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With my original TY2020 return I got a refund of about $5000. It turns out though that I missed some information and once I've amended it I owe about $1000 back (so the refund should have been $4000). How do I calculate interest on that? Or should I just wait for the IRS to tell me after I pay the principal? This is actually regarding a CP2000 notice but all the IRS' calculations were way off[1]: does that change the situation?

  1. Because my broker correctly reported a big stock sale to the IRS without its cost basis (and I left out both the sale and the basis on my original tax return, hence the CP2000).

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You can't calculate and pay interest with additional tax owed on an amended return, since there's no line for such interest on Form 1040-X. The IRS will calculate it and bill you. The reason is that the date your payment is credited is not necessarily the same date you file the amended return; for instance, your payment date could be different because you sent your payment earlier or later than your filing, you could have applied your previous return's overpayment, you could be on a payment plan .... (The same is true if you overpaid on your return: you wouldn't preemptively include the interest the IRS owes you on your refund request, because you have no idea on what date the IRS will get around to reading your return and refund you your overpayment ....)

Interestingly, when the IRS does get around to reading your return, they should assess you interest starting from the later of (1) your 2020 tax deadline, 17 May 2021 and (2) the date the IRS sent you your 2020 refund. See Revenue Ruling 99-40: you owe interest during the time your tax underpayment was both due and unpaid. Your interest liability ends on the postmark date on which you send them your underpayment.

The rate at which the IRS assesses interest is the federal short term funds rate plus 3 percentage points, compounded daily. For most of this period, the federal short term funds rate was zero, and it increased to 1% on 1 April 2022; so assuming you got your 2020 refund around mid-May 2021, to a first approximation you will owe a bit more than 3% interest on your $1000 underpayment.

On a tangent ... I don't know how the IRS assesses accuracy penalties, but if they say you have to pay such a penalty, you can try arguing these reasonable cause factors to persuade them to abate the penalty (see IRM 20.1.1.3.2.2.6):

Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. For example, consider the following:

The taxpayer’s education.

If the taxpayer has previously been subject to the tax.

If the taxpayer has been penalized before.

If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know.

The level of complexity of a tax or compliance issue.

In any case, reasonable cause factors do not apply to interest, only to penalties.

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You most definitely can leave it to the IRS to calculate. Submit the amended return and the owed taxes and they'll send you (or not...) the bill for the interest.

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