1040-US: Interest charge calculation from Form 3520, Part III, Schedule C

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Question

How does the interest charge from Form 3520, Part III, Schedule C calculate?

Answer

There are two ways to enter the combined interest rate used for the Form 3520, Part III, Schedule C interest charge calculation. Both are determined by the applicable date from which to calculate interest. The default option for the applicable date is mid-year through the tax year for which reporting is made. (For example, in the case of a 2017 calendar year taxpayer, the applicable date would be June 30, 2017.)

The tax application uses the interest rate specified in the Form 3520, line 51 instructions. This interest rate is based on the applicable number of years of the foreign trust reported on line 50.

If using an alternative option for the applicable date, such date must be entered in the Applicable  date field on Screen 3520-2. This enables the Combined interest rate imposed on total accumulation distribution (Force) field. The amount entered in this field is used as the combined interest rate for the calculation. The option to use an alternative applicable date is valid if only a single accumulated distribution was received, in which case the date of the distribution may be used as the applicable date.

Per the Form 3520 instructions for Line 51, to calculate interest in such a case, “for portions of the interest accumulation period that are prior to 1996 (and after 1976), interest accumulates at a simple rate of 6 percent annually, without compounding. For portions of the interest accumulation period that after 1995, interest is compounded daily at the rate imposed on underpayments of tax under section 6621(a)(2). This compounded interest for periods after 1995 is imposed not only on the tax, but also on the total simple interest attributable to pre-1996 periods.”

Related topic: Form 3520 - Foreign Trust Transactions FAQs (1040)

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