Academic journal article Journal of Accountancy

Overpayments, Underpayments and Interest Netting

Academic journal article Journal of Accountancy

Overpayments, Underpayments and Interest Netting

Article excerpt

Since 1986, the Internal Revenue Service has provided separate tax rates for overpayments and underpayments -- with higher rates for underpayments. To reduce interest expenses, most companies want over-and underpayments "netted" when they overlap during the same period. The IRS will allow annual netting for companies that have both during the same year; also, an overpayment for one year can be offset against an underpayment for another year if both are outstanding at the time of the offset.

On April 18, 1997, the Treasury Department issued Netting of Interest on Tax Overpayments and Underpayments, recommending a legislative solution to implementing "global" interest netting, such as netting an underpayment against an overpayment that already had been paid by the IRS. Meanwhile, President Clinton's recently unveiled tax simplification package includes a global interest netting proposal calling for a zero rate of interest during a period of mutual indebtedness for an overlap. Both the Treasury report and President Clinton's package recommend that global netting be limited to income taxes, applied only to tax years not barred by statute and performed only at the company's request, with the company bearing the burden of establishing whether it is entitled to the interest netting. …

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