How is interest different from a 'penalty' for refund purposes?

For Form 843 purposes, both are claimable. The form covers 'penalties and interest.' The Kwong reasoning extends to interest tied to assessments inside the suspended-deadline window — though the legal argument for interest is one step further than for penalties.

What if I already received an IRS interest abatement under §6404?

§6404 interest abatement is a separate procedure based on IRS errors or unreasonable delays. If you've already received §6404 abatement, only the remaining interest balance is potentially eligible under Kwong.

Are large-corporate-underpayment 'hot interest' assessments different?

Hot interest under §6621(c) applies to large corporate underpayments at federal short-term rate + 5%. The same Kwong reasoning applies, but the dollar amounts at stake are typically much higher. Coordinate with substantive corporate-tax counsel.

Underpayment Interest COVID Refund

TL;DR

Underpayment interest under IRC § 6601 is technically interest, not a penalty. But where the underlying assessment was imposed without statutory authority under the November 2025 ruling in Kwong v. United States, the related interest may be refundable on the same Form 843 alongside the penalty refund. Interest abatement under IRC § 6404(e) is the closest direct hook. Filing a protective Form 843 by your IRC § 6511 deadline preserves the claim. We handle this on a no-win, no-fee basis.

What underpayment interest is

IRC § 6601 imposes interest on any unpaid tax balance from the original due date until paid. The rate for individuals is the federal short-term rate plus 3 percentage points; for corporations the rate structure differs slightly. Interest is compounded daily under § 6622. Unlike § 6651 penalties, interest is not a punitive addition to tax but a time-value-of-money charge for the period the IRS was without its money.

On the transcript, interest assessments post as TC 196 (computer-generated) or TC 340 (manually assessed). Each TC 196 entry covers a discrete interest-accrual period; multi-year balances often produce multiple TC 196 lines as the IRS recomputes interest at each rate change.

Interest is conceptually distinct from § 6651(a)(2) failure-to-pay penalty, even though both attach to the same unpaid balance. The penalty is punitive (charged whether or not the IRS could have invested the money); the interest is compensatory (charged because the IRS was deprived of use of the funds).

How underpayment interest is calculated

Take the unpaid balance. For each interest-rate period (the IRS sets rates quarterly), compute daily interest at the applicable rate, compounded daily under § 6622. Sum across periods to produce the cumulative interest. The transcript posts this in periodic TC 196 lines, often quarterly or annually.

Worked numbers: a $20,000 unpaid balance carried for 24 months at varying rates between 3% and 8% per annum produces roughly $2,000+ in cumulative TC 196 interest. The exact figure depends on the rate schedule for the underlying months.

Why Kwong v. United States may unlock a refund

The Kwong ruling addresses penalty-assessment authority under IRC § 7508A(d), not interest directly. But interest follows the underlying assessment. Where § 7508A(d) suspended the deadline that triggered the underlying penalty or unpaid-tax position, interest accruing during the suspended period may be addressable on two grounds: (a) refund of interest tied to a penalty that is itself refunded under Kwong, and (b) interest abatement under IRC § 6404(e) for interest attributable to IRS error or delay.

A combined Form 843 may seek both penalty refund and interest abatement on the same filing. The Kwong ruling is being appealed; eligibility is not guaranteed. A protective filing preserves both arguments.

Finding underpayment interest on your IRS account transcript

Pull your IRS account transcript (see our transcript guide). For § 6601, look for:

TC 196 — computer-generated interest assessment.
TC 340 — manually assessed interest.
TC 197 / TC 341 — interest abatements.
The 23C date on each TC 196 line — the legal assessment date for that interest segment.
TC 670 — payment.

Worked example: a $20,000 carried balance with multiple TC 196 lines

Consider a taxpayer who carried a $20,000 unpaid 2020 balance for 24 months. The IRS account transcript shows three TC 196 entries: $620 (covering 2021 at lower rates) with a 23C date of April 4, 2022, $880 (covering 2022 as rates rose) with a 23C date of March 20, 2023, and $540 (covering early 2023) with a 23C date of June 26, 2023. The taxpayer paid the full balance plus interest in July 2023.

