Netting of interest on deficiencies and refunds: December 23, 1991 - letter sent to IRS by Tax Executives Institute

Timothy J. McCormally

On December 16, 1991, Tax Executives Institute and other taxpayer representatives met with officia Revenue Service to discuss the netting of interest on tax underpayments and overpayments pursuant to Internal Revenue Code. The meeting wa8 arranged at TEI's suggestion following last spring's IRS hear provisions of the Code. (TEI's comments on the "hot interest" rules were reprinted in the May-June 1 Executive.) The following individuals attended the meeting on the Institute's behalf: Linda B. Burke of America, chair of TEI's IRS Administrative Affairs Committee, Timothy J. McCormally, Institute Ta P. Rasmussen, Assistant Tax Counsel. Also attending were representatives of the American Bar Associa Taxation, the Tax Division of the American Institute of Certified Public Accountants, and the Distri

On December 23, 1991, the Institute sent the following letter to the Kenneth E. Kempson, IRS Deput Counsel (Domestic/Technical), who led the IRS delegation to the meeting. (The letter wa8 signed by M Supplemental submissions will be reprinted in future issues of The Tax Executive.

Thank you for meeting on December 16 with Jane Berper [D.C. Bar], Linda Burke [TEI], Marianne Micco [AICPA], Tom Persky [Price Waterhouse], Jeff Rasmuseen [TEI], Dick Stark [ABA], and me to discuss the netting of interest pursuant to section 6402 of the Internal Revenue Code. We appreciate the opportunity to discuss the substantive and mechanical aspects of the netting issue with you and other representatives of Chief Counsel as well as your confreres from Returns Processing. We also appreciate the Internal Revenue Service's acknowledgement, as a policy matter, that "widespread netting is desirable." The question remains -- as I believe everyone at the meeting agreed -- how best to implement "comprehensive crediting procedures" given the current system capabilities. To our mind's eye, "doing what is doable" should be the only limitation on system-wide netting.

Following the meeting, you requested that our group -- either individually or collectively -- submit written comments that summarized both the discussion and our recommendations. My understanding is that Tom Persky is fine-tuning an extensive memorandum outlining his proposed "fresh start" approach toward the computation of interest. We believe that adoption of the "fresh start" approach will enable the IRS to effectuate Congress's instruction that the IRS adopt "comprehensive crediting procedures." The Institute will be providing its comments to Tom for incorporation into his memorandum and may well submit independent comments within the next several weeks. At this point, I want simply to make the following points:

* As previously stated, we recognize

that any IRS-initiated netting

will of necessity be circumscribed

by the capabilities of

the IRS's own system. This

should not preclude taxpayers

from establishing their entitlement

to netting. The goal of

the undertaking should be to

develop procedures (or regulatory

language) that empower

taxpayers and local IRS personnel

to effectuate congressional

intent in respect of the interest

owing on underpayments and

overpayments. Obviously, taxpayers

would prefer that the

"comprehensive crediting procedures"

be self-executing, but

even if the onus is placed on

the taxpayer (at least initially)

to perform the necessary calculations,

there can be no question

that the result would be

more beneficial than what currently

obtains. Thus, we believe

it would be desirable for

the implementing revenue procedure

to provide that taxpayers

may, through the use of the

"fresh start" approach outlined

during the meeting or possibly

one or more other algorithmic

alternatives, apply for relief

under section 6402's netting

provision.

* We recognize the administrative

problems that might attend

a netting program that

crosses tax type (e.g., a Form

941 underpayment and a Form

1120 overpayment). Thus, we

believe the netting procedure,

again at least initially, could

properly be limited to within-class

netting of overpayments

and underpayments (e.g., Form

1120 overpayments and Form

1120 underpayments). Indeed,

for years TEI has contended

that systems and other obstacles

to comprehensible (as opposed

to comprehensive) cross-type

netting should lead the

IRS to circumscribe its BMF

Offset Program.

* We must disagree with the suggestion

made during our meeting

that the comprehensive netting

of interest might frustrate

the congressional intent underlying

the "hot interest" provisions

of section 6621(c). Indeed,

since Congress renewed

its netting mandate as part of

the legislative history of the

"hot interest" provision, we

question whether section 6621(c)

may properly be invoked to circumscribe

the scope of any netting

procedure under section

6402. In our view, section

6621(c) only prescribes the interest

rate that is to apply to

large corporate underpayments;

if an underpayment is vitiated

(or, at least, reduced) by the

existence of a tax overpayment

by the same taxpayer, then section

6621(c) does not come into

play (or only comes into play to

the extent of the deduced large

corporate tax underpayment).

* Several times during our meeting,

concern was expressed because

the "fresh start" approach

that we outlined would

result in the netting of overpayments

and underpayments,

not simply the netting of interest

on overpayments and underpayments.

Upon reflection,

we do not see any legal basis

for the concern. It is clear that

section 9402 speaks to the netting

of overpayments and underpayments,

as well as the

interest thereon, for the statute

authorizes the Secretary to

"credit the amount of such overpayment,

including any interest

allowed thereon, against

any liability in respect of an

internal revenue tax, on the

part of the person who made

the overpayment . . . ." We

would be interested in further

exploring this point with you.

Once again, we appreciated the opportunity to meet with you on December 16 and shall be following up in the near future. In the meantime, if you should have any questions about the matters discussed in this letter, please do not hesitate to call me.

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