If a formal or informal loan has taken place between a corporation and the owner, a Revenue Agent will be able to see if an appropriate interest rate has been paid under IRC Sec. 7872.
Recently, the applicable federal rate for loans has fallow to very low levels. This can be beneficial to taxpayers who can now replace existing higher interest loans with new lower rate loans or convert demand loans to term loans to lock in lower rates. As long as the new interest rate equals or exceeds the applicable federal rate, the below market interest rules will not apply.
This is important in audit situations where the Revenue Agent will examine the loans that have been given to owners of a corporation. If the Revenue Agent finds that the loans have been given with excessively lower interest rates, the agent will determine that the loan was given as compensation and not as an ordinary loan.