United States

Alaska: Federal Look-Back Interest Applies, but at Alaska Rate

Dec 12, 2016
From KPMG TaxWatch

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The Alaska Office of Administrative Hearings recently issued a hearing determination addressing whether so-called look-back interest could be assessed by the Department of Revenue and if so, at what rate of interest. Under the Internal Revenue Code, “look-back interest" is interest that needs to be paid by a taxpayer or refunded to a taxpayer as the result of income from a long-term contract that has been reported on prior-year tax returns using the percentage of completion method. The Administrative Law Judge (ALJ) first summarily concluded that Alaska adopts the federal look-back interest provision because Alaska adopts the portion of the Code (IRC section 460) that provides for look-back interest. Having made that determination, the ALJ next addressed the rate question. For federal purposes, the lower overpayment rate applies to look-back interest. For Alaska purposes, an 11 percent Alaska rate applies to both underpayments and overpayments of tax. The taxpayer argued that the Alaska rate was inapplicable because it was applied to delinquent taxes and look-back interest liability is not related to delinquent taxes. The ALJ appeared to find the issue of whether look-back liability was related to delinquent taxes inapplicable. For federal purposes, the overpayment rate applies and the ALJ concluded that the 11 percent Alaska overpayment rate should likewise apply. The ALJ also rejected the taxpayer’s argument that the interest should be abated due to lack of Alaska guidance on the applicability of federal look-back interest, as there is no authority in the law to abate interest for good cause. Finally, the ALJ rejected the taxpayer’s argument that equitable considerations required abatement because it had reported federal look back interest in earlier years and had not been assessed for Alaska purposes. Please contact Jonathan Drugge at 206-913-4422 with questions on In the Matter of Granite Construction, Inc.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.