3520 Annual Return To Report Transactions With Foreign Trusts

8697

Interest Computation Under the Look-Back
Method for Completed Long-Term Contracts

Form
(Rev. November 2002)

䊳

Department of the Treasury
Internal Revenue Service

䊳

See separate instructions.

For the filing year beginning

OMB No. 1545-1031
Attachment
Sequence No.

Please print or type.

, and ending

97

. See page 2 of the instructions.

Name

A Identifying number

Fill In Your
Address Only If
You Are Filing This
Form Separately
and Not With Your
Tax Return

Number, street, and apt., room, or suite no. If a P.O. box, see page 3 of the instructions.

B Check applicable box to show type of taxpayer:

City or town, state, and ZIP code

Corporation

S corporation

Individual

Partnership

Estate or trust

C If you were an owner of an interest in a pass-through entity (such as a partnership or an S corporation) that holds one or more long-term contracts to which this
interest computation relates, enter the name and employer identification number of the entity. Attach a schedule if there is more than one such entity.
Name of entity

Part I

Employer identification number

Regular Method

1 Taxable income or loss for the prior years shown on tax
return (or as previously adjusted) before net operating loss
or capital loss carrybacks (other than carrybacks that must
be taken into account to properly compute interest under
section 460) (see page 3 of the instructions). If you were
required to file Form 8697 for an earlier year, enter adjusted
taxable income for the prior years from line 3, Form 8697,
for the most recent filing year that affects the prior years

Date of each prior year to which interest
computation relates:
(a)
Year ended
mo.
yr.

(b)
Year ended
mo.
yr.

(c)
Year ended
mo.
yr.

(d)
Totals
(Add columns (a),
(b), and (c).)

2 Adjustment to income to reflect the difference between:
(a) the amount of income required to be allocated for
post-February 1986 contracts completed or adjusted
during the tax year based on the actual contract price and
costs, and (b) the amount of income reported for such
contracts based on estimated contract price and costs.
See page 3 of the instructions and attach a schedule listing
each separate contract, unless you were an owner of an
interest in a pass-through entity reporting this amount from
Schedule K-1 or a similar statement
3 Adjusted taxable income for look-back purposes. Combine
lines 1 and 2
4 Income tax liability on line 3 amount using tax rates in effect
for the prior years (see page 3 of the instructions)
5 Income tax liability shown on return (or as previously
adjusted) for the prior years (see page 3 of the instructions).
If you were required to file Form 8697 for an earlier year,
enter the amount required to be reported on line 4, Form
8697, for the most recent filing year that affects the prior
years
6 Increase or decrease in tax for the prior years on which
interest is due (or is to be refunded). Subtract line 5 from
line 4.
7 Interest due on increase, if any, shown on line 6 (see
page 3 of the instructions)
8 Interest to be refunded on decrease, if any, shown on
line 6 (see page 3 of the instructions)
9 Net amount of interest to be refunded to you. If line 8, column (d), exceeds line 7, column (d), enter the excess. File
Form 8697 separately; do not attach it to your tax return (see page 3 of the instructions)
10

Net amount of interest you owe. If line 7, column (d), exceeds line 8, column (d), enter the excess. Attach
Form 8697 to your tax return. See page 4 of the instructions for where to include this amount on your return

For Privacy Act and Paperwork Reduction Act Notice, see page 5 of the instructions.

Cat. No. 64598V

Form

8697

(Rev. 11-2002)

Form 8697 (Rev. 11-2002)

Part II

Page

Simplified Marginal Impact Method

1 Adjustment to regular taxable income to reflect the
difference between: (a) the amount of such income required
to be allocated for post-February 1986 contracts
completed or adjusted during the tax year based on actual
contract price and costs, and (b) the amount of such
income reported for such contracts based on estimated
contract price and costs. See page 4 of the instructions
and attach a schedule listing each separate contract,
unless you were an owner of an interest in a pass-through
entity reporting this amount from Schedule K-1 or a similar
statement

Date of each prior year to which interest
computation relates:
(a)
Year ended
mo.
yr.

(b)
Year ended
yr.
mo.

(c)
Year ended
yr.
mo.

(d)
Totals
(Add columns (a),
(b), and (c).)

2 Increase or decrease in regular tax for prior years. Multiply
line 1 in each column by the applicable regular tax rate (see
page 4 of the instructions)
Note: For prior years beginning before 1987, skip lines 3
and 4 and enter on line 5 the amount from line 2.
3 Adjustment to alternative minimum taxable income to
reflect the difference between: (a) the amount of such
income required to be allocated for post-February 1986
contracts completed or adjusted during the tax year based
on actual contract price and costs, and (b) the amount of
such income reported for such contracts based on
estimated contract price and costs. See page 4 of the
instructions and attach a schedule listing each separate
contract, unless you were an owner of an interest in a
pass-through entity reporting this amount from Schedule
K-1 or a similar statement
4 Increase or decrease in alternative minimum tax (AMT) for
prior years. Multiply line 3 in each column by the applicable
AMT rate (see page 4 of the instructions)
5 Enter the larger of line 2 or line 4. See page 4 of the
instructions if either amount is negative
Pass-through entities: Skip line 6 and enter on line 7 the
amount from line 5.
6 Overpayment ceiling. For each column in which line 5 is a
negative number, enter your total tax liability for the prior
year, as adjusted for past applications of the look-back
method and after net operating loss, capital loss, net
section 1256 contracts loss, and credit carryovers and
carrybacks to that year. For each column in which line 5 is
a positive number, leave line 6 blank and enter on line 7
the amount from line 5
7 Increase or decrease in tax for the prior years on which
interest is due (or is to be refunded). Enter the amount from
line 5 or line 6, whichever is smaller. Treat both numbers
as positive when making this comparison, but enter the
amount as a negative number
8 Interest due on increase, if any, shown on line 7 (see page
4 of the instructions)
9 Interest to be refunded on decrease, if any, shown on
line 7 (see page 4 of the instructions)
10