All three 23C dates sit inside the disaster window. A protective Form 843 referencing IRC § 7508A(d), IRC § 6404(e), Kwong v. United States, 179 Fed. Cl. 382 (Nov. 2025), and each TC 196 entry preserves a combined claim of approximately $2,040 in interest plus any related § 6651 penalty refund.

Common scenarios where underpayment interest may be addressable

Interest tied to a Kwong-eligible penalty

Where the underlying penalty is refunded under Kwong, related interest is generally refunded as well as a derivative consequence. The protective Form 843 should list both the TC 166 / TC 276 penalty entries and the corresponding TC 196 interest entries, with a request that any penalty refund be accompanied by the related interest refund.

IRS-delay interest under § 6404(e)

IRC § 6404(e) authorizes the IRS to abate interest attributable to unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act. Pandemic-era processing backlogs commonly produced exactly this kind of delay. The protective claim may pair the Kwong argument with a § 6404(e) request.

Interest accrued on amounts that should not have been assessed

Where an underlying tax assessment is reversed (whether under Kwong, reasonable cause, or another theory), the interest that accrued on that amount is reversed as well. The protective Form 843 should anchor the interest claim to each affected underlying assessment.

Filing deadline for interest refund claims

IRC § 6511 governs interest refund claims the same way it governs penalty refund claims: 3 years from filing or 2 years from payment, whichever is later. § 7508A(d) extension under the Kwong reading may further lengthen the window. Confirm specific dates against your transcript.

How PenaltyBack handles interest claims

We pull your IRS account transcript, identify each TC 196 and TC 340 entry inside the disaster window, link each to the underlying assessment, and draft a combined Form 843 that seeks penalty refund (under Kwong) and interest abatement (under § 6404(e)) on a single filing. We file under our authorized representative status. Our work is no-win, no-fee. The Kwong appeal is pending; the protective claim preserves both arguments regardless.

Frequently asked questions about interest refunds

Is interest the same as a penalty under Kwong?

No. Interest is a § 6601 charge for use of the IRS's money; a penalty is a § 6651 addition to tax. The Kwong analysis applies most directly to penalties, with interest addressable as a derivative consequence or under § 6404(e).

Can I combine a penalty refund and an interest abatement on the same Form 843?

Yes. A single Form 843 may list multiple penalty entries and multiple interest entries with the legal basis for each.

I paid the interest already. Is it still refundable?

Possibly. The 2-year-from-payment window under § 6511 may still be open. The protective claim preserves the refund position.

What is the difference between underpayment interest and failure-to-pay penalty?

Failure-to-pay (TC 276) is a punitive 0.5% per month addition under § 6651(a)(2). Underpayment interest (TC 196) is the federal short-term rate + 3 points compounded daily under § 6601. Both attach to the same unpaid balance but are computed separately.

Does the Kwong argument for interest abatement differ from the penalty argument?

Yes. The penalty argument is direct: § 7508A(d) suspends the deadline that triggered the penalty. The interest argument is indirect: refunding the underlying penalty refunds the related interest, and § 6404(e) provides a separate hook for IRS-delay interest. The protective claim should articulate both grounds and list each TC 196 entry separately so partial relief can still capture as much of the in-window interest as the appeal ultimately permits.

My interest accrued across multiple IRS rate periods — how is that handled on the claim?

Each rate period typically posts as its own TC 196 entry on the transcript, each with its own 23C date and dollar amount. The protective Form 843 lists every in-window TC 196 entry separately so each can be evaluated on its own facts.

If the underlying penalty is partially abated under Notice 2022-36, what happens to the interest?

Interest tied to an abated penalty is generally abated on the same proportion. If the abatement was partial, residual interest may still be a Kwong / § 6404(e) candidate. Pull the current transcript to confirm what remains assessed.

Kwong v. United States, explained. Failure-to-file vs failure-to-pay. How to read your transcript. Form 843 protective claim wording. The IRS may owe you money from COVID.