New procedure for the suspension of interest on underpayments.

• Author: Dougherty, James A.

The IRS released Rev. Proc. 2