Net amount of interest to be refunded to you. If line 9, column (d), exceeds line 8, column (d), enter the excess. File
Form 8697 separately; do not attach it to your tax return (see page 4 of the instructions)

11

Net amount of interest you owe. If line 8, column (d), exceeds line 9, column (d), enter the excess. Attach
Form 8697 to your tax return. See page 4 of the instructions for where to include this amount on your return

Signature(s) Complete this section only if this form is being filed separately.

Sign
Here
Paid
Preparer’s
Use Only

Under penalties of perjury, I declare that I have examined this form, including accompanying schedules and statements, and to the best of my
knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer
has any knowledge.

䊳

䊳

Signature(s)

Preparer’s
signature

䊳

Firm’s name (or yours
if self-employed), address, and ZIP code

Date
Preparer’s SSN or PTIN

Date

䊳

Check if
self-employed

䊳

EIN
Phone no. (

)

2

PAGER/SGML

Userid: ________
Fileid: I8697.SGM

Leading adjust: 10%
( 6-Oct-2005)

❏

Draft
(Init. & date)

❏

Ok to Print

Filename: D:\USERS\0syhb\documents\epicfiles\Epic files\I8697.SGM

Page 1 of 6

Instructions for Form 8697

11:24 - 6-OCT-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Instructions for Form 8697

Department of the Treasury
Internal Revenue Service

(Rev. September 2005)
(Use with the November 2002 revision of Form 8697)
Interest Computation Under the Look-Back Method for Completed Long-Term
Contracts
Section references are to the Internal Revenue Code unless otherwise noted.

General Instructions
What’s New

• Form 8697 is not being revised at
this time. Continue to use the
November 2002 revision of Form 8697
in conjunction with these updated
instructions.
• The tax rates used for the interest
computation have changed. See the
instructions for Line 2 on page 5.

Purpose of Form
Use Form 8697 to figure the interest
due or to be refunded under the
look-back method of section 460(b)(2)
on certain long-term contracts that are
accounted for under either the
percentage of completion method or the
percentage of completion-capitalized
cost method. For guidance concerning
these methods, see Notice 89-15,
1989-1 C.B. 634. For details and
computational examples illustrating the
use of the look-back method, see
Regulations section 1.460.

Who Must File
General Rule
You must file Form 8697 for each tax
year in which you completed a
long-term contract entered into after
February 28, 1986, that you accounted
for using either the percentage of
completion method or the percentage of
completion-capitalized cost method for
Federal income tax purposes. You also
must file Form 8697 for any tax year in
which the contract price or contract
costs are adjusted for one or more of
these long-term contracts from a prior
year.

Pass-Through Entities
A pass-through entity (partnership, S
corporation, or trust) that is not closely
held must apply the look-back method
at the entity level to any contract for
which at least 95% of the gross income
is from U.S. sources. A pass-through
entity is considered closely held if, at
any time during any tax year for which
there is income under the contract,

50% or more (by value) of the
beneficial interests in the entity is held
(directly or indirectly) by or for five or
fewer persons. For this purpose, rules
similar to the constructive ownership
rules of section 1563(e) apply.
If you are an owner of an interest in
a pass-through entity for every year in
which a long-term contract was being
accounted for under the percentage of
completion method or the percentage of
completion-capitalized cost method and
the pass-through entity is not subject to
the look-back method at the entity level,
you must file this form for your tax year
that ends with or includes the end of
the entity’s tax year in which the
contract was completed or adjusted.
The pass-through entity will provide on
Schedule K-1 the information you need
to complete this form.

Change of Taxpayer
If the taxpayer reporting income from a
long-term contract changes prior to the
year of completion of the contract, the
taxpayer as of the date of completion
will be responsible for the payment of
interest, if any, due from any year in
which the contract was being
accounted for under either the
percentage of completion method or the
percentage of completion-capitalized
cost method. Generally, only the
taxpayer that had accounted for a
long-term contract in a year that an
overpayment occurred may request a
refund of interest on the overpayment.

