Internal Revenue Manual - 4.10.

26 Net Rate Netting Procedures for LMSB Cases

Part 4. Examining Process Chapter 10. Examination of Returns Section 26. Net Rate Netting Procedures for LMSB Cases
4.10.26 Net Rate Netting Procedures for LMSB Cases
4.10.26.1 Overview 4.10.26.2 Discussing Net Rate Netting with Taxpayers 4.10.26.3 Offsetting Distinguished from Net Rate Netting 4.10.26.4 Considering Requests for Net Rate Netting 4.10.26.5 Reviewing Net Rate Netting Requests involving More than One Taxpayer Identification Number (TIN) 4.10.26.6 Returning Imperfect Net Rate Netting Requests to Taxpayers 4.10.26.7 Identifying Net Rate Netting Cases for Processing 4.10.26.8 Form Letters used for Net Rate Netting Requests Exhibit 4.10.26-1 Offsetting Distinguished from Net Rate Netting Exhibit 4.10.26-2 Flowchart of Net Rate Netting Procedures

4.10.26.1 (05-23-2008) Overview

1. This section provides guidance to examiners who receive formal or informal requests for Net Rate Netting (NRN). The purpose of this guidance is to ensure that LMSB team members properly handle cases with NRN requests so that case processing functions in SB/SE or Appeals can properly compute interest after the case is closed to them. These procedures do not apply to NRN requests worked in case processing units. 2. NRN is authorized by IRC section 6621(d). This paragraph provides for a net rate of zero for interest on overlapping periods of tax overpayments and underpayments. 3. Rules for computing NRN are located in IRM section 20.2.14. 4. This section distinguishes NRN requests from formal claims. NRN requests will not be subject to formal claims procedures during examination consideration.

4.10.26.2 (05-23-2008) Discussing Net Rate Netting with Taxpayers

1. Examiners are more likely to encounter NRN requests in cases with complex returns than in cases with smaller returns. 2. In such cases, the examiner will determine if it is beneficial to discuss NRN with the taxpayer during the planning stage of the engagement. If so, such discussions will clarify the following points. A. NRN is frequently confused with interest offsetting. NRN involves debit and credit interest amounts in the same period of time. Offsetting is done when there are debit and credit interest amounts for different periods of time. Campus operations automatically process offsets after a case closes.

Note:
No special case processing instructions are required for offsets. Offsets will be done before any NRN request is processed. See IRM 4.10.26.3, Offsetting Distinguished from Net Rate 1
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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases Netting. B. The Service will not process any NRN request until the examination is complete for all the affected periods. C. Because of the complexity surrounding NRN requests, the Service will not provide estimates of the interest due or receivable from a NRN adjustment. D. The examiner will consider any NRN request made during the examination process. Taxpayers will find Instructions in Rev. Proc. 99-43, 1999-47 I.R.B. 57 and/or Rev. Proc. 2000-26, 2000-24 I.R.B. 1257. E. The Service will perform interest computations based on information provided in the request. It is to the taxpayers advantage to prepare an accurate request. The taxpayer should specify any overlapping periods which are not under consideration by Examination or Appeals and attest that none of the periods have been previously used for NRN purposes.

Note:
If any period involved in the current request has been subject to any previous net rate netting, the taxpayer should attach the interest computation to its request. This will assist campus personnel in the subsequent processing of the request. F. NRN requests are not formal refund claims for the purposes of IRC section 7422. They are special requests pursuant to Revenue Procedure 99-43, and/or Revenue Procedure 2000-26. Accordingly, taxpayers must full pay any related interest amounts before filing an administrative claim for refund. G. Examiners not will disallow a NRN request using the formal claims disallowance process. Instead, they will return any imperfect request to the taxpayer with a letter explaining the reasons. H. Pursuant to section 7422, taxpayers may file an administrative claim for refund and receive judicial review by a Federal District Court or Court of Claims if the accounts involved are first paid in full. Flora v. United States, 362 U.S. 145 (1960).

