Global interest netting.

On March 12, 1998, Tax Executives Institute submitted letters to all members of the Senate Committee on Finance, urging them to support the inclusion of a proposal for global interest netting in pending legislation on restructuring the Internal Revenue Service. The letters were prepared under the aegis of the Institute's IRS Administrative Affairs Committee whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc.

On behalf of Tax Executives Institute, I am writing to urge you to support the inclusion in the Senate Finance Committee's bill to restructure and reform the Internal Revenue Service a measure to provide for the netting of interest on tax overpayments and underpayments. Such legislation is needed to give the IRS clear authority to implement meaningful interest netting rules and protect taxpayers from the adverse effects of the interest rate differential.

Background

Tax Executives Institute is the professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in North America. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

Discussion

Under current law, the Internal Revenue Code imposes a higher interest rate on tax deficiencies than it pays on tax refunds. TEI has long opposed the interest rate differential, which was first enacted in 1986, on the grounds that interest should be imposed, not as a penalty but simply for the use or forbearance of money. The differential is unfair to taxpayers who owe tax to the IRS at the same time they are owed refunds by the IRS, especially where the taxpayer is at all times a net creditor of the government. These periods of "mutual indebtedness" are a common occurrence for taxpayers, particularly for businesses, who often have overpayments and underpayments spanning several years because of the length of time it takes to audit their returns.

Congress did not intend the interest differential to be as draconian as it has become. In enacting the interest rate differential in 1986 and on two subsequent occasions, Congress clearly expressed its view that taxpayers should not be penalized during periods of mutual indebtedness. It thus instructed the IRS to implement comprehensive procedures for netting overpayments and underpayments in these situations. Twelve years later, however, the IRS still has not adopted such "global netting" procedures. In an April 1997 report to Congress, the Treasury Department stated that the IRS has not implemented these netting policies because of both administrative difficulties and concern over whether it has precise statutory authority to do so.

Tax Executives Institute respectfully submits that the expeditious resolution of the interest netting controversy is essential to the fair and orderly operation of the tax system, and we urge Congress to enact remedial legislation as part of the effort to restructure and reform the IRS. Thus, TEI supports the provision of the House Restructuring Bill (section 331 of H.R. 2676) that would provide that, during periods of overlapping interest (or mutual indebtedness), a net interest rate of zero would apply on equal amounts of tax underpayments and overpayments. The bill would also permit the IRS to take into account interest paid on previously determined deficiencies or refunds on the taxpayer's accounts for the purpose of determining the appropriate rate of interest to be used on a deficiency or refund that exists during the same period.

TEI does have concerns over some aspects of the provision contained in the House bill. Specifically, we believe the House proposal is limited unnecessarily to income and self-employment taxes and also question the propriety of limiting its effect to interest accruing after date of enactment. We see no reason global interest netting should be limited to certain types of income taxes; it should be equally available with respect to income, excise, and employment taxes. In addition, we believe that there are many taxpayers with pending interest-rate differential disputes that will be unfairly denied the benefit of the global netting rules unless the provision is extended to all open years. Thus, we favor amending the House provision to extend global interest netting to open years where the taxpayer reasonably identifies and establishes its entitlement to such netting under the provision, requests the IRS to recalculate interest charges in accordance with the provision, and makes the request prior to a specified date (say, December 31, 1999). Failure to apply global netting to past periods of mutual indebtedness would leave in place an economic impediment to efforts to close tax years and get current on audit cycles.

Conclusion

We appreciate the opportunity to share with you our concerns regarding global interest netting and look forward to working with you on this important legislation in the weeks ahead.