Exception for Certain
Construction Contracts
The look-back method does not apply
to the regular taxable income from:
• Any home construction contract (as
defined in section 460(e)(6)(A)) or
• Any other construction contract
entered into by a taxpayer: (a) who
estimates the contract will be
completed within 2 years from the date
the contract begins and (b) whose
average annual gross receipts for the 3
tax years preceding the tax year in
which the contract is entered into do
not exceed $10 million. See section
460(e).
Cat. No. 10703K

However, the look-back method
does apply to the alternative minimum
taxable income from any such contract
that must be accounted for using the
percentage of completion method for
alternative minimum tax purposes. See
section 56(a)(3) for details.

Small Contract Exception
The look-back method does not apply
to any contract completed within 2
years of the contract start date if the
gross price of the contract (as of
contract completion) does not exceed
the smaller of:
• $1 million or
• 1% of the taxpayer’s average annual
gross receipts for the 3 tax years before
the tax year of contract completion.
See section 460(b)(3)(B) for details.

De Minimis Exception
You may elect not to apply the
look-back method in certain de minimis
cases for contracts completed in tax
years ending after August 5, 1997. The
look-back method does not apply in the
following cases if the election is made.
1. In the completion year if, for each
prior contract year, the cumulative
taxable income (or loss) actually
reported under the contract is within
10% of the cumulative look-back
income (or loss). Cumulative look-back
income (or loss) is the amount of
taxable income (or loss) that you would
have reported if you had used actual
contract price and costs instead of
estimated contract price and costs.
2. In a post-completion year if, as of
the close of the post-completion year,
the cumulative taxable income (or loss)
under the contract is within 10% of the
cumulative look-back income (or loss)
under the contract as of the close of the
most recent year in which the look-back
method was applied to the contract (or
would have been applied if the election
had not been made).
For purposes of item 2, discounting
under section 460(b)(2) does not apply.
To make the election, attach a
statement to your timely filed income
tax return (determined with extensions)

Page 2 of 6

Instructions for Form 8697

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for the first tax year of the election.
Write at the top of the statement
“NOTIFICATION OF ELECTION
UNDER SECTION 460(b)(6).” Include
on the statement your name, identifying
number, and the effective date of the
election. Also identify the trades or
businesses that involve long-term
contracts. Once made, the election
applies to all contracts completed
during the election year and all later tax
years, and may not be revoked without
IRS consent. See Regulations section
1.460-6(j) for more details. If you timely
filed your return without making the
election, you may make the election on
an amended return filed no later than 6
months after the due date of your tax
return (excluding extensions). Write
“Filed pursuant to section 301.9100” at
the top of the amended return.

Filing Instructions
If You Owe Interest (or No
Interest Is To Be Refunded to
You)
Attach Form 8697 to your income tax
return. Neither you nor any paid
preparer is required to complete the
Signature section of Form 8697.
For taxpayers other than
partnerships (that are not electing large
partnerships), include any interest due
in the amount to be entered for total tax
(after credits and other taxes) on your
return (e.g., 2005 Form 1040, line 63;
2005 Form 1120, Schedule J, line 11,
etc.). Write on the dotted line to the left
of the entry space “From Form 8697”
and the amount of interest due.
For partnerships (other than electing
large partnerships), write “From Form
8697” and any interest due in the
bottom margin of the tax return and
attach a check or money order for the
full amount payable to “United States
Treasury.” Write the partnership’s
employer identification number (EIN),
daytime phone number, and “Form
8697 Interest” on the check or money
order.

If Interest Is To Be Refunded
to You
Do not attach Form 8697 to your
income tax return. Instead, file Form
8697 separately with the IRS at the
applicable address listed below.
• Individuals:
Philadelphia, PA 19255-0001
• All others:
Cincinnati, OH 45999-0001
Complete the Signature section of
Form 8697 following the instructions for
the Signature section of your income
tax return. If additional Forms 8697 are

needed (to show more than 3 prior tax
years), sign only the first Form 8697.

8697. Put your name and identifying
number on each sheet.

File Form 8697 by the date you are
required to file your income tax return
(including extensions). Keep a copy of
Form 8697 and any attached schedules
for your records.

Applying the Look-Back
Method Under Special
Situations

Filing a Corrected Form
8697
You must file a corrected Form 8697
only if the amount shown on Part I, line
6, or Part II, line 7, for any prior year
changes as a result of an error you
made, an income tax examination, or
the filing of an amended tax return.
When completing Part I, line 1, of the
corrected Form 8697, follow the
instructions on the form but do not
enter the adjusted taxable income from
Part I, line 3, of the original Form 8697.
When completing Part I, line 5 (or Part
II, line 6), of the corrected Form 8697,
do not include the interest due, if any,
from Part I, line 10 (or Part II, line 11),
of the original Form 8697 that was
included in your total tax when Form
8697 was filed with your tax return.
• If both the original and corrected
Forms 8697 show an amount on the
line for interest you owe, file an
amended income tax return.
• If both the original and corrected
Forms 8697 show an amount on the
line for interest to be refunded to you,
write “Amended” in the top margin of
the corrected Form 8697, and file it
separately.
• If your original Form 8697 shows an
amount on the line for interest you owe
and the corrected Form 8697 shows an
amount on the line for interest to be
refunded to you, you must:
1. File an amended income tax
return showing $0 interest from Form
8697 and
2. File the corrected Form 8697
separately (but do not write “Amended”
at the top of the form because this is
the first Form 8697 that you will file
separately).
• If the original Form 8697 shows an
amount on the line for interest to be
refunded to you and the corrected Form
8697 shows an amount on the line for
interest you owe, you must:
1. File the corrected Form 8697
separately (with “Amended” written at
the top) showing $0 interest to be
refunded and
2. File an amended income tax
return and attach a copy of the
corrected Form 8697.