4.10.26.3 (05-23-2008) Offsetting Distinguished from Net Rate Netting

1. ) NRN is not the same as offsetting between tax modules. Offsetting is transferring credit from an overpaid tax module to an underpaid tax module. The Service generally offsets unsettled modules, through Master File programming. (See IRC 6402(a) and IRM 20.2.5.12, Debit Interest on Liabilities Paid by Offset.) 2. Offsets will be done before any NRN request is processed. The following are examples of offsets that will be done before processing a net rate request: A. Overpayments and underpayments closing in the same cycle. B. Overpayment closing with current underpayments on the module. C. Underpayment closing with current overpayments on the module.

Note:
See IRM Exhibit 4.10.26-1 for more information.

4.10.26.4 (05-23-2008) Considering Requests for Net Rate Netting

1. When a taxpayer files a Form 843 or written statement request with a campus, the tax examiner receiving the request will check to determine if there is any examination or Appeals activity. If there is, the campus will inform the Examination or Appeals group manager of the request. Generally, the 2
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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases campus will process such requests after the examination or Appeals activity is closed.

Note:
For requests received from a campus on Form 843, see Rev. Proc. 99-43.05.04, "Filing Requirements for Form 843" or Rev. Proc. 2000-26.05.04, "Filing Requirements for Form 843," as applicable. 2. The taxpayers may make a NRN request during an examination. If an oral request is made, the taxpayer must be instructed to provide a written statement as required by Rev. Proc. 99-43 or 2000-26.Oral requests will not be considered. 3. For written requests received during an examination, see Rev. Proc. 99-43.05.06, "Special Procedures, " or Revenue Procedure Rev. Proc. 2000-26.05.06, "Special Procedures." The examiner will determine whether the necessary information is present on the NRN request. See IRM 20.2.14.6.1.1(6). 4. NRN requests may not be surveyed or excluded from consideration in any examination on account of risk analysis factors or excluded from an examination plan. The examiner should document all activity related to NRN requests in the workpapers. 5. When the examiner receives a written request during an examination, the following actions must be taken: A. Date stamp the request B. Send Letter 4126, Acknowledgement of Net Rate Netting Request. 6. Letter 4126 informs the taxpayer that: A. The request will be reviewed for accuracy and completeness B. Accepting the request is not a guarantee that it will be allowed. C. Offsetting will be applied before a net rate adjustment will be made. D. If one of the tax modules is under examination or appeals, the NRN request will not be processed until the tax is settled. E. Statute of limitation issues may impact allowance of the request and will be determined when the request is processed.

Note:
Neither Centralized Case Processing nor the Appeals Complex Interest Team will consider any Net Rate request where the examiner has crossed out the received date. 7. If the examiner determines that any of the necessary information is missing, they will prepare a Letter 4127, Perfection of Net Rate Netting Request. This letter will identify the information that is needed and provide a deadline for the taxpayer to respond. 8. If the examiner determines that sufficient information is provided for working the NRN request, they will determine whether there is more than one taxpayer identification number (TIN) involved in the request. If only one taxpayer identification number is involved, they will conclude consideration of the net rate request by: A. Associating all letters, forms and workpapers related to the request with the case file B. Properly indexing them in the examination plan and C. Informing the taxpayer that the request will be processed after closing. 9. If more than one TIN is involved in the NRN request, see IRM section 4.10.26.5.

4.10.26.5 (05-23-2008) Reviewing Net Rate Netting Requests involving More than One Taxpayer Identification Number (TIN)

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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases 1. The field examiner must review the NRN request to determine whether the request includes more than one TIN. (A net rate adjustment cannot be made between different taxpayers.) If so, the field examiner must make a determination whether IRC 6621(d) applies.

