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TAX CLINIC

6603(a) allows taxpayers to make a de- If the taxpayer had not made a deposit same as any other time a taxpayer pays
posit for any income tax, estate and gift and first made payment on Nov. 10, a tax. The payment is credited to the
taxes, and certain excise taxes that have 2021, it would owe interest from April taxpayer’s account, and if the ultimate
not been assessed at the time of the de- 15, 2008, until Nov. 10, 2021. liability is less than the amount of the
posit. In certain instances, a taxpayer will To make a deposit, the taxpayer advance payment, the IRS will credit the
be paid interest on a deposit that is re- must follow the procedures detailed in excess against the taxpayer’s other tax
turned to the taxpayer to the extent that Rev. Proc. 2005-18, Section 4.01(1). liabilities (if any) and refund the excess
the deposit is attributable to a disputable Generally, a taxpayer must send the (IRS Notice 1016, How to Stop Interest
tax (Sec. 6603(d)). deposit and a written statement to the on Your Account (February 2006)).
The next year, the IRS released Rev. IRS Service Center where it files its A taxpayer must identify the tax and
Proc. 2005-18, which provides detailed returns or the office where the taxpayer’s tax period to which it is making the
instructions to taxpayers on how to return is under examination. The written advance payment. Just as with undes-
make deposits. Rev. Proc. 2005-18, statement must explicitly designate the ignated deposits, if the taxpayer does
Section 4.02(2), governs how the IRS remittance as a deposit and include: (1) not designate the payment for a specific
will treat the deposit. Once the IRS the type of the tax; (2) the tax year(s); tax and period, the IRS will apply the
assesses the tax liability (e.g., after the and (3) a statement identifying the payment against outstanding taxes in
IRS issues a notice of deficiency and amount of and basis for the “disputable the order of priority the IRS determines
the taxpayer does not petition the Tax tax.” will serve its best interest (Rev. Proc.
Court), the IRS will convert the deposit Interest on a deposit under Sec. 2002-26, §3.02). If the amount of the
to a payment against the tax. If the 6603(d) will be allowed only to the payment is less than the total liability
taxpayer petitions the Tax Court, the extent that the deposit is attributable for the tax period, the IRS will apply the
IRS will convert the deposit into a pay- to a disputable tax. Sec. 6603(d) defines amount first to tax, then penalties, and
ment unless the taxpayer requests the a “disputable tax” as the amount of tax then interest.
deposit continue to be treated as a de- specified at the time of the deposit as
posit during the Tax Court proceeding. the taxpayer’s reasonable estimate of the Critical differences
This request must be made in writing maximum amount of any tax attribut- Although both deposits and advance
before the deadline to petition the Tax able to an item of income, gain, loss, payments will stop interest from accru-
Court expires. deduction, or credit if the taxpayer has ing, there are critical differences.
If the deposit is converted into a a reasonable basis for its treatment of First, a taxpayer can get a deposit
payment, Sec. 6603(b) provides that the such item and reasonably believes that back from the IRS much easier than a
taxpayer is treated as having paid the the IRS also has a reasonable basis for refund. To request the return of a de-
tax on the date the deposit was made. disallowing the taxpayer’s treatment of posit, the taxpayer must follow the pro-
Thus, a taxpayer who made a deposit such item. cedures in Rev. Proc. 2005-18, Section 6.
would owe interest only for the period If the IRS receives a remittance Under Sec. 6603(c), the IRS must return
from the due date of the tax payment without the written statement designat- the deposit (to the extent not already
to the date of the deposit. For example, ing it as a deposit, the IRS will treat the used as a payment of tax). In exceptional
a taxpayer’s 2007 taxes were due April remittance as a payment and apply it circumstances, the IRS does not have
15, 2008. In 2010, the IRS begins an to any outstanding liabilities for taxes, to return the check if the collection of
audit of a deduction that, if disallowed, penalties, or interest (Rev. Proc. 2005-18, the tax is in jeopardy (Sec. 6603(c)).
will increase the taxpayer’s tax by $1 §4.01(2)). The IRS will apply the undes- With respect to advance payments, a
million. On July 15, 2010, the taxpayer ignated remittances treated as payments taxpayer cannot simply ask for them
deposits $1 million with the IRS for its to the earliest tax year for which there back. Sec. 6511 requires a taxpayer to file
2007 tax liability. After a lengthy audit, is a liability, and the remittance will be an administrative refund claim (which
IRS Appeals, a Tax Court trial, and an applied first to tax, then penalties, and the IRS could deny), and it must file the
appeal to the U.S. Court of Appeals, finally to interest (Rev. Proc. 2005-18, refund claim within the statute of limi-
the taxpayer loses the issue on Oct. §4.01(2)). tation for filing refund claims (which is
2, 2021, and is deemed to have paid generally the later of three years from
the tax and interest on Nov. 10, 2021. Advance payments the date the return was filed or two years
Because the taxpayer made the deposit, An advance payment is simply the pay- from the date the tax is paid).
it owes interest on the $1 million only ment of the proposed tax liability before Second, although taxpayers are
from April 15, 2008, to July 15, 2010. the IRS assesses the tax. It operates the generally entitled to interest when the

10 March 2022 The Tax Adviser