Attachments
If you need more space, attach
separate sheets to the back of Form

-2-

10% Method
For purposes of the percentage of
completion method, a taxpayer may
elect to postpone recognition of income
and expense under a long-term
contract entered into after July 10,
1989, until the first tax year as of the
end of which at least 10% of the
estimated total contract costs have
been incurred. For purposes of the
look-back method, the recognition of
income and expense must be
postponed for such contracts until the
first tax year as of the end of which at
least 10% of the actual total contract
costs have been incurred. Therefore,
income and expense will be allocated
to a different tax year if the first tax year
that the 10% threshold is exceeded
based on actual costs differs from the
first tax year that the 10% threshold is
exceeded based on estimated costs.
The election to use the 10% method
applies to all long-term contracts
entered into during the tax year for
which the election is made and all later
years. See section 460(b)(5) for more
details.

Change Orders
A change order for a contract is not
treated as a separate contract for
purposes of applying the look-back
method unless the change order would
be treated as a separate contract under
the rules for severing and aggregating
contracts provided in Regulations
section 1.460-1(e). Therefore, if a
change order is not treated as a
separate contract, that portion of the
actual contract price and contract costs
attributable to the change order must
be taken into account in allocating
contract income to all tax years of the
contract, including tax years before the
change order was agreed to.

Post-Completion
Adjustments
General Rule
If the contract price or costs are revised
to reflect amounts properly taken into
account after the contract completion
date for any reason, you must apply the
look-back method in the year such
amounts are properly taken into
account, even if no other contract is
completed in that year. Generally, the
amount of each such post-completion
adjustment to total contract price or

Page 3 of 6

Instructions for Form 8697

11:24 - 6-OCT-2005

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contract costs is discounted, solely for
look-back purposes, from its value at
the time the amount is taken into
account in computing taxable income to
its value at the time the contract was
completed. The discount rate for this
purpose is the Federal mid-term rate
under section 1274(d) in effect at the
time the amount is properly taken into
account.
However, you may elect not to
discount post-completion adjustments
for any contract. To make this election,
attach a statement to your timely filed
income tax return (determined with
extensions) for the first tax year after
completion in which you take into
account any adjustment to the contract
price or contract costs. Indicate on the
statement that you are making an
election not to discount post-completion
adjustments under Regulations section
1.460-6(c)(1)(ii)(C)(2) and identify the
contracts to which the election applies.
Once made, the election is binding for
all post-completion adjustments that
apply to a contract under an election.

Delayed Reapplication Method
For purposes of reapplying the
look-back method after the year of
contract completion, you may elect the
delayed reapplication method. Under
this method, the look-back method is
reapplied after the contract completion
year (or after a later reapplication of the
look-back method) only when one of
the following conditions is met for that
contract:
1. The net undiscounted value of
increases or decreases in the contract
price occurring from the time of the last
application of the look-back method
exceeds the smaller of $1 million or
10% of the total contract price at that
time,
2. The net undiscounted value of
increases or decreases in contract
costs occurring from the time of the last
application of the look-back method
exceeds the smaller of $1 million or
10% of the total actual contract costs at
that time,
3. The taxpayer goes out of
existence,
4. The taxpayer reasonably believes
the contract is finally settled and
closed, or
5. None of the above conditions
(1 – 4) are met by the end of the 5th tax
year that begins after the last previous
application of the look-back method.
To elect the delayed reapplication
method, attach a statement to your
timely filed income tax return
(determined with extensions) for the
first tax year of the election. Indicate on
the statement that you are making an
election under Regulations section

1.460-6(e) to use the delayed
reapplication method. Once made, the
election is binding for all long-term
contracts for which you would reapply
the look-back method in the absence of
the election in the year of the election
and all later years, unless the IRS
consents to a revocation of the election.
See Regulations section 1.460-6(e) for
more details.

Specific Instructions
All filers must complete the information
at the top of the form above Part I
according to the following instructions
and complete either Part I or Part II as
appropriate. Also sign the form at the
bottom of page 2 unless you are filing
the form with your tax return.

Filing Year
Fill in the filing year line at the top of the
form to show the tax year in which the
contracts for which this form is being
filed were completed or adjusted. If you
were an owner of an interest in a
pass-through entity that has completed
or adjusted one or more contracts,
enter your tax year that ends with or
includes the end of the entity’s tax year
in which the contracts were completed
or adjusted.

Name
Enter the name shown on your Federal
income tax return for the filing year. If
you are an individual filing a joint return,
also enter your spouse’s name as
shown on Form 1040.

Address
Enter your address only if you are filing
this form separately. Include the
apartment, suite, room, or other unit
number after the street address. If the
Post Office does not deliver mail to the
street address and you have a P.O.
box, show the box number instead.

