SERVICE TO USE FEDERAL SHORT-TERM RATE AS BASIS FOR INTEREST ON OVERPAYMENTS AND UNDERPAYMENTS.

Notice 88-59

In determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621 of the Internal Revenue Code, the Internal Revenue Service will use the federal short-term rate based on daily compounding.

Section 6621 of the Code, as amended by the Tax Reform Act of 1986, section 1511, 1986-3 C.B. 1, 661, establishes differential rates for computing interest on tax overpayments and underpayments. The overpayment rate equals the sum of the federal short-term rate plus 2 percentage points, and the underpayment rate equals the sum of the federal short-term rate plus 3 percentage points. For this purpose, the "federal short-term rate" is the federal short-term rate determined in accordance with section 1274(d), rounded to the nearest percent. Under section 6621, the rate effective for a calendar quarter is based on the federal short-term rate determined during the first month of the preceding calendar quarter.

Section 1274(d)(1)(C)(i) of the Code provides that the federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any one month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less.

Section 6622 of the Code provides the general rule that in computing the amount of any interest required to be paid by the Secretary or by the taxpayer, or any other amount determined by reference to the amount of interest, the interest and the amount shall be compounded daily.

Annual, semi-annual, quarterly, and monthly equivalency rates are published monthly for purposes of section 1274(d) of the Code. The statute and committee reports do not specify which federal short- term rate should be used in performing the computations required by section 6621. Because the section 6621 rate is subject to daily compounding under section 6622, the rate most consistent with determination of the section 6621 rate is the federal short-term rate based on a daily compounding assumption.

In addition, the daily compounding rate is the rate that most accurately reflects the cost to the government of borrowing funds that are unavailable because of tax delinquencies.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this Notice is Mary Jan Kossar of the Individual Tax Division. For further information regarding this Notice contact Mrs. Kossar on (202) 566-4751 (not a toll-free call).