Sunday, September 23, 2012

Updates on Interest Rates (9/23/12)

In my Federal Tax Procedure text, I state the interest for quarters earlier than the 3d quarter of 2012.  The following are the interest rates for the third quarter of 2012.  Please keep in mind that these interests rates are provided for illustration only.  The interest rates can change each quarter, depending upon the federal short term rates.


Underpayment interest rate - 3%  [Text footnoted p. 244, nonfootnoted p. 174]
Underpayment larger corporate (Hot Interest) rate - 5% [Text footnoted p. 244, nonfootnoted p.  174]

Overpayment rate - general - 3% [Text footnoted p. 255, nonfootnoted p.   181]
Corporate overpayment rate - general - 2% [Text footnoted p. 255, nonfootnoted p. 182]
Large Corporate Ovepayments (over $10,000) - .5% [Text footnoted p. 255-6 nonfootnoted p.  182]

See the IRS web page on these interest rates here.

As revised the portions changed should read (I highlight the key changes):


B. Underpayment Interest Rates.

1. General.

The underpayment interest rate is the federal short-term borrowing rate plus 3 percentage points. § 6621(a)(2).  The interest rate is reset quarterly and announced in a Revenue Ruling.   For the third quarter 2012, this interest rate is 3%.  Interest is compounded daily.  Since the interest rate may vary from quarter to quarter, in order to compute the interest due on an underpayment, it is necessary to consider all the interim quarterly rates from the due date of the underpayment.

2. Large Corporate Underpayments (“Hot Interest”).

Section 6621(c) imposes a higher rate for large corporate underpayments defined as a C corporation underpayment exceeding $100,000.  The interest rate is 2 percentage points above the normal rate.  For the third quarter of 2012, this interest rate is 5%.  This interest rate also is re-set quarterly in the same manner as regular interest.  For the period to which the additional rate applies,the base to which the rate applies is the same base as the underlying tax liability base.  Practitioners often refer to this additional interest as “hot interest.”


B. Interest Rate.

1. General Overpayments.

For individuals, the overpayment interest rate is the same as the general underpayment rate – i.e., short-term federal rate plus 3 percentage points. §§ 6611(a) referring 6621.   For the third quarter in 2012, this interest rate is 3%.

2. Special Reduced Corporate Overpayment Rates.

a. General 1% Reduction (the “GATT Rate”).

For corporations, however, the overpayment interest rate is reduced by one percent (i.e., the rate is the short-term federal rate plus 2 percent rather than 3 percent).  § 6621(a)(1).  (This reduced interest rate is often referred to as the “GATT rate”).  For the third quarter 2012, this interest rate is 2%.

b. 2.5% Reduction on“Large” Corporate Overpayments.

There is a critical exception – for corporate overpayments exceeding $10,000 – the short-term federal rate is only increased by 0.5 percentage points.  § 6621(a)(1) (flush language).  For the third quarter 2012, this interest rate is 0.5 %.  As you can see, this low interest rate is a powerful incentive for corporations not to loan money to the Government via overpayment of taxes, because they can likely achieve a better return elsewhere.  (By the same token, of course, as noted above, the large corporate underpayment interest premium – the so-called “hot interest” in § 6621(c) – creates a powerful incentive to avoid being a debtor to the Government at least after the IRS makes the critical determinations of additional tax due and owing; in short, there are incentives for corporations to better manage the due tos and due froms in the tax area.)  The Tax Court has recently held that this reduction in interest rate is applicable only to C Corporations.  Normally, of course, S Corporations are not subject to tax, but sometimes S Corporations can be subject to tax and, under the Tax Court’s holdings, any overpayment by S Corporations will not be subject to this reduced interest rate.  This reduction is also applied to any amounts due by the Government that are treated as a tax for purposes of calculating interest on the amounts due, such as, for example, interest due on wrongful levies.

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