Item A—Identifying
Number
If you are an individual, enter your
social security number. Other filers
must use their EIN.

Part I—Regular Method
Use Part I only if you are not electing,
do not have an election in effect, or are
not required to use the simplified
marginal impact method as described in
the instructions for Part II on page 4.

Columns (a), (b), and (c)
Enter at the top of each column the
ending month and year for:

-3-

• Each prior tax year in which you were

required to report income from the
completed long-term contract(s) and
• Any other tax year affected by such
years.

Note. If there were more than 3 prior
tax years, attach additional Forms 8697
as needed. On the additional Forms
8697, enter your name, identifying
number, and tax year. Complete lines 1
through 8 (as applicable), but do not
enter totals in column (d). Enter totals
only in column (d) of the first Form
8697.

Line 1
Do not reduce taxable income or
increase a loss on line 1 by any
carryback of a net operating loss,
capital loss, or net section 1256
contracts loss, except to the extent that
carryback resulted from or was
adjusted by the redetermination of your
income from a long-term contract for
look-back purposes.

Line 2
In each column, show a net increase to
income as a positive amount and a net
decrease to income as a negative
amount.
In figuring the net adjustment to be
entered in each column on line 2, be
sure to take into account any other
income and expense adjustments that
may result from the increase (or
decrease) to income from long-term
contracts (e.g., a change to adjusted
gross income affecting investment
expenses under section 212, medical
expenses under section 213, etc.; and
the deduction for state income taxes by
an accrual basis taxpayer).
Include the following on an attached
schedule.
1. Identify each completed
long-term contract by contract number,
job name, or any other reasonable
method used in your records to identify
each contract.
2. For each contract, report in
columns for each prior year: (a) the
amount of income previously reported
based on estimated contract price and
costs and (b) the amount of income
allocable to each prior year based on
actual contract price and costs. Total
the columns for each prior year and
show the net adjustment to income
from long-term contracts.
3. Identify any other adjustments
that result from a change in income
from long-term contracts and show the
amounts in the columns for the affected
years so that the net adjustment shown
in each column on the attached
schedule agrees with the amounts
shown on line 2.

Page 4 of 6

Instructions for Form 8697

11:24 - 6-OCT-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

An owner of an interest in a
pass-through entity is not required to
provide the detail listed in 1 and 2
above with respect to prior years. The
entity should provide the line 2 amounts
with Schedule K-1 or on a separate
statement for its tax year in which the
contracts are completed or adjusted.
Note. Taxpayers reporting line 2
amounts from more than one Schedule
K-1 (or a similar statement) must attach
a schedule detailing by entity the net
change to income from long-term
contracts.

Lines 4 and 5
Reduce the tax liability to be entered on
lines 4 and 5 by allowable credits (other
than refundable credits, e.g., the credit
for taxes withheld on wages, the
earned income credit, the credit for
federal tax on fuels, etc.), but do not
take into account any credit carrybacks
to the prior year in computing the
amount to enter on lines 4 and 5 (other
than carrybacks that resulted from or
were adjusted by the redetermination of
your income from a long-term contract
for look-back purposes). Include on
lines 4 and 5 any taxes (such as
alternative minimum tax) required to be
taken into account in the computation
of your tax liability (as originally
reported or as redetermined).

Lines 7 and 8
For the increase or decrease in tax for
each prior year, interest due or to be
refunded must be computed at the
applicable interest rate and
compounded on a daily basis, generally
from the due date (not including
extensions) of the return for the prior
year until the earlier of:
• The due date (not including
extensions) of the return for the filing
year or
• The date the return for the filing year
is filed and any income tax due for that
year has been fully paid.
Exceptions:
• If a net operating loss, capital loss,
net section 1256 contracts loss, or
credit carryback is being increased or
decreased as a result of the adjustment
made to net income from long-term
contracts, the interest due or to be
refunded must be computed on the
increase or decrease in tax attributable
to the change to the carryback only
from the due date (not including
extensions) of the return for the prior
year that generated the carryback and
not from the due date of the return for
the year in which the carryback was
absorbed. See section 6611(f).
• In the case of a decrease in tax on
line 6, if a refund has been allowed for
any part of the income tax liability
shown on line 5 for any year as a result

