Discussion:"Factors" used by IRS in assessing interest on underpayments

What is it called exactly? What search word(s) would you use to look in your tax research programs (BNA or Kleinrock). Please help and thank you in advance.

To make matters worse, the Help Section of TaxInterest offers this:

"The factor is the result of a formula that is used by the IRS in calculating daily interest. The following algebraic equation represents this formula."

But then the Help function fails to provide the formula. Very frustrating.

Here are a few lines from the TaxInterest report if anyone wants to try his or her hand. The correct interest and new balance can be produced very easily using a spreadsheet or a financial calculator, but so far I haven't been able to decypher the Factor formula.

Tax = $10,000.00, due 04-15-02.

Interest thru 06-30-02: 76 Days, Interest Rate = 6.00%, Factor = 0.012570476. Interest = $125.70. New Balance = $10,125.70.

Interest thru 09-30-02: 92 Days, Interest Rate = 6.00%, Factor = 0.015236961. Interest = $154.28. New Balance = $10,279.98.

Interest thru 12-31-02: 92 Days, Interest Rate = 6.00%, Factor = 0.015236961. Interest = $156.64. New Balance = $10,436.62.

Interest thru 03-31-03: 90 Days, Interest Rate = 5.00%, Factor = 0.012404225. Interest = $129.46. New Balance = $10,566.08.

Maybe the formula is in Rev Proc 95-17, but so far I haven't been able to find that either. I know it's going to be something easy once I figure it out or someone tells me.

PS: I know this comes under the heading of "why bother?" or "who cares?" but inquiring minds want to know. At least mine does.

[(1+i)^n] – 1 Where i = daily interest factor and n = number of days.

If you enter 92 days at 6 percent into the above formula, you will get a factor of 0.0152369614444479, which corresponds to what you would find in Rev Proc 95-17 (although the tables round off to 0.015236961).

In the IRS "490 Activity Summary" I am reading, the interest for 3-31-2005 to 10-1-2008 as a one-line item and the factor used is 0.281375755. How did they arrive at this number?

The rate for that time period ranges from 5% to 8% and I'd think the factors would be very different. And the tables such as Table 21 for 8% only has 184 days. Please advice again.

Or, more technically, [(1+i₁)^n₁ * (1+i₂)^n₂ * (1+i₃)^n₃ * . . . * (1+i_n)^n_n ] – 1

(where the subscript 1 through n represent each of the quarters/applicable periods in your total elapsed period, with subscript n being the last, or "nth" separate period - e.g., for you, subscript n=16 if you're looking up factors by calendar quarter).

Using the example from Happy Tax - the factor for the period from 4-15-02 to 3-31-03 would be: 1.012570476*1.015236961* 1.015236961*1.012404225 = 1.056608379 -1 = 0.056608379.

I plugged the dates you provided into my computer and I calculated a factor of 0.28137575525794. Following are the interest rates for the applicable time period.

Oct. 1, 2008-Dec. 31, 2008 6%
July 1, 2008-Sept. 30, 2008 5%
Apr. 1, 2008-June 30, 2008 6%
Jan. 1, 2008-March 31, 2008 7%
July 1, 2006-Dec. 31, 2007 8%
Oct. 1, 2005-June 30, 2006 7%
July 1, 2005-Sept. 30, 2005 6%
Apr. 1, 2005-June 30, 2005 6%
Mar 31, 2005-Mar 31, 2005 5%