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IRS Look-Back Method Interest Rate Calculation

By Martel Pellerin

Form 8697 is used to determine the interest due or to be refunded under the look-back method of section 460(b)(2) on certain long-term contracts that are accounted for under either the percentage of completion method or the percentage of completion-capitalized cost method. TaxInterest software is an excellent program to do the interest calculation.

You must file Form 8697 for each tax year in which you completed a long-term contract entered into after February 28, 1986, that you accounted for using either the percentage of completion method or the percentage of completion-capitalized cost method for federal income tax purposes.

The overpayment rate designated under section 6621 is used to calculate the interest for both hypothetical overpayments and underpayments. The applicable interest rates are published quarterly in revenue rulings in the Internal Revenue Bulletin available at IRS.gov.

The interest accrual period starts on the day after the return due date (not including extensions) for each prior tax year and ends on the return due date for the following tax year. The interest rate in effect for the entire interest accrual period is the overpayment rate determined under section 6621(a)(1) applicable on the first day of the interest accrual period, and the interest is compounded daily. Even though the IRS’ interest rate changes quarterly, for look-back purposes the interest rate stays the same for the accrual period which is generally one year.

In TaxInterest, we have a custom table available specifically to do the Look-Back Method interest calculation. This custom table – shown below - uses the applicable quarterly rate, one day following the due date for the following 12 months. If you have a need for this table, just email support@TimeValue.com and we would be glad to send you it.

IRS Look-Back Method Interest Rate Calculation TaxInterest Blog image

In TaxInterest, you would open this table and do your computation on your tax with the available interest rates.

If you have any questions using TaxInterest software, please give our Support Team a call at 800-426-4741 or email at support@TimeValue.com.

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