of a net operating loss, capital loss, net
section 1256 contracts loss, or credit
carryback to such year, and the amount
of the refund exceeds the amount on
line 4, interest is allowed on the amount
of such excess only until the due date
(not including extensions) of the return
for the year in which the carryback
arose.
Note. If a different method of interest
computation must be used to produce
the correct result in your case, use that
method and attach an explanation of
how the interest was computed.
Applicable Interest Rates
Tables of interest factors to compute
daily compound interest were published
in Rev. Proc. 95-17, 1995-1 C.B. 556.
The annual interest rate in effect and
the table and corresponding page
number in 1995-1 C.B. for periods
through September 30, 2005, are
shown in the tables on page 5. For
periods beginning after September 30,
2005, use the applicable overpayment
rate under section 6621(a)(1) in the
revenue rulings published quarterly in
the Internal Revenue Bulletin.
Contracts completed in tax years
ending after August 5, 1997. For
contracts completed in tax years ending
after August 5, 1997, an interest rate is
determined for each interest accrual
period. The interest accrual period
starts on the day after the return due
date (not including extensions) for each
prior tax year and ends on the return
due date for the following tax year. The
interest rate in effect for the entire
interest accrual period is the
overpayment rate determined under
section 6621(a)(1) applicable on the
first day of the interest accrual period.
The applicable interest rates for
taxpayers other than corporations are
shown in Table 1 (for interest accrual
periods beginning through 1994) and
Table 2 (for interest accrual periods
beginning after 1994). Corporations
also use Table 1 for interest accrual
periods beginning through 1994. For
interest accrual periods beginning after
1994, corporations use Table 3 for the
first $10,000, and use Table 4 for the
portion (if any) of the increase or
decrease in tax exceeding $10,000.
Contracts completed in tax years
ending before August 6, 1997. The
applicable interest rates for taxpayers
other than corporations are shown in
Table 1 (for periods through 1994) and
Table 2 (for periods after 1994).
Corporations use Table 1 for periods
through 1994. For periods after 1994,
corporations use Table 3 for the first
$10,000, and use Table 4 for the
portion (if any) of the increase or
decrease in tax exceeding $10,000.

-4-

Line 9
See If Interest Is To Be Refunded to
You on page 2 for where to file Form
8697. Additional interest to be refunded
for periods after the due date of the
return, if any, will be computed by the
IRS and included in your refund. Report
the amount on line 9 (or the amount
refunded by the IRS if different) as
interest income on your income tax
return for the tax year in which it is
received or accrued.

Line 10
See If You Owe Interest under Filing
Instructions on page 1 for how to report
this amount on your tax return.
Corporations (other than S
corporations) may deduct this amount
(or the amount computed by the IRS if
different) as interest expense for the tax
year in which it is paid or incurred. For
individuals and other taxpayers, this
interest is not deductible.

Part II—Simplified
Marginal Impact Method
Part II is used only by pass-through
entities required to apply the look-back
method at the entity level (see Who
Must File on page 1) and taxpayers
electing (or with an election in effect) to
use the simplified marginal impact
method. Under the simplified method,
prior year hypothetical underpayments
or overpayments in tax are figured
using an assumed marginal tax rate,
which is generally the highest statutory
rate in effect for the prior year under
section 1 (for an individual) or section
11 (for a corporation). This method
eliminates the need to refigure your tax
liability based on actual contract price
and actual contract costs each time the
look-back method is applied.
To elect the simplified marginal
impact method, attach a statement to
your timely filed income tax return
(determined with extensions) for the
first tax year of the election. Indicate on
the statement that you are making an
election under Regulations section
1.460-6(d) to use the simplified
marginal impact method. Once made,
the election applies to all applications of
the look-back method in the year of the
election and all later years, unless the
IRS consents to a revocation of the
election.

Columns (a), (b), and (c)
Enter at the top of each column the
ending month and year for each prior
tax year in which you were required to
report income from the completed
long-term contract.
Note. If there were more than 3 prior
tax years, attach additional Forms 8697

Page 5 of 6

Instructions for Form 8697

11:24 - 6-OCT-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

as needed. On the additional Forms
8697, enter your name, identifying
number, and tax year. Complete lines 1
through 9 (as applicable), but do not
enter totals in column (d). Enter totals
only in column (d) of the first Form
8697.

Line 1
In each column, show a net increase to
income as a positive amount and a net
decrease to income as a negative
amount.
On an attached schedule:
• Identify each completed long-term
contract by contract number, job name,
or any other reasonable method used
in your records to identify each
contract; and
• For each contract, report in columns
for each prior year: (a) the amount of
income previously reported based on
estimated contract price and costs and
(b) the amount of income allocable to
each prior year based on actual
contract price and costs. Total the
columns for each prior year and show
the net adjustment to income from
long-term contracts.
An owner of an interest in a
pass-through entity is not required to
provide the detail listed in (a) and (b)
above for prior years. The entity should
provide the line 1 amounts with
Schedule K-1 or on a separate
statement for its tax year in which the
contracts are completed or adjusted.
Note. Taxpayers reporting line 1
amounts from more than one Schedule
K-1 (or a similar statement) must attach
a schedule detailing by entity the net
change to income from long-term
contracts.

Line 2
Multiply the amount on line 1 by the
applicable regular tax rate for each prior
year shown in column (a), (b), or (c).
The applicable regular tax rate is as
follows:
1. Individuals and pass-through entities
in which, at all times during the year,
more than 50% of the interests in the
entity are held by individuals directly or
through other pass-through entities:
a. Tax years beginning before
1987 . . . . . . . . . . . . . . . . . . .
50%
b. Tax years beginning in 1987 38.5%
c. Tax years beginning in 1988,
1989, or 1990 . . . . . . . . . . . . .
28%
d. Tax years beginning in 1991
or 1992 . . . . . . . . . . . . . . . . .
31%

e. Tax years beginning in 1993
through 2000 . . . . . . . . . . . . . 39.6%
f. Tax years beginning in 2001 39.1%
g. Tax years beginning in 2002 38.6%
h. Tax years beginning in 2003
or later . . . . . . . . . . . . . . . . . .
35%

