The need for interest netting guidance

Tax Executive, The, Nov, 1999

October 14, 1999

On October 14, 1999, Tax Executives Institute submitted the following comments to the Secretary of the Treasury, Lawrence H. Summers, and the Commissioner of Internal Revenue, Charles O. Rosotti, concerning the need for guidance on retrospective interest-netting rules of the IRS Restructuring and Reform Act of 1998. The comments took the form of a letter from TEI President Charles W. Shewbridge, III, and were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of Wang Global, Inc. The Internal Revenue Service issued the requested guidance on November 9.

On behalf of Tax Executives Institute, I am writing to urge the Treasury Department and Internal Revenue Service to issue guidance as expeditiously as possible concerning how taxpayers may elect to apply the interest netting rules of section 6621(d) of the Internal Revenue Code. Enacted as part of the IRS Restructuring and Reform Act, the statute provides a transition rule permitting taxpayers to apply the ameliorative netting provision to prior years if an election is filed before December 31, 1999. With less than three months to go until the transition period expires, no guidance has been issued concerning how this election is to be made, where taxpayers are to file the election, and what information is to be submitted.

TEI is the preeminent association of business tax executives in North America. Our approximately 5,000 members represent 2,800 of the leading corporations through 52 chapters in the United States, Canada, and Europe. As a broad-based organization dedicated to fair and efficient tax administration, TEI has long been concerned about the harsh effects of the interest rate differential, which imposes a higher interest rate on tax underpayments (or deficiencies) than the rate imposed on overpayments (or refunds). Last year, Congress revised the interest charges to permit a taxpayer to net the periods in which it has both an overpayment and an underpayment. The rule is effective for tax periods beginning after July 22, 1998, but a taxpayer may elect to apply the netting provision retroactively to all open years.

Revenue Procedure 99-19 -- which was issued by the IRS earlier this year -- clarified many questions left open by the statute, but failed to address the more practical aspects of how a taxpayer may "reasonably identif[y] and establish[] periods of such tax overpayments and underpayments" and request -- not later than the end of 1999 -- that the Secretary of the Treasury apply section 6621(d). In the procedure, the IRS requested comments on the specificity required to elect interest netting for prior years, but it has not yet supplemented the revenue procedure, even though less than three months remain before the transition period window closes.

Large corporations (such as those that employ TEI's members) are part of the IRS's Coordinated Examination Program (CEP) and are audited by the IRS on a continual basis. These CEP taxpayers may have years under examination with open statutes of limitations for 10 years or more. Determining the amount of under- and overpayments for these open years is complex and time-consuming, especially when the returns are still under audit (or an audit has not even begun) and the amount of the over- or underpayment for a given year is unknown. Taxpayers need to know how to elect the transitional relief as soon as possible. TEI therefore urges the Treasury Department and IRS to issue guidance on the election of interest netting as soon as possible.

If you have any questions about this issue or need additional information, please do not hesitate to call either me at (404) 249-3600 or Timothy J. McCormally of the Institute's professional staff at (202) 638-5601.