Note:
If an office examiner receives a request for NRN that involves more than one TIN, the case should be transferred to a field group. 2. This issue may not be surveyed or excluded from consideration in any examination on account of risk analysis factors or excluded from an examination plan. 3. The field examiner must ascertain the facts surrounding the relationships between TIN holders and analyze the facts in terms of applicable law. See Service Center Advice: IRS FSA 200212028; 2002 FSA Lexis 4; 2002 WL 442928.

Note:
It may be appropriate to consult with Counsel on this issue. 4. If the field examiner determines that the multiple TINs are the "same taxpayer" for net rate purposes, take the following actions: A. Indicate that NRN exists on Form 3198, Special Handling Notice, B. Document the facts, law and conclusion in the workpapers, C. Inform the taxpayer that the request will be processed after closing, D. Notate that conclusion in the examination plan and, E. For any case sent to Appeals, indicate in Form 4655, Report Transmittal that the NRN request involves "the same taxpayer" and should be processed after the other issues are resolved. 5. If the field examiner determines that the multiple TINs are not the "same taxpayer," the field examiner should mark through the date stamp on the request and initial it, then issue Letter 4128, Return of Net Rate Netting Request Involving More than One TIN, to the taxpayer indicating the Service is unable to process the request. If the field examiner concludes that any periods attributable to by the taxpayer who submitted the request are subject to netting, he or she may indicate the periods on the letter. Information related to other taxpayers may not be disclosed. A. Example 1: Corporation A files a NRN request with multiple TINs. Corporation A has only underpayment periods. Subsidiaries B, C, and D have only overpayment periods. For whatever reason, B, C, and D are determined not to be the same taxpayer as Corporation A. These overpayment periods may not be netted against the underpayment periods of Corporation A. B. Example 2: Corporation A files a NRN request with multiple TINs. Corporation A has overpayments for periods 1, 2, and 3 and an underpayment for period 4. Subsidiary B has underpayments for periods 1, 2, 3, and 4. Subsidiary B joined the consolidated group at the beginning of period 2. Subsidiary B cannot net its underpayment with the overpayment of parent A for period 1, but the overpayments and underpayments of periods 2 and 3 can be netted. C. Example 3: Parent Corporation A files a NRN request for overlapping periods of underpayment and overpayment interest involving Corporation A and its subsidiaries B and C. These three entities have separate TINs. The IRS determines that Corporation A is not the same taxpayer as Corporations B and C for purposes of interest rate netting because Corporation As underpayment was incurred before Corporations B and C became members of a consolidated group with Corporation A as the parent. Therefore, Corporations B and C are not jointly liable with Corporation A for the income tax underpayment. However, the IRS determines that Corporation B can file a net rate request for its own underpayment of employment taxes and its own overpayment of excise taxes. Similarly, the IRS determines that Corporation C can file its own net rate request. The IRS will advise Parent Corporation A 4
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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases (the entity that filed the net rate request) that its request will not be approved, but that Corporations B and C should file their own requests for their own overlapping periods. 6. If the examiner determines that any portion of the request should be denied because the multiple TINs are not the same taxpayer, the taxpayer does not have the right to elevate the issue to Appeals. 7. If there are other issues that require Appeals consideration, the examiner should notate the NRN request on Form 4665 and explain the facts and law surrounding the NRN issue. The taxpayer does not have the right to protest this issue except in a formal judicial review following the full payment of the related interest amounts and the filing of an administrative claim for refund.

4.10.26.6 (05-23-2008) Returning Imperfect Net Rate Netting Requests to Taxpayers

1. NRN requests are not refund claims for the purposes of IRC 7422. Accordingly, examiners will not disallow a net rate request using the formal claim disallowance process. Instead, they will return any imperfect request to the taxpayer. 2. Pursuant to IRC 7422, taxpayers may file an administrative claim for refund and receive judicial review by a Federal District Court or Court of Claims if and only if the accounts involved are first paid in full. See Flora v. United States, 362 U.S. 145 (1960). 3. When an examiner determines that a taxpayers net rate request is inappropriate, they should: A. Cross out the date stamp and initial it; B. Prepare Letter 4129, Return of Imperfect Net Rate Netting Request, to the taxpayer explaining the reasons for this decision , and C. Send it to the taxpayer with the original net rate request 4. If an Appeals Officer receives a protest to a NRN request that is not full paid and that was returned to the taxpayer, the Appeals Officer will not work this issue. 5. If the taxpayer later files a perfected request, the date that the perfected request is received will be used to determine all applicable statute of limitations dates.