2. Corporations (other than S
corporations) and pass-through entities
not included in 1 above:
a. Tax years ending before July 1,
1987 . . . . . . . . . . . . . . . . . . . .
b. For tax years beginning before
July 1, 1987, that include July 1,
1987, the rate is 34% plus the
following:
Number of days in tax year before 7/1/87
Number of days in tax year

46%

⫻ 12%

c. Tax years beginning after
June 30, 1987, and ending
before 1993 . . . . . . . . . . . . . .
d. For tax years beginning
before 1993 that include January
1, 1993, the rate is 34% plus the
following:
Number of days in tax year after 12/31/92
Number of days in tax year

e. Tax years beginning after
1992 . . . . . . . . . . . . . . . . . . .

⫻

34%

1%

35%

Line 5
If both lines 2 and 4 are negative, enter
whichever amount is greater. Treat both
numbers as positive when making this
comparison, but enter the amount as a
negative number. (If the amount on one
line is negative, but the amount on the
other line is positive, enter the positive
amount.)

Lines 8 and 9
For the increase (or decrease) in tax for
each prior year, interest due or to be
refunded must be computed at the
applicable interest rate and
compounded on a daily basis from the
due date (not including extensions) of
the return for the prior year until the
earlier of:
• The due date (not including
extensions) of the return for the filing
year or
• The date the return for the filing year
is filed and any income tax due for that
year has been fully paid.
See Applicable Interest Rates in the
instructions for Part I, lines 7 and 8, on
page 4.

Line 10
See the instructions for Part I, line 9, on
page 4.

Line 3
See the instructions for Part II, line 1,
on this page and complete line 3 in the
same manner, using only income and
deductions allowed for alternative
minimum tax (AMT) purposes.

Line 4
Multiply the amount on line 3 by the
applicable AMT rate, which is as
follows:
1. Individuals and pass-through entities
in which, at all times during the year,
more than 50% of the interests in the
entity are held by individuals directly or
through other pass-through entities:
a. Tax years beginning in
1987 through 1990 . . . . . . .
b. Tax years beginning in
1991 or 1992 . . . . . . . . . . .
c. Tax years beginning in
1993 or later . . . . . . . . . . . .

28%

2. Corporations (other than S
corporations) and pass-through
entities not included in 1 above

20%

-5-

21%
24%

Line 11
See the instructions for Part I, line 10,
on page 4.
Table 1
Interest Rates for All Taxpayers,
for Periods Through 1994
From
—
7/1/86
1/1/87
10/1/87
1/1/88
4/1/88
10/1/88
1/1/89
4/1/89
10/1/89
4/1/91
1/1/92
4/1/92
10/1/92
1/1/93
7/1/94
10/1/94

Through
6/30/86
12/31/86
9/30/87
12/31/87
3/31/88
9/30/88
12/31/88
3/31/89
9/30/89
3/31/91
12/31/91
3/31/92
9/30/92
12/31/92
6/30/94
9/30/94
12/31/94

Rate
10%
9%
8%
9%
10%
9%
10%
10%
11%
10%
9%
8%
7%
6%
6%
7%
8%

Table

Page

25
23
21
23
73
71
73
25
27
25
23
69
67
65
17
19
21

579
577
575
577
627
625
627
579
581
579
577
623
621
619
571
573
575

Page 6 of 6

Instructions for Form 8697

11:24 - 6-OCT-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Table 2
Interest Rates for Taxpayers Other
Than Corporations,
for Periods After 1994
From

Through

Rate

1/1/95
4/1/95
7/1/95
1/1/96
4/1/96
7/1/96
1/1/97
4/1/98
4/1/99
1/1/00
4/1/00
1/1/01
4/1/01
7/1/01
1/1/02
1/1/03
10/1/03
1/1/04
4/1/04
7/1/04
10/1/04
1/1/05
4/1/05

3/31/95
6/30/95
12/31/95
3/31/96
6/30/96
12/31/96
3/31/98
3/31/99
12/31/99
3/31/00
12/31/00
3/31/01
6/30/01
12/31/01
12/31/02
9/30/03
12/31/03
3/31/04
6/30/04
9/30/04
12/31/04
3/31/05
9/30/05

8%
9%
8%
8%
7%
8%
8%
7%
8%
8%
9%
9%
8%
7%
6%
5%
4%
4%
5%
4%
5%
5%
6%

Table

Page

21
23
21
69
67
69
21
19
21
69
71
23
21
19
17
15
13
61
63
61
63
15
17

575
577
575
623
621
623
575
573
575
623
625
577
575
573
571
569
567
615
617
615
617
569
571

Table 3
Interest Rates for Corporate
Increases or Decreases in Tax
of $10,000 or Less
for Periods After 1994
From

Through

Rate

1/1/95
4/1/95
7/1/95
1/1/96
4/1/96
7/1/96
1/1/97
4/1/98
1/1/99
4/1/99
1/1/00
4/1/00
1/1/01
4/1/01
7/1/01
1/1/02
1/1/03
10/1/03
1/1/04
4/1/04
7/1/04
10/1/04
1/1/05
4/1/05

