IRS not permitted to credit overpayments against subsequent year's potential deficiency.

• Author: Everidge, Kathryn L.

The IRS National Office recently ruled that the Service had no authority to credit prior years' overpayments against a subsequent year's potential deficiency (Letter Ruling (TAM) 9739003).

The IRS based its holding on the fact that a potential deficiency was not an outstanding liability. In other words, crediting such overpayment against a potential deficiency was not allowed.

Moreover, the Service ruled that the taxpayer was entitled to additional interest on those overpayments for the period of the potential deficiency and was not barred by the statute of limitations (SOL) from making a claim for this interest. The National Office also concluded that, even though underpayment interest did accrue on the potential deficiency, the IRS was barred by the SOL from assessing and collecting interest on the potential deficiency

The taxpayer (T) timely filed a return and paid taxes for Year 1. On April 4 of Year 4, the taxpayer filed an application for tentative refund (Form 1139, Corporate Application for Tentative Refund) for Year 1 based on a net operating loss (NOL) and general business credit carryback from Year 3; the Service issued a refund on April 20 of Year 4. T's Year I return was examined and on August 31 of Year 4,T made an advance payment (including interest) to account for a proposed adjustment.

On September 21 of Year 4,T filed a second tentative refund application for Year 1, also based on a carryback from Year 3; the Service issued a second refund for Year 1 on November 2 of Year 4.

On October 4 of Year 4, the IRS assessed additional tax and interest in an amount equal to T's advance payment. The interest was computed from the due date of the Year 1 return (March 15 of Year 2) to the date of the advance payment (August 31 of Year 4). Both T and the IRS agreed that this interest was miscalculated because underpayment interest stopped accruing 011 March 15 of Year 4 (the due date of the Year 3 return that gave rise to the carryback). On December 6 of Year 10, T filed a claim for refund of this overpaid interest, the timeliness of which was questioned.

Also, some time after December Year 4,T filed Form 872, Consent to Extend the Time to Assess Tax, and agreed to extend the limitations period for Year 1 to December 31 of Year 8. On December 28 of Year 8, the Service accepted a Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, reflecting an overassessment...