4.10.26.7 (05-23-2008) Identifying Net Rate Netting Cases for Processing

1. For all cases closed from examination with NRN requests, A. The team member who prepares Form 3198, Special Handling Notice for Centralized Case Processing, must check the box on the back of Form 3198 under " Special Interest Features" to indicate interest netting. B. Requests and workpapers related to the overlapping interest periods must be placed in the same file as the tax return to which it relates. C. For any case involving unagreed issues not related to the NRN request, Form 4665 must note that there is a NRN request to be processed, date received and where to find the request in the workpapers.

4.10.26.8 (05-23-2008) Form Letters used for Net Rate Netting Requests
1. Examiners will use form letters to acknowledge, perfect, or return NRN requests. 2. These letters are intended for the exclusive use of field or office examiners and Appeals Officers. They are not intended for use of tax examiners or other campus employees involved in the processing of the requests. Separate procedures for campus staff may be found in IRM 2.20.14. 3. General Instructions of all NRN Letters. Provide: A. Date: date this letter is prepared. 5
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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases B. Complete information for person to contact. C. Identify the Net Rate Interest Netting request received by Taxpayer, TIN/SSN, Tax Period and date received. D. To: Insert taxpayer contact name and address. E. Follow Power-of-Attorney procedures as applicable.

4.10.26.8.1 (05-23-2008) Specific Instructions for Letter 4126, Acknowledgement of Net Rate Netting
1. If the taxpayer makes a verbal request for NRN, do not send this letter. Ask the taxpayer to provide a written request per Rev. Proc. 99-43 or Rev. Proc. 2000-26 . 2. Upon receipt of a written request or Form 843, determine if the information required by the appropriate Revenue Procedure was included in the request. 3. If the information is adequate, date stamp the document; prepare and send the acknowledgement letter. 4. If the request is not satisfactory, prepare Letter 4127: Perfection of Net Rate Netting Request. See IRM Exhibit 4.10.26-3 .

4.10.26.8.2 (05-23-2008) Specific Instructions for Letter 4127, Perfection of Net Rate Netting Request
1. Rev. Proc. 99-43 states that a Form 843 requesting the net rate of zero should be filed for pre-enactment interest periods (interest accruing before October 1, 1998). (For additional information on pre-enactment see IRM 20.2.14.6.1.2)

Note:
Examiners should be aware that a prior netting adjustment could have been made during an overlapping period(s), but it may not have been completely used there may be a remaining period or overpayment/underpayment that can still be netted. 2. No Form 843 is required when a computation of interest using the net interest rate of zero under IRC 6621(d) is requested by a taxpayer in connection with a return (or returns) of the taxpayer under consideration by any function of the Service (including Examination, Appeals, or a case before a federal court that requires a computation of interest by any function of the Service). Rather than filing a Form 843, the taxpayer must furnish a letter or written statement to such function that details: A. Type(s) of tax and/or type(s) of return(s) B. Tax periods involved C. Underpayment amount(s) and approximate date of payment, if paid D. Overpayment amount(s) and approximate date of refund or offset E. Identification of overlapping period(s) F. Certification that the net rate has not been used during the identified overlapping period(s)

Note:
Examiners should be aware that a prior netting adjustment could have been made during an overlapping period(s), but the balance may not have been completely used. There may be a remaining period or overpayment/underpayment that can still be netted. 3. Written statements provided during examination must:

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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases A. State that the taxpayer is requesting the net interest rate of zero under IRC 6621(d); B. Indicate the type of tax and type of return that affects the interest computation for the taxable period under consideration; C. State when and for what period(s) the refund or payment (that affects the interest computation for the taxable period under consideration) was made; D. State that, to the extent of equivalent amounts of overpayment or underpayment, the period(s) set forth under section 5.06(3) of this revenue procedure has (have) not previously been applied to obtain a net interest rate of zero under IRC 6621(d).

