How to Reduce Interest Paid to IRS while You are Preparing Your Case
(1) a payment; or
(2) a deposit.
Taxpayers occasionally make deposits to suspend the running of interest on potential underpayments of tax (Code Sec. 6603; Rev. Proc. 2005-18). The procedures for designating a remittance as a deposit, rather than a tax payment, are contained in Rev. Proc. 2005-18. Under Section 4 of that procedure, a taxpayer may make a deposit under Code Sec. 6603 by remitting to the IRS Service Center at which the taxpayer is required to file its return, or to the appropriate office at which the taxpayer’s return is under exam, a check or a money order accompanied by a written statement designating the remittance as a deposit. The written statement also must include:
(1) the type(s) of tax;
(2) the tax year(s); and
(3) a statement described in Section 7.02 of Rev. Proc. 2005-18 identifying the amount of, and basis for, any disputable tax.
In Syring v. U.S., 2013 PTC 236 (W. D. Wisc. 2013), the taxpayer argued that a remittance to the IRS was a deposit and not a tax payment. The court concluded that because the taxpayer did not follow Rev. Proc. 2005-18 and provide a written designation with the remittance, the remittance was properly characterized as a tax payment and the taxpayer’s refund claim was barred by the statute of limitations.
Undesignated remittances treated as tax payments are applied to the earliest tax year for which there is a liability, and are applied first to tax, then penalties and finally to interest. An undesignated remittance treated as a payment of tax is posted to the taxpayer’s account as a payment upon receipt, or as soon as possible thereafter, and may be assessed, provided that assessment will not imperil a criminal investigation or prosecution. The amount of an undesignated remittance treated as a payment is taken into account by the IRS in determining the existence of a deficiency and whether a notice of deficiency is required to be issued.
A tax remittance that constitutes a deposit is treated much like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (Rosenman v. U.S., 323 U.S. 658 (1945)). However, if a remittance constitutes a payment, the taxpayer may recover the money only by filing a timely claim for a refund or credit (Miller v. U.S., No. 99-737T (Fed. Cl. 2000)). A remittance that discharges or pays a deemed or assessed tax liability constitutes a payment (Rosenman v. U.S., 323 U.S. 658 (1945)). A remittance also constitutes a payment if it is made under a Code section the plain language of which states that the remittance is to be “deemed paid” (Baral v. U.S., 528 U.S. 431 (2000); Deaton v. Comm’r, 440 F.3d 223 (5th Cir. 2006); Nicholas Acoustics & Specialty Company, Inc. v. U.S., 2011 PTC 128 (5th Cir. 2011)). Thus, estimated tax payments and withholding taxes are remittances that are considered paid on the due date of a calendar year taxpayer’s income tax return.