Tax prepayments--advance payments or deposits under Blom?

• Author: Snow, Danny

As the interest rate on Federal tax underpayments increases (8% for the calendar quarter beginning July 1,2006), taxpayers facing a tax liability dispute with the IRS are even more likely to consider making voluntary prepayments to obviate the effects of any interest and penalties. Taxpayers can make prepayments in one of two ways, as long as the IRS has not already assessed tax. They can designate them either as a deposit or an advance payment of tax. There is an important distinction between the two, which was highlighted in a recent court decision.

A deposit made under Sec. 6603 that is in accordance with Rev. Proc. 2005-18 will be returned if the taxpayer simply submits a written request to the ILLS. A prepayment made as an "advance payment of tax," however, will be returned only if the taxpayer follows the Service's procedures for claiming a refund. Consequently, a request for a return of an advance payment is subject to the strict statute of limitations (SOL) on refund claims. According to Sec. 6511, for the IRS to consider a refund claim, it must be filed within three years of filing the return or within two years of paying the tax, whichever is later. Taxpayers that do not file a return must file a refund claim within two years of paying the tax.

Facts

In Biota, ED PA, 5/31/06, the taxpayer prevailed in convincing a district court that a payment made by an estate was a "deposit in the nature of a cash bond." (Prior to the American Jobs Creation Act of 2004's enactment of Sec. 6603, a prepayment made as a deposit was referred to as a deposit in the nature of a cash bond.) While the taxpayer was successful, the case serves as a reminder that for a prepayment of a disputable tax to be considered a deposit, taxpayers must closely follow Rev. Proc. 2005-18's requirements.

In Blom, an executrix visited an IRS office to inquire about an extension to file the decedent's Federal estate tax return. The decedent had died on March 1, 1996. The executrix believed assets held in trust from the decedent's late husband's estate were supposed to be included in the decedent's taxable estate. The estate eventually became involved in litigation with the trustee.

As a result of her visit to the IRS, the executrix filed Form 4768, Application for Extension of Time To File a Return and/or pay U.S. Estate (and Generation-Skipping Transfer) Taxes, on Nov. 22, 1996. At the same time, she submitted two checks to the Service, totaling $140,000. Neither of the...