest netting rules, which were adopted last year as part of the Internal Revenue Service Restructuring and Reform Act, Pub. L. No.105-206, [sections] 3301. A recently issued revenue procedure narrowly construes the new statute and, we believe, undermines Congress’s intent to provide equitable relief when there are mutual periods of indebtedness between the government and the taxpayer. A technical correction is therefore needed to remedy the situation.

Interest netting issues arise because of the difference in the rates of interest charged on over- and underpayments of tax. For the past 13 years, the statutory rate of interest on underpayments has exceeded the rate of interest on overpayments by as much as 4.5 percentage points. The differential is especially egregious when there are cross-payments due — which may net to zero (or even result in the taxpayer’s being a net creditor of the government) — and yet those payments create an interest charge to the taxpayer.

Congress addressed this inequity in the IRS Restructuring Act by revising the interest calculation for periods in which a taxpayer has both an overpayment and an underpayment. Section 6621(d) of the Internal Revenue Code now provides that “[t]o the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.”

The enactment of section 6621(d) signalled Congress’s desire to return fairness and equity to the Code’s rules on charging for the use of funds. The Treasury Department and IRS have recently issued Revenue Procedure 99-19, 1999-14 I.R.B. 10 (March 16, 1999), which regrettably adopts an extremely narrow interpretation of the new statute. Specifically, the procedure provides that the interest netting is not available in respect of any period during which interest was not “allowable” or “payable” by law; an example of this disallowance is the 45-day interest-free period the government has after a return is filed in which to issue a refund of taxes paid.

The IRS’s interpretation runs afoul of congressional intent in enacting section 6621(d). Last year, Congress recognized that charging a taxpayer interest for a period of underpayment that runs concurrently with a non-interest bearing overpayment is fundamentally unfair. On a net basis, the government is not harmed during that period, and no net interest should be due. Moreover, from an administrative viewpoint, the procedure complicates an already complex calculation. The calculation should clearly take into account all periods of mutual indebtedness, even those periods considered interest-free under current law.

On June 10, 1999, several members of the Oversight Subcommittee urged a technical clarification of the interest netting rules in order to effectuate congressional intent. TEI strongly supports this clarification and urges the full Committee to include it in any tax bill enacted this year.

COPYRIGHT 1999 Tax Executives Institute, Inc.

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