Allocating advance payments between tax and interest.

• Author: Urban, Michael A.

Rev. Proc. 2005-18 supersedes Rev. Proc. 84-58, which for more than 20 years had specified the procedures for making remittances to suspend interest running on tax underpayments. The issuance of Rev. Proc. 2005-18 was welcome, as it provides guidance on making deposits under new Sec. 6603, withdrawing them and converting deposits made under Rev. Proc. 84-58 to Sec. 6603 deposits.

In one important respect, however, the lack of congruity between the scope of the new and old procedures has left a void. Specifically, while section 6 of Rev. Proc. 84-58 addressed in some detail the allocation of advance payments between tax and interest,

Rev. Proc. 2005-18 does not address that issue. As a result, while it is tempting (and arguably, even reasonable) for taxpayers and tax advisers to continue to look to Rev. Proc. 84-58 for guidance on payment allocation questions, the fact that Rev. Proc. 84-58 has been superseded by Rev. Proc. 2005-18 would appear to compel taxpayers to identify--and evaluate the continuing applicability of--the statutory and regulatory provisions and case law that underpin section 6 of Rev. Proc. 84-58.

Full and Partial Payments

In the case of an advance payment in an amount greater than the tax due, Rev. Proc. 84-58 provided that the IRS would respect the taxpayer's allocation of the excess amount to interest or penalties. This position is not controversial; support for it is found in Rev. Proc. 2002-26.

For partial payments, Rev. Proc. 84-58 stated that the Service would honor the taxpayer's request to allocate all or part of the payment to interest if the taxpayer either (1) agrees to the assessment and collection of the liability by executing a waiver of restrictions (i.e., Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment; 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overrassessment; or 4549, Income Tax Examination Changes); or (2) pays the portion of the underlying tax that corresponds to the amount of the payment designated as interest. Otherwise, any purported partial payment of tax would be treated in its entirety as a deposit in the nature of a cash bond, unless (and until) the taxpayer cured the defect by redesignating the amount to be allocated to interest.

By honoring the taxpayer's allocation of all or some of a payment to interest, the IRS was implicitly allowing the taxpayer to deduct that...