Note:
If the NRN Request is date stamped, and the request is returned to the taxpayer as imperfect or rejected, the date stamp must be crossed out to void the submission or received date. 4. If the taxpayer does not respond within the required time frame, then send Letter 4129: Return of Imperfect Net Rate Netting Request, to the taxpayer with the request. Maintain a copy in the case file.

4.10.26.8.3 (05-23-2008) Specific Instructions for Letter 4128, Return of Net Rate Netting Request Involving More than One TIN
1. In cases involving more than one TIN, if the NRN request involves only netting between overlapping periods of "different taxpayers " : A. Complete the first paragraph of Letter; B. Do not include the second paragraph of the Letter; C. Cross out the date stamp on the NRN Request and initial it; and D. Send Letter 4128 to the taxpayer with the original NRN Request. 2. If the examiner concludes that any periods attributable to the taxpayer who submitted the request are subject to netting, A. He or she will cross out the date stamp on the NRN Request and initial it; B. Indicate the periods in the second paragraph of the letter, and C. Send Letter 4128 to the taxpayer with the original NRN Request. 3. Information related to other taxpayers may not be disclosed.

4.10.26.8.4 (05-23-2008) Specific Instructions for Letter 4129, Return of Imperfect Net Rate Netting Request
1. If the NRN Request is date stamped and the request is returned to the taxpayer as imperfect, the examiner must cross out the date stamp and initial the request to void the submission or received date. 2. Enclose the taxpayers request.

Exhibit 4.10.26-1 (05-23-2008) Offsetting Distinguished from Net Rate Netting

If a taxpayer requests a "net" balance during an examination, it may be a request for either "offsetting" or "net rate netting." To determine which it is, review a current transcript of the account and consider the following: Offsetting Definition: Offsetting is transferring credit from an overpaid tax module to an underpaid tax module. Neither module should have a zero balance, including the current adjustments. The Service generally offsets unsettled modules, usually through Master File programming. Offset in the following situations: 1. Overpayments and underpayments closing in the same cycle.2. Overpayment closing with current 7
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Internal Revenue Manual - 4.10.26 Net Rate Netting Procedures for LMSB Cases underpayments on the account. 3. Underpayment closing with current overpayments on the account.Example: Current balance on modules is zero. There is an assessment shown by TC 300 on TXMOD 02 199612 and allowing TC 301 on TXMOD 02 199912. The overpayment on 199912 should be applied to the balance owing on 199612.Net Rate Netting Definition:Net Rate Netting is adjusting debit and credit interest rates to a net rate of zero. There must be concurrent debit and credit interest running in the same period of time. Generally, one module will be in zero balance. The taxpayer must provide a written request for net rate. Net in the following situations at the taxpayers request: 1. Closing underpayments and taxpayer requests net rate interest computed against previously refunded overpayment on a different module.2. Closing overpayment and the taxpayer requests net rate interest computed against previously paid tax assessment on a different module. (Rare) Example: The transcript shows an assessment shown by TC 300 on TXMOD 02 199612. The taxpayer informs the Internal Revenue Service that he received a refund from TXMOD 10 199612 and wants the interest on the current adjustment netted. An overlapping interest period occurred between an overpayment (that was refunded or offset with interest) and an underpayment that was previously paid so it is appropriate to consider Net Rate Netting.IRM 20.2.14 provides information on Netting of Overpayment and Underpayment Interest and Offset Methodology.

Exhibit 4.10.26-2 (05-23-2008) Flowchart of Net Rate Netting Procedures

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