Imputed Interest Rate
Imputed interest is interest you are assumed to have collected even if that interest was not paid.
For example, you pay income tax on the imputed interest of a zero-coupon bond you hold in a taxable account even though the interest is not paid until the bond matures.
Similarly, you may be required to pay income tax on imputed interest if you make an interest-free loan, even if that loan is to your children or another member of your family. The government's position, in this case, is that you should have charged interest even though you didn't do so.
A common term for the IRS expression “unstated interest”or sometimes “original issue discount.”It applies to the situation in which a promissory note calls for no interest or insufficient interest under the circumstances.In an audit,the IRS will calculate an interest rate,impute that to the transaction, and declare each year's imputed interest as additional income to the lender, on which the lender must pay income taxes, penalties, and interest. (The rules are found at 26 U.S.C. §1273,1274 and 483.)