Discussion:Interest received from IRS - Taxable?

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Discussion Forum Index --> Tax Questions --> Interest received from IRS - Taxable?

Lalva (talk|edits) said:

8 September 2007
I thought that the interest received by taxpayer from IRS was always taxable, but I just read in a foot note in a CP notice that: "if you claimed a tax deduction for this interest, remember to report it as income in your next tax return".

In this case the TP paid interest on tax due after receiving a CP2000 notice. Then we did an amended return because the IRS computed the income twice, and he received a refund of taxes paid and interest. In this case then I guess he doesn't have to reported, does he? Can you claim a tax deduction for interest paid to IRS?

Thank you.

Donniecastleman (talk|edits) said:

8 September 2007
I thought interest from the IRS is definitely taxable, with no deduction for interest paid to the feds, that's just what I think, otherwise my former client that owes 50K in interest and back penalties over 7 years of tax returns would be filing NOL's for the next 5 years! Just a thought.

PureABC (talk|edits) said:

8 September 2007
I agree with Donnie - No deduction for the interest/penalties paid but the interest received is taxable income.

TxSrv (talk|edits) said:

8 September 2007
IRS would not say that in a notice, if there were not authority to exclude the income, as in a Ruling or such. Seems like a refund of erroneously paid interest to me. Research anyone?

Death&Taxes (talk|edits) said:

8 September 2007
I wonder about this for in this case, your client is recovering the direct interest he paid and could not deduct, but I would add this is not akin to a matter where a client finds his bank is overcharging interest.

Add a complication: client pays CP2000 on sale of stock gross because he cannot find the cost, but later finds the cost and amends to recover part of what he paid. What then?

Southernbellecpa (talk|edits) said:

8 September 2007
Interest charged to a trade or business taxpayer would be deductible - but otherwise it would be nondeductible consumer interest. Donnie's right, interest income from the IRS is definitely taxable. Seems like that language in the CP notice is just old warmed-over wording from the old days - otherwise why would the IRS issue a 1099 for interest income in a case when an individual taxpayer gets paid interest without having paid any previously?

NYEA (talk|edits) said:

8 September 2007
Perhaps I misread the prior post "Interest charged to a trade or business taxpayer would be deductible - but otherwise it would be nondeductible consumer interest".
I'm interpreting that to say interest paid to the IRS would be deductible. At one time that was true but the Tax Court reversed itself and has now determined that such interest is NOT deductible.

The holdings from Robinson 119 TC 44

1. Held: Insofar as sec. 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), apply under the circumstances herein to characterize the 1987 underpayment interest thus paid in 1995 as not being “interest *** on indebtedness properly [pg. 45] allocable to a trade or business” within the meaning of sec. 163(h)(2)(A), I.R.C. 1986, and therefore as not being deductible under ch. 1, I.R.C. 1986, these regulations are valid.

2. Held, further, Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and remanded 141 F.3d 936 [81 AFTR 2d 98- 1483] (9th Cir. 1998), will no longer be followed.

3. Held, further, Ps are not entitled to deduct the interest they paid in 1995 on account of the underpayment of their 1987 income tax liability.

Southernbellecpa (talk|edits) said:

8 September 2007
I stand corrected. Thanks.

Taxman7 (talk|edits) said:

September 8, 2007
unfortunately interest paid to IRS is not deductible, but interest paid by IRS is definitely taxable, but not to worry, to be sure client will receive a 1099-INT sometime in January, the only interest not taxable would be a refund of interest paid in by the client, which is different than the IRS paying on additional refund from 1040X ,,,,

TxSrv (talk|edits) said:

9 September 2007
I'm sorry here, but I think in the orig poster's case, there is analogous relief under section 6404(e), re erroneous interest assessment. The IRS made a clearly erroneous assessment, permitting t/p to file a claim for abatement of interest under 6404 (tax automatic under law). Where the tax/interest has been fully paid (claim for refund), it makes no sense for IRS to first insist upon a 6404(e) abatement claim [unpaid] to tell IRS it was in error, only to be automatically allowed where it must and does acknowledge the error.

I tried to quickly Google the IRS site for this, namely the obtuse IRM instructions to its workers as to how to input a claim in this case, but to no avail. Cryptic codes they input do affect how the computer handles the transaction, and how notices read. I know that. I can rationalize how it may not suppress a 1099-INT, but there still may be an argument this is not income in a future CP-2000 case.

The notice wording here is totally wrong (potentially disastrous) in the generic case, where IRS issues a usual refund on an amended return filed late (+/- interest), if t/p filed the original wrong. One poster here said "old days," but IRS devotes considerable staff-years to trying to prevent public-relations disaster in its notices on an IRS-error on a case like this, seemingly not following Congressional intent of statute.

If IRS issues a 1099-INT in this case, as other law may compel it, I think one has argument under 6404(e), as to Congressional intent under the Taxpayer Bill of Rights, subsection (e) enacted in 1998 (as to IRS error, or mere unconscionable delay). Can't prove it (interest abatement input under 6404(e)) as weakly I just researched, but if precedent (and if enough money involved), the first tax pro arguing the case and successfully so, gets the spoils! Agree on that one least that?

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