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Fourth Quarter 2024 IRS Interest Rates on Overpayment & Underpayment of Tax

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On August 21, 2024, the IRS announced that the Fourth Quarter 2024 IRS interest rates on overpayment and underpayment of tax will remain the same as in the Third Quarter of 2024.

This means that, the Fourth Quarter 2024 IRS interest rates will be as follows:

eight (8) percent for overpayments (seven (7) percent in the case of a corporation);

eight (8) percent for underpayments;

ten (10) percent for large corporate underpayments; and

five and a half (5.5) of a percent for the portion of a corporate overpayment exceeding $10,000.

How Are the IRS interest Rates Calculated?

Internal Revenue Code (“IRC”) §6621 establishes the IRS interest rates on overpayments and underpayments of tax. Let’s deal with the overpayment rates first. Under §6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points for individuals and 2 percentage points in cases of a corporation. There is an exception to this rule: with respect to a corporate overpayment of tax exceeding $10,000 for a taxable period of time, the rate is the sum of the federal short-term rate plus one-half of a percentage point.

Furthermore, under §6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Again, there is an exception for a large corporate underpayment: in such cases, §6621(c) requires the underpayment rate to be the sum of the relevant federal short-term rate plus 5 percentage points. Additionally, the readers should see §6621(c) and §301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

Pursuant to the IRC §6621(b)(1), the Fourth Quarter 2024 IRS interest rates were computed based on federal short-term rates in January of 2024. 

Why Are the IRS interest Rates Important?

It is important to note that the Fourth Quarter 2024 IRS interest rates are relevant for a great variety of purposes. Let’s highlight three of its most important uses. First, these rates will determine the interest a taxpayer will get on any IRS refunds.

Second, the rates will also be used to establish the interest to be added to any additional US tax liability on amended or audited tax returns. This also applies to the tax returns that were amended pursuant to Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Finally, the Fourth Quarter 2024 IRS interest rates will be used to calculate PFIC interest on any relevant §1291 PFIC tax. This PFIC interest will be reported on the relevant Form 8621 and ultimately Form 1040.

Given the importance of the IRS interest rates, we at Sherayzen Law Office constantly deal with the IRS interest rates on overpayments and underpayments of tax. This is why we closely follow any changes in these IRS interest rates, including the Fourth Quarter 2024 IRS interest rates.

2022 Fourth Quarter IRS Interest Rates (Underpayment & Overpayment)

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On August 15, 2022, the IRS announced that the 2022 Fourth Quarter IRS interest rates will again increase for both underpayment and overpayment cases. This increase closely follows the Federal Reserve’s recent increases in interest rates.

This means that, the 2022 Fourth Quarter IRS interest rates will be as follows:

Six (6) percent for overpayments (five (5) percent in the case of a corporation);
Six (6) percent for underpayments;
eight (8) percent for large corporate underpayments; and
three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2023.

The the 2022 Fourth Quarter IRS interest rates are important for many reasons. These are the rates that the IRS uses to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2022 Fourth Quarter IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. Surprisingly, we sometimes see this scenario arise in the context of offshore voluntary disclosures.

Sherayzen Law Office continues to track any changes the IRS makes to its overpayment and underpayment interest rates.

May 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On May 21, 2018, the IRS announced the creation of another six compliance campaigns. Let’s explore these May 2018 IRS Compliance Campaigns in more detail.

May 2018 IRS Compliance Campaigns: Background Information

After a long period of planning, the IRS Large Business and International division (“LB&I”) finalized its new restructuring plan in 2017. Under the new plan, LB&I decided to switch to issue-based examinations and IRS campaigns.

The idea behind the IRS compliance campaigns is to concentrate the LB&I limited resources where they are most needed – i.e. where there is the highest risk of noncompliance. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS introduced additional campaigns in November of 2017 and March of 2018. As of March 13, 2018, there were a total of twenty-nine campaigns outstanding.

