Interest Accrual Depends on Corporation’s Knowledge of Overpayment

Internal Revenue Service

In a legal memorandum, the IRS concluded that whether overpayment interest accrues from the original due date of a foreign corporation’s tax return depends on whether it knew that its full withholding, at the time it occurred, would result in an overpayment for which it would seek a refund. The corporation sought a refund on its Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation,” for all the taxes withheld on interest paid to it by a related U.S. corporation. The deadline for filing that return was June 15 of the following year, but the IRS did not receive it until after that date. The corporation timely requested an extension, but it is unclear whether it filed a processable return by the extended due date. It is also not known when the corporation became aware that its full withholding would result in an overpayment for which it would seek a refund. The IRS issued the claimed refund with overpayment interest that appears to run from the day after the return was received. Under <a href="/research/federal/usc26/6611" resolve="/lr/resolve/section-6611/cny5" title="section 6611">section 6611</a>, interest is generally paid on any overpayment of tax from the date of the overpayment to a date that precedes the refund date by not more than 30 days. Any income tax withheld is deemed to have been paid by the recipient on the due date for filing its return, which for the corporation was June 15. However, the IRS appears to have started computing interest from the date it received the return because it was treated as late under an exception to the general rule that interest accrues from the date of overpayment. <a href="/research/federal/usc26/6611#cny5-0000006" resolve="/lr/resolve/section-6611b3/cny5#cny5-0000006" title="Section 6611(b)(3)">Section 6611(b)(3)</a> provides that if a tax return is filed after the due date (including extensions), no interest is allowed or paid for any day before the date on which the return is filed. But that provision does not apply if the taxpayer does not have a filing obligation under <a href="/research/federal/cfr26/1.6012-2#cws4-0000037" resolve="/lr/resolve/reg-section-16012-2g2ia/cws4#cws4-0000037" title="reg. section 1.6012-2(g)(2)(i)(a)">reg. section 1.6012-2(g)(2)(i)(a)</a> and did not know that it was owed a refund when the return was due. The IRS reasoned that if the corporation knew that its full withholding would result in an overpayment for which it would seek a refund, it would be required to file a timely income tax return. If it did so, overpayment interest accrues from June 15 of the year after the withholding. If the corporation’s income tax return is not timely, overpayment interest accrues from the date it filed a processable return. However, if the corporation did not know that its full withholding would result in an overpayment for which it would seek a refund, the overpayment interest accrues from June 15 even though the return was filed after that date, because <a href="/research/federal/usc26/6611#cny5-0000006" resolve="/lr/resolve/section-6611b3/cny5#cny5-0000006" title="section 6611(b)(3)">section 6611(b)(3)</a> would not apply.

In a legal memorandum, the IRS concluded that whether overpayment interest accrues from the original due date of a foreign corporation’s tax return depends on whether it knew that its full withholding, at the time it occurred, would result in an overpayment for which it would seek a refund.

In a legal memorandum, the IRS concluded that whether overpayment interest accrues from the original due date of a foreign corporation’s tax return depends on whether it knew that its full withholding, at the time it occurred, would result in an overpayment for which it would seek a refund. The corporation sought a refund on its Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation,” for all the taxes withheld on interest paid to it by a related U.S. corporation. The deadline for filing that return was June 15 of the following year, but the IRS did not receive it until after that date. The corporation timely requested an extension, but it is unclear whether it filed a processable return by the extended due date. It is also not known when the corporation became aware that its full withholding would result in an overpayment for which it would seek a refund. The IRS issued the claimed refund with overpayment interest that appears to run from the day after the return was received. Under section 6611, interest is generally paid on any overpayment of tax from the date of the overpayment to a date that precedes the refund date by not more than 30 days. Any income tax withheld is deemed to have been paid by the recipient on the due date for filing its return, which for the corporation was June 15. However, the IRS appears to have started computing interest from the date it received the return because it was treated as late under an exception to the general rule that interest accrues from the date of overpayment. Section 6611(b)(3) provides that if a tax return is filed after the due date (including extensions), no interest is allowed or paid for any day before the date on which the return is filed. But that provision does not apply if the taxpayer does not have a filing obligation under reg. section 1.6012-2(g)(2)(i)(a) and did not know that it was owed a refund when the return was due. The IRS reasoned that if the corporation knew that its full withholding would result in an overpayment for which it would seek a refund, it would be required to file a timely income tax return. If it did so, overpayment interest accrues from June 15 of the year after the withholding. If the corporation’s income tax return is not timely, overpayment interest accrues from the date it filed a processable return. However, if the corporation did not know that its full withholding would result in an overpayment for which it would seek a refund, the overpayment interest accrues from June 15 even though the return was filed after that date, because section 6611(b)(3) would not apply.

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Interest Accrual Depends on Corporation’s Knowledge of Overpayment