3/31/95
6/30/95
12/31/95
3/31/96
6/30/96
12/31/96
3/31/98
12/31/98
3/31/99
12/31/99
3/31/00
12/31/00
3/31/01
6/30/01
12/31/01
12/31/02
9/30/03
12/31/03
3/31/04
6/30/04
9/30/04
12/31/04
3/31/05
9/30/05

8%
9%
8%
8%
7%
8%
8%
7%
6%
7%
7%
8%
8%
7%
6%
5%
4%
3%
3%
4%
3%
4%
4%
5%

Table

Page

21
23
21
69
67
69
21
19
17
19
67
69
21
19
17
15
13
11
59
61
59
61
13
15

575
577
575
623
621
623
575
573
571
573
621
623
575
573
571
569
567
565
613
615
613
615
567
569

Table 4
Interest Rates for Corporate
Increases or Decreases in Tax
Exceeding $10,000
for Periods After 1994
From

Through

Rate

Table

Page

1/1/95
4/1/95
7/1/95
1/1/96
4/1/96
7/1/96
1/1/97
4/1/98
1/1/99
4/1/99
1/1/00
4/1/00
1/1/01
4/1/01
7/1/01
1/1/02
1/1/03
10/1/03
1/1/04
4/1/04
7/1/04
10/1/04
4/1/05

3/31/95
6/30/95
12/31/95
3/31/96
6/30/96
12/31/96
3/31/98
12/31/98
3/31/99/
12/31/99
3/31/00
12/31/00
3/31/01
6/30/01
12/31/01
12/31/02
9/30/03
12/31/03
3/31/04
6/30/04
9/30/04
3/31/05
9/30/05

6.5%
7.5%
6.5%
6.5%
5.5%
6.5%
6.5%
5.5%
4.5%
5.5%
5.5%
6.5%
6.5%
5.5%
4.5%
3.5%
2.5%
1.5%
1.5%
2.5%
1.5%
2.5%
3.5%

18
20
18
66
64
66
18
16
14
16
64
66
18
16
14
12
10
8
56
58
56
10
12

572
574
572
620
618
620
572
570
568
570
618
620
572
570
568
566
564
562
610
612
610
564
566

Privacy Act and Paperwork
Reduction Act Notice. The Privacy
Act of 1974 and Paperwork Reduction
Act of 1980 say that when we ask you
for information we must tell you our
legal right to ask for it, why we are
asking for it, and how it will be used.
We must also tell you what could
happen if we do not receive it and
whether your response is voluntary or
mandatory under the law.
Section 460 provides special rules
for computing interest under the
look-back method for completed
long-term contracts. Section 6001 and
its regulations say that you must file a
return or statement with us for any tax
you are liable for. Your response is
mandatory under this section and its
regulations. Section 6109 and its
regulations say that you must show
your identifying number (social security
number or employer identification
number) on what you file. This is so we
know who you are and can process
your return and other papers.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records
relating to a form or its instructions
must be retained as long as their
contents may become material in the
administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required
by section 6103.
We ask for the information on this
form to carry out the Internal Revenue

-6-

laws of the United States. We need this
information to ensure that you are
complying with these laws and to figure
and collect or refund the correct
amount of interest.
We may give the information to the
Department of Justice and to other
Federal agencies, as provided by law.
We may give it to cities, states, the
District of Columbia, and U.S.
commonwealths or possessions to
carry out their tax laws. We may give it
to foreign governments because of tax
treaties they have with the United
States. We may also disclose this
information to Federal and state
agencies to enforce Federal nontax
criminal laws and to combat terrorism.
If you do not file Form 8697, do not
provide the information we ask for, or
provide fraudulent information, you may
forfeit any refund of interest otherwise
owed to you, be charged penalties, or
be subject to criminal prosecution.
The time needed to complete and
file this form will vary depending on
individual circumstances. The
estimated burden for individual
taxpayers filing this form is approved
under OMB control number 1545-0074
and is included in the estimates shown
in the instructions for their individual
income tax return. The estimated
burden for all other taxpayers who file
this form is shown below.
Recordkeeping
Part I . . . . . . . . . . . . . . .
Part II . . . . . . . . . . . . . .

8 hr., 36 min.
9 hr., 19 min.

Learning about the law
or the form
Part I . . . . . . . . . . . . . . .
Part II . . . . . . . . . . . . . .

2 hr., 22 min.
2 hr., 5 min.

Preparing, copying,
assembling, and
sending the form to the
IRS
Part I . . . . . . . . . . . . . . .
Part II . . . . . . . . . . . . . .

2 hr., 37 min.
2 hr., 19 min.

If you have comments concerning
the accuracy of these time estimates or
suggestions for making this form
simpler, we would be happy to hear
from you. You can write to the Internal
Revenue Service, Tax Products
Coordinating Committee,
SE:W:CAR:MP:T:T:SP, 1111
Constitution Ave., NW, IR-6406,
Washington, DC 20224. Do not send
the tax form to this address. Instead,
see Filing Instructions on page 2.