On Complexity and Algorithms in Tax Administration (9/8/21)

The Procedurally Taxing Blog has a good post this morning, Bob Probasco (Guest Blogger), Complications from Extensions and Unprocessible Returns (Procedurally Taxing Blog 9/8/21), here.  It delves into the interaction of  (i) the Beard test for a valid return (Beard v. Commissioner, 82 T.C. 766 (1984), affd. 793 F.2d 139 (6th Cir. 1986)), (ii) the differences between a Beard-valid return and a processible return, and (iii) the arcana of interest computations based on those differences and the interaction of § 7508A disaster relief.  Bob does a great job weaving through that stuff, so I won’t even try to summarize it here (too great a risk of showing my ignorance).  Rather, I found Bob’s conclusion in this dance through tax arcana should resonate with students of the tax law and tax procedure:

Two Final Thoughts

            First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

            Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpretation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate. 

 JAT Comments:

FTPB 2020 Update 04 - Correction on GATT Corporate Overpayment Interest (9/23/20)

The 2020 editions erroneously describe the regular corporate interest rate (2% above the federal rate) as the "GATT" rate.  The special reduced rate (.5% above the federal rate or 1.5% lower than the regular corporate overpayment rate) is the GATT rate.  The following are the corrections to paragraph III.B.2. subparagraphs a. and b.).  

a. General 1% Reduction.

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).  For the third quarter of 2020, this interest rate is 2%. 

b. Reduction for Corporate Overpayments Over $10,000.

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).  (This reduced interest rate is often referred to as the “GATT rate”).  Mathematically, the interest rate is 1.5% lower than the regular corporate rate discussed above.  For the third quarter of 2020, 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.)  Although S Corporations are normally not subject to tax, sometimes they can be; the court opinions conflict as to whether any overpayment by S Corporations will 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.

Tax Procedure Book Errata - Interest Rates (12/7/16)

I provide interest rates for the more commonly encountered deferred payments (underpayments and overpayments) in Chapter 7, titled appropriate "Interest."  When I state the interest rate in the text, it is for the 3d quarter of 2016.  (That will be clear in the footnotes edition which cites the 2016 IRS publication.)  However, in the current text, I did not change the indicated quarter for the interest rates and thus said it was for 2014 or 2015.  That will be corrected in the next editions and going forward.

The interest rates for the first quarter of 2017 have recently been announced in IR-2016-159, Dec. 5, 2016 (with Rev Rul. 2016-28, 2016-51 IRB), here, are:

• four (4) percent for overpayments [three (3) percent in the case of a corporation];
• 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
• four (4) percent for underpayments; and
• six (6) percent for large corporate underpayments [JAT note: sometimes called "hot" interest]. 

The announcement explains the basis for the interest as follows:

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. 

The interest rates announced today are computed from the federal short-term rate determined during October 2016 to take effect Nov. 1, 2016, based on daily compounding.

Remember that these interest rates are adjusted quarterly.

In my practice, I generally have an accountant associated with my client representation.  The accountant makes the calculations when some degree of precision is required.  I generally just need to ball park the calculation in discussions with the client.  I use a software program called Tax Interest, here.  It is relatively inexpensive and very easy to use.  It is also more powerful than just for ball park calculations, but I just use it for my ball park calculations.  I find that some of the accountants with whom I work use that same program for making their interest and penalty calculations.

Ford Motor Company Loses Claim for Interest on Deposit (12/18/12)

In Ford Motor Co. v. United States, 2012 U.S. App. LEXIS 25725 (6th Cir. 2012) (unpublished), here, the Sixth Circuit denied the taxpayer a claim for refund for interest that the taxpayer alleged should have accrued in its favor while a remittance was on deposit with the IRS at the taxpayer's request.  These were deposits for years prior to Section 6603's effective date (October 22, 2004); readers will recall that Section 6603, here, now provides a statutory regime for deposits for what previously was a court created regime emanating from Rosenman v. United States, 323 U.S. 658 (1945).  Contrary to prior law (under Rosenman), Section 6603 does allow interest on the disputable amount of a deposit during the time of the deposit.  But, as noted, that was not the law prior to Section 6603.  At least that is what everyone except Ford Motor Co. and its counsel thought.

The Court sets out the gravamen of the two side's arguments as follows:

The government seizes upon the plain meaning of the word "payment," arguing that there can be no overpayment until there has actually been a payment—and there was no payment until Ford requested that its deposits be converted into tax payments. Prior to that point, Ford's remittances were, at its own request, treated as deposits in the nature of a cash bond and Ford could have requested their return at any time. As Revenue Procedure 84-58 § 2.03 clearly states, "[a] deposit in the nature of a cash bond is not a payment of tax." Accordingly, the government argues that it does not owe Ford interest from the date of the original remittances because they were indisputably made only as deposits, not as payments of any tax obligation.
But, wait, this taxpayer argued. 

Ford counters that the "most appropriate starting point" is not § 6611, but rather § 6601, the provision that governs underpayment interest. First, Ford contends that these two sections should be interpreted symmetrically because they both use very similar language, compare § 6601 ("date paid"), with § 6611 ("date of the overpayment"), and both deal with the accrual of interest on tax payments. Second, Ford notes that under § 6601(a), only a "payment" stops the accrual of underpayment interest against a taxpayer, and since a deposit in the form of a cash bond stops the accrual of interest from the date it is remitted, Rev. Proc. 84-58 § 5.01, that deposit must be considered a payment under § 6601(a). And because a deposit is treated as a payment for underpayment interest purposes under § 6601, it should also be considered a payment for overpayment interest purposes under § 6611. In other words, if a mere deposit stops the accrual of underpayment interest, then a mere deposit must also start the accrual of overpayment interest.

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.

INTEREST RATES FOR THIRD QUARTER 2012

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.