Interest Due on Unpaid Tax

 Taxes are due and payable at the time the tax return is required to be filed, determined without regard to any extension of time for filing the return. If any amount of tax is not paid by such date, there shall be added to the tax interest at the rate of the Federal short-term rate per I.R.C. Section 6621(b), plus four percentage points, compounded daily. The federal short-term rate is set by the IRS and can change on a quarterly basis.

Change in Overpayment of Tax Only, Effective July 1, 2003; Underpayment of Tax Remains the Same:

The rate for underpayments of tax remains at the Federal short-term rate plus four percentage points, compounded daily; the rate for overpayment of tax has been reduced to the Federal short-term rate plus two percentage points, simple interest.

Exception to Compounded Interest for Underpayment of Estimated Tax:

Penalties for underpayment of estimated income tax is now calculated with simple interest instead of daily compounding.

Abatement of Interest:
The assessment of interest is not discretionary and the Commissioner does not have the authority to abate interest accrued on unpaid tax.


Installment Sales, Large Sales Addition to Tax Calculation 

Chapter 131 of the Acts of 2010, Section 46:
Section 46 of the Act provides for an increase in tax, consistent with federal law, on certain taxpayers who defer payment of income tax through use of the installment sale method.  Effective for tax years beginning on or after January 1, 2010, with respect to installment obligations as of the close of the tax year, interest must be paid on Massachusetts deferred tax of certain installment sales.  

An addition to tax applies to taxpayers who have deferred the gain, and the tax associated with that gain, on non-dealer installment sales with a sales price of over $150,000 if the aggregate face amount of installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million.  An installment sale addition to tax must also be paid on the deferred gain from the installment sale of timeshares and residential lots if the sale meets certain criteria.

The G.L. c. 62C, § 32A addition to tax is measured by an interest charge on the deferred tax from installment sale gains. 
 

  • To calculate the interest amount for G.L. c. 62C, § 32A (a) non-dealer obligations exceeding both thresholds, i.e., (i) sales price exceeds $150,000 and (ii) the aggregate face amount of installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million, determine the "applicable percentage" of the deferred tax liability with respect to the obligation. The "applicable percentage" is determined by dividing the portion of the aggregate face amount of such obligations outstanding as of the close of the taxable year in excess of $5 million by the aggregate face amount of such obligations arising in and outstanding at the close of the taxable year. Once determined, this percentage does not change. The deferred tax liability for any taxable year with respect to an installment obligation is the amount of unrecognized gain in the obligation as of the close of the taxable year, multiplied by your applicable tax rate. Multiply the deferred tax liability by the Massachusetts underpayment interest rate under G.L. c. 62C, § 32(a) in effect for the quarter in which your taxable year ends to determine the addition to tax under G.L. c. 62C, § 32A (a).

    If you are a partner in a partnership or a shareholder in an S corporation, the $150,000/$5 million thresholds apply to you at the partner or shareholder level. The "applicable percentage" will be determined by each partner or shareholder; once determined, this percentage does not change in future tax years with regard to the transactions included in the ratio.

    For more information, see I.R.C. § 453A, the regulations thereunder, and Internal Revenue Service Publication 537. Massachusetts follows federal rules, to the extent practicable, in determining the amount subject to the addition to tax under c. 62C, § 32A (a).
  • To calculate the interest amount under G.L. c. 62C, § 32A (b) on deferred payments for the installment sale of timeshares, campgrounds, or residential lots as defined in I.R.C. § 453(l)(2)(B), multiply the amount of tax attributable to the payments received on installment obligations by the underpayment rate determined under G.L. c. 62C, § 32 (a) as of the date of the sale, compounded semi-annually, for the period beginning on the date of the sale and ending on the date payment was received. Massachusetts follows federal rules, to the extent practicable, in determining the amount subject to the addition to tax under G.L. c. 62C, § 32A (b).

    Reporting of information from partnerships or S corporations:
    If you are a partner in a partnership or a shareholder in an S corporation, the partnership or S corporation is required to inform you as to your share of gain on installment transactions, the date of the sale, and any other information you may need to calculate the addition to tax.

    DOR announces the underpayment interest rate under G.L. c. 62C, § 32 (a) every quarter in a TIR.

For Partnerships/S corporations:

Instructions for letter "e" bubbles at the top of the Form 3K-1/SK-1.
Use either "partnership" or "S corporation" depending on the entity.


Partnerships /S corporations that have indicated on the 3K-1 that they are reporting transactions under G.L. c. 62C, 32A, identified as Internal Revenue Code section 453A or 453(l)(2)(B) transactions, must separately communicate information to the partner /shareholder that will enable the partner /shareholder to calculate the addition to tax.

  • For 453A transactions, the partnership /shareholder must inform the partner /shareholder of the partner's /shareholder's share of the aggregate face amount of installment sales transactions arising in and outstanding as of the close of the taxable year, and any other information the partner/ shareholder may need to calculate the addition to tax. The $150,000/$5 million thresholds apply at the level of the individual partner /shareholder. The partnership/ S corporation must therefore communicate to the partner/ shareholder all 453A installment sale transactions exceeding $150,000. The "applicable percentage" is the ratio of the aggregate face amount of installment sale obligations arising in and outstanding as of the close of the taxable year in excess of $5 million to the aggregate face amount of such obligations arising in and outstanding at the close of the taxable year. The "applicable percentage" will be determined by each partner /shareholder.
  • For 453(l)(2)(B) transactions, the partnership /S corporation must inform the partner /shareholder of the partner's /shareholder's share of gain on installment transactions, the date of the transactions, and any other information the partner /shareholder may need to calculate the addition to tax.

Where to Report on Original Tax Return; What to Enclose:

  • Enter interest amount in the appropriate box on Mass Form 1, Line 47 or Mass Form 1-NR/PY, Line 52 and make sure amount is included in the total of either Line 47 or 52

Massachusetts References:

Federal References:

  • I.R.C. Section 6621(b