Question

which of the following statements is a correct computation of interest for the look-back method?

a) interest is computed by recalculating the original tax liability using the section 6621 overpayment rate.

b) interest is computed on the difference in the original tax amount and the recomputed tax liability from the prior year's tax return.

c) interest is computed on the difference in the recomputed tax liability and the original tax amount using section 6621 overpayment rate.

d) interest is computed by recalculating the original tax liability using the prior year's tax return.

Answer 1

Solution: interest is computed on the difference in the recomputed tax liability and the original tax amount using section 6621 overpayment rate

Explanation: The look-back computes the additional interest that is required to be paid to (or refunded by) the IRS on taxes paid on contract revenue which have been recognized in prior years using the method of percentage of completion. Firstly determines the taxable amount; and then comparing what would have been the tax liability under percentage of completion. Afterwards applying the interest rate on overpayments designated under section 6621