Revised sec. 6621(c)(2) hot interest provision.

The Taxpayer Relief Act of 1997 amended Sec. 6621(c)(2), which provides for an increased rate of interest for large corporate underpayments. This amendment is effective for interest accruals after 1997.

A large corporate underpayment is defined as any underpayment of tax by a C corporation for any taxable period if the underpayment exceeds $100,000. This amount does not include interest or penalties when determining if the $100,000 threshold has been met; however, the additional 2% interest rate applies to the full underpayment (including tax and penalties).

The additional 2% rate is triggered by a letter or notice of deficiency not paid in full within 30 days, but only if there is an underpayment of tax exceeding $100,000. Prior to the amendment, a notice or letter for under $100,000 in tax could become a trigger if there were subsequent tax increases that raised the tax underpayment to over $100,000. If there was more than one trigger, the earliest trigger date was the applicable date.

Under the amendment, the applicable date will be the 30th day after the issuance of the first letter or notice of a deficiency or assessment of tax of over $100,000 not paid within 30 days. Small notices or letters reflecting amounts not greater than $100,000 are disregarded and can no longer trigger the additional 2% interest rate. If the additional 2% interest rate was being charged on an account, it should stop as of Dec. 31, 1997, if the notice establishing the 2% rate increase did not reflect tax over $100,000. The increased rate would only begin again 30 days after a notice or letter, if one is issued after Jan. 1, 1998 reflecting a tax amount exceeding $100,000. If the tax account has already been triggered by a notice or letter for a tax amount over $100,000, interest continues to accrue at the higher rate until the entire balance is fully paid.

Under the amendment, there can be two applicable dates on accounts, and an applicable date is never voided once it is determined. Although the applicable date is never voided, a letter or notice that sets the trigger date can be disregarded. If a statutory notice is rescinded, an assessment is abated or a 30-day letter was issued to the wrong taxpayer or for the wrong tax year, such letter or notice is disregarded in determining the additional 2% interest date. If the letter or notice is disregarded, the additional 2% interest will not accrue on the balance due not paid within 30 days. Any trigger date set in error can be corrected by the IRS by disregarding that date when manually computing the interest.

At the present time, the Service's computer system has not been reprogrammed to automatically stop charging the additional 2% interest rate. This increases the potential for errors on taxpayers' accounts that can result in overcharged deficiency interest. Taxpayers who had "hot interest" triggered on their accounts prior to 1998 and who paid additional taxes after 1997 should review their accounts for potential overcharged interest.

FROM LINDA MARTIN, WASHINGTON, DC, SANDY RAYNARD AND RANDY BESSINGER, KANSAS CITY, MO