Recently enacted legislation will make a number of changes in the way the Department of Revenue calculates interest and penalties on overdue tax and interest on refunds of tax. The changes are set forth in §§ 395 and 396 of the FY93 budget, St. 1992, c. 133. Generally, as of January 1, 1993, the interest rate will be based on the Federal short term rate plus four percentage points, compounded daily, and interest will be calculated on penalties as more fully described below. The method of interest and penalty calculation mandated by Commissioner of Revenue v. Molesworth, 408 Mass 580 (1990), is superseded by this legislation. The Molesworth case was discussed in prior Technical Information Release (TIR) 91-2. This TIR explains the method by which the Commissioner will calculate interest and penalties on unpaid tax under G.L. c. 62C, § 32, and interest on refunds under G.L. c. 62C, § 40, as of January 1, 1993.
A. Statutory Framework
The administrative provisions of Chapter 62C of the General Laws generally apply to taxes or excises imposed by G.L. c. 60A; G.L. c. 62-65C, inclusive; G.L. c. 121A, § 10; and G.L. c. 138, § 21. See G.L. c. 62C, § 2. In general, a taxpayer is required to file a return and pay the applicable tax on or before a statutory due date. Chapter 62C, § 32, provides for the accrual of interest on taxes that are not paid on or before the statutory due date of the return.
Chapter 62C also imposes various penalties for failure to report or pay taxes properly. These include, but are not limited to the following, which are unchanged by the 1992 legislation: G.L. c. 62C, § 33(a), imposes a penalty for failure to file a return on or before its due date of one percent per month (or fraction thereof) of the amount of tax required to be shown on the return; G.L. c. 62C, § 33(b), imposes a penalty for failure to pay tax on or before its due date or extended due date of one half percent per month (or fraction thereof) of the amount of the unpaid tax; G.L. c. 62C, § 33(c), imposes a penalty for failure to pay an assessment of tax within thirty days of the Commissioner's Notice of Assessment of one half percent per month (or fraction thereof) of the amount of the unpaid assessed tax.
In addition to the penalties described above, G.L. c. 62C,§ 28, allows an assessment of tax of up to double the amount of the tax that the Commissioner estimates should have been shown on a properly filed return. Section 28 applies when a taxpayer has failed to file a return, failed to correct an insufficient return within thirty days of notice from the Commissioner, or filed a false or fraudulent return.
B. Interest Calculation on Underpayments Prior to January 1, 1993
Under the Molesworth decision in 1990, the "tax" upon which interest and penalties was calculated has generally been the tax that would have been shown on a properly completed and timely filed return. This decision also mandated that voluntary partial payments be applied in accordance with the taxpayer's direction in the absence of other statutory authority. The Molesworth decision and the changes it effected were more fully discussed in TIR 91-2. Both before and after Molesworth, simple interest was calculated at eighteen percent per year on taxes not paid on or before the applicable statutory due date, as determined without regard to extensions. See G.L. 62C, § 32, prior to amendment by St. 1992, c. 133.
C. Interest Calculation on Underpayments on or after January 1, 1993
Interest accruing on unpaid tax on or after January 1, 1993 will accrue at the federal short-term rate plus four percentage points, compounded daily. G.L. c. 62C, § 32, as amended by St. 1992, c. 133, § 395. The federal short-term rate is determined and published by the IRS and can change on a quarterly basis. It is based on the average yield of outstanding federal obligations with a maturity date of three years or less. See IRC §§ 6621(b) and 1274(d). The short-term rate is set for the first month of each calendar quarter and takes effect in the first month of the next quarter. For example, a rate will be set in October 1992 which will take effect in January 1993. The IRS publishes a quarterly Revenue Ruling containing this rate. The Department of Revenue will also announce the applicable rate on a quarterly basis by issuing a Technical Information Release. Questions about the rate should be directed to the Department's Taxpayer Assistance Bureau at (617) 727-4545.
Under the new rules, interest accrues on unpaid penalties as well as on unpaid tax. Interest will be calculated on failure to file penalties, G.L. c. 62C, § 33(a), starting on the statutory due date, including extensions and continuing to the date of payment of the penalty, and on failure to pay penalties, G.L. c. 62C, § 33(b), and § 33(c), starting 31 days after the notice of assessment and continuing to the date of payment of the penalty.
Notices of assessment of tax due under G.L. c. 62C, §§ 26, 27, and 30, will include interest on the unpaid tax through the thirtieth day following the date of the notice. Notices of double assessment under G.L. c. 62C, § 28, will include interest on the total assessment and on the 33(a) penalty through thirty days following the date of assessment. Interest calculated on tax assessed pursuant to Chapters 62 and 63 will accrue on additions to tax resulting from underpayment of estimated tax in accordance with G.L. c. 62B, § 14, and G.L. c. 63B, § 3.
D. Interest Calculation on Refunds Prior to January 1, 1993
G.L. c. 62C, § 40, prior to amendment, provided that simple interest was paid on refunds of tax pursuant to G.L. c. 62C, §§ 36, 36A, 37 or 39, G.L. c. 65 ,§§ 27 and 29, or G.L. c. 65A, § 6. Overpayments refunded within ninety days from the filing of an original tax return do not include interest. Overpayments refunded after the ninety day period include interest from the later of the statutory due date without regard to extensions, or the date of overpayment, to a date preceding the date of the refund check by not more than thirty days.
E. Interest Calculation on Refunds on or after January 1, 1993
Interest accruing on refunds on or after January 1, 1993 will be calculated at the federal short-term rate plus four percentage points, compounded daily. G.L. c. 62C, § 40 as amended by St. 1992, c. 133, § 396. As before, overpayments refunded within ninety days after the filing of an original tax return will not include interest. Refunds made after the ninety day period will include interest from the later of 1) the statutory due date without regard to extensions; 2) the date of overpayment; or 3) the date of filing. The interest rate and compounding are new, as is the third limitation above, which in some circumstances will shorten the period during which interest accrues. These rules will apply regardless of the reason for the overpayment.
F. Application of Payments
In the absence of written taxpayer instructions provided at the time of payment, the order in which a taxpayer's voluntary payments are applied to outstanding liabilities for interest, penalties, and tax, is within the administrative discretion of the Commissioner. Since interest will compound and will accrue on both unpaid penalties and tax as of January 1, 1993, the order in which a taxpayer's partial payments are applied to interest, penalty, and tax on or after that date generally will not affect the taxpayer's total liability. Nevertheless, commencing on January 1, 1993, and until further notice, the Commissioner will apply payments made on or after that date first to tax, then to penalty and then to interest, unless otherwise instructed by the taxpayer. Taxpayers may continue to direct voluntary payments by filing Form TDP-1 with each payment.
G. Administrative Matters
In situations where a taxpayer has either underpaid or overpaid tax prior to the effective date of these new rules, the taxpayer's account will be calculated using the former interest rate through December 31, 1992, and the new rate applied to that balance on or after January 1, 1993, regardless of when the underlying liability was incurred or when the tax was assessed. The statutory amendments concerning the date at which interest begins to accrue on overpayments will be applicable to all refunds issued on or after January 1, 1993.
Commissioner of Revenue
December 23, 1992