Six New May 2018 IRS Compliance Campaigns

On May 21, 2018, the LB&I introduced the following new campaigns: Interest Capitalization for Self-Constructed Assets; Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties; Forms 1042/1042-S Compliance; Nonresident Alien Tax Treaty Exemptions; Nonresident Alien Schedule A and Other Deductions; and NRA Tax Credits. Each of these campaigns was selected by the IRS through the analysis of the LB&I data as well as from suggestions made by IRS employees.

It is also important to point out that each of these campaigns as well as the twenty-nine previous campaigns were reviewed by the IRS in light of the 2017 Tax Reform (which was enacted on December 22, 2017).

May 2018 IRS Compliance Campaigns: Interest Capitalization for Self-Constructed Assets

The first campaign focused on the Internal Revenue Code (“IRC”) Section 263A. Under this provision if a taxpayer engaged in certain production activities with respect to “designated property”, he is required to capitalize the interest that he incurs or pays during the production period with respect to this property.

IRC Section 263A(f) defined “designated property” as: (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The IRS created this campaign with the goal of ensuring taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Construction companies are likely to be the most immediate target of this campaign. Given the fact that Section 263A is not well-known, the IRS adopted varous treatment streams for this campaign, including issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance.

May 2018 IRS Compliance Campaigns: Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign reflects the increasing attention of the IRS to foreign trusts. This is a highly complex area of law. In order to deal with this complexity, the IRS stated that it will adopt a multifaceted approach to improving Form 3520 and Form 3520-A compliance. The treatment streams will include (but not limited to) examinations and penalties assessed by the campus when the forms are received late or are incomplete. The IRS will also use Letter 6076 to inform the trusts about their potential Form 3520-A obligations.

May 2018 IRS Compliance Campaigns: Form 1042/1042-S Compliance

Taxpayers who make payments of certain US-source income to foreign persons must comply with the related withholding, deposit and reporting requirements. This campaign targets Withholding Agents who make such payments but do not meet all of their compliance duties. The IRS will address noncompliance and errors through a variety of treatment streams, including examination.

May 2018 IRS Compliance Campaigns: Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical (“FDAP”) income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by US payors to improperly claim treaty benefits and exempt US-source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: Nonresident Alien Schedule A and Other Deductions

This is another campaign that targets NRAs. In this case, the IRS focuses on the Form 1040NR Schedule A itemized deductions. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new IRC provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: NRA Tax Credits

This is yet another (third) campaign that targets NRAs; this time it concerns tax credits claimed by the NRAs. The IRS here targets NRAs who erroneously claim a dependent tax credit and who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Furthermore, the IRS also wants to target NRAs who claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, please contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

March 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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With this article, we begin a series of articles dedicated to the description of the IRS compliance campaigns initiated between March of 2018 and April of 2019. This article is dedicated to the March 2018 IRS Compliance Campaigns.

March 2018 IRS Compliance Campaigns: Background Information

On March 13, 2018, the IRS Large Business and International division (“LB&I”) has announced the creation of another five additional compliance campaigns. This news came after similar announcements on January 31, 2017 and November 3, 2017 about the selection of a total of twenty-four IRS compliance campaigns.

These campaigns came into existence as a result of a long and broad restructuring of the LB&I, which required a large investment of time and resources. Campaign development in particular required strategic planning and deployment of resources, training and tools, metrics and feedback.

The basic idea behind the IRS campaigns is to focus the limited resources of the IRS on the high-risk compliance issues in the most efficient way. These campaigns also go hand-in-hand with the recent IRS shift to issue-based audits.

Five March 2018 IRS Compliance Campaigns

On March 13, 2018, the IRS announced the creation of five additional campaigns: Costs that Facilitate an IRC Section 355 Transaction, SECA Tax, Partnership Stop Filer, Sale of Partnership Interest and Partial Disposition Election for Buildings.

Each of these campaigns was identified by the IRS through the LB&I data analysis as well as recommendations from IRS compliance employees.

March 2018 IRS Compliance Campaigns: Costs that Facilitate an IRC Section 355 Transaction

In general, costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off or split-up, must be capitalized (i.e. they cannot be deducted). Nevertheless, some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure that taxpayers only capitalize the facilitative costs. The IRS intends to reach this goal through issue-based examinations.

March 2018 IRS Compliance Campaigns: SECA Tax

This campaign focuses on partners’ self-employment tax under the Self-Employment Contributions Act (“SECA”). Unless a partner qualifies as a “limited partner” for self-employment tax purposes, he must report his pass-through income from the partnership and pay the required self-employment tax under SECA.

The IRS, however, has realized that, with respect to service-based partnerships (particularly, law firms), some partners have improperly claimed that they qualified as limited partners. As part of this campaign, the IRS will focus on limited liability partnerships, limited partnerships and limited liability companies.

March 2018 IRS Compliance Campaigns: Partnership Stop Filer

This campaign focuses on a very common problem – a partnership ceases to file tax returns even though it continues to do business, fails to supply Schedules K-1 to its partners and the partners never report any of the pass-through income from the partnership.

Since there are various possible reasons that cause this problem to arise, the IRS decided to adopt a flexible approach to enforcement in this campaign. The treatment streams will vary from stakeholder outreach, soft letters (to encourage voluntary self-correction) to issue-based examinations.

March 2018 IRS Compliance Campaigns: Sale of Partnership Interest

A sale of a partnership interest usually results in a capital gain or loss. The taxation of such a gain varies from long-term capital gains tax rate of 15% (if the partnership interest was held for more than a year) and higher capital gains rates for appreciated collectibles to short-term capital gains and, in some cases, even ordinary income (for example, in situations where the a partnership has inventory items or unrealized receivables at the time of the sale or exchange).

This campaign intends to deal with two problems that arise with respect to a sale of a partnership interest. First, the IRS will target taxpayers who simply do not report the sale (there is a surprisingly large number of these individuals, especially in a small-business setting, like a restaurant).

Second, the IRS wants to improve compliance with respect to correct taxation of the gain from a disposition of a partnership interest. The incorrect reporting usually occurs where the entire such gain is taxed at long-term capital gain tax rates, rather than 25% or 28% capital gain rates.

The IRS realizes that there are a variety of reasons for errors concerning the proper reporting and taxation of a partnership disposition gain. For this reason, it will apply a variety of treatment streams to noncompliance taxpayers, including soft letters and examinations. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.

March 2018 IRS Compliance Campaigns: Partial Disposition Election for Buildings

In August of 2014, the IRS issued regulations concerning IRC Section 168. In particular, Treas. Reg. Section 1.168(i)-8 supply the rules concerning gain/loss recognition with respect to partial disposition of MACRS property. In order to comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:

disposed of a portion of a MACRS asset owned by the taxpayer;
identified the asset that was partially disposed;
determined the placed-in-service date of the partially disposed asset;
determined the adjusted basis of the disposed portion; and
reduced the adjusted basis of the asset by the disposed portion.

The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Passport Revocation and Denial for Tax Debt | IRS Tax Lawyer & Attorney

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Starting January 1, 2018, the State Department commenced to deny the requests for US passport issuance and renewal made by individuals with “seriously delinquent tax debt”. Moreover, the State Department has been granted the authority for US passport revocation with respect to these individuals. Let’s explore this new law on passport revocation and denial for tax debt.

Passport Revocation and Denial: IRC Section 7345

Section 32101 of the 2015 Fixing America’s Surface Transportation Act (“FAST Act”) added IRC Section 7345, which requires the IRS to notify the State Department of taxpayers that the IRS has certified individuals as having “seriously delinquent tax debt.” This is called “Section 7345 Certification.” Once the State Department receives such a Certification, it is generally required to deny a passport application for the certified individuals and may even revoke or limit passports that were previously issued to these individuals.

Passport Revocation and Denial: Who Can Make Section 7345 Certifications

Only designated IRS officials may certify an individual or reverse Certification. IRC Section 7345(g) specifically reserves this right to the Commissioner of Internal Revenue, the Deputy Commissioner for Services and Enforcement of the Internal Revenue Service (IRS), or the Commissioner of an operating division of the IRS (collectively, “Commissioner or specified delegate”).

Passport Revocation and Denial: Seriously Delinquent Tax Debt

The term “seriously delinquent tax debt” is defined in IRC Section 7345(b)(1), which sets up four requirements. First, the debt must be “unpaid, legally enforceable Federal tax liability of an individual.” Id. Note that the seriously delinquent tax debt is limited to liabilities incurred under Title 26 of the United States Code (i.e. the Internal Revenue Code). The term does not include items such as FBAR penalties and child support.

Second, this federal tax liability must have been “assessed.” IRC Section 7345(b)(1)(A).

Third, the assessed liability must be greater than $50,000. IRC Section 7345(b)(1)(B). Pursuant to the IRC Section 7345(f), the $50,000 amount is adjusted for inflation each calendar year beginning after 2016. In fact, for 2018, the threshold amount is $51,000.

Finally, either a levy pursuant to IRC Section 6331 or a lien pursuant to the IRC Section 6323 has been issued with respect to the assessed tax liability. IRC Section 7345(b)(1)(C). Moreover, the administrative appeal rights under IRC Section 6320 with respect to the lien must have been either exhausted or lapsed. Id.

Passport Revocation and Denial: More Than $50,000 Threshold

In calculating whether the $50,000 federal tax liability threshold is met, the IRS will aggregate all of the current tax liabilities for all taxable years and periods assessed against an individual. It will also include penalties and interest.

Passport Revocation and Denial: Exclusions

Under the newly-issued IRS guidance, the term “seriously delinquent tax debt” for the purposes of passport revocation and denial does not include the following:

1. A debt that is being timely paid under an IRS-approved installment agreement under section 6159.

2. A debt that is being timely paid under an offer in compromise accepted by the IRS under section 7122.

3. A debt that is being timely paid under the terms of a settlement agreement with the Department of Justice under section 7122.

4. A debt in connection with a levy for which collection is suspended because of a request for a due process hearing (or because such a request is pending) under section 6330.

5. A debt for which collection is suspended because the individual made an innocent spouse election (section 6015(b) or (c)) or the individual requested innocent spouse relief (section 6015(f)).

Passport Revocation and Denial: Exceptions

Additionally, the State Department will not revoke or deny the US passport of a taxpayer if one of the following exceptions apply:

1. The taxpayer is in bankruptcy;

2. The IRS identified the taxpayer as a victim of tax-related identity theft;

3. The IRS determined that the taxpayer’s account is currently uncollectible due to hardship;

4. The taxpayer is located within a federally declared disaster area;

5. The taxpayer has a request pending with the IRS for an installment agreement;

6. The taxpayer has a pending offer in compromise with the IRS;

7. The taxpayer has an IRS-accepted adjustment that will satisfy the debt in full; or

8. If the taxpayer is serving in a designated combat zone or participating in a contingency operation, the IRS will postpone the Certification.

Passport Revocation and Denial: 90-Day Delay

Before denying a passport, the State Department will grant a taxpayer 90 days to allow him to either resolve any erroneous certification issues, make a full payment of the tax debt or enter into a payment arrangement with the IRS.

Passport Revocation and Denial: Main Remedy in Case of Erroneous Certification

In cases where the IRS makes an erroneous Certification or fails to revers a certification, a taxpayer does not have many choices. It appears that the taxpayer will not be able to appeal to the IRS Office of Appeals. The main course of action in these situations appears to be a civil action in court under IRC Section 7345(e).

Contact Sherayzen Law Office for Professional Help with US Tax Issues

Sherayzen Law Office is a highly experienced tax law firm based in Minneapolis. We have helped hundreds of US taxpayers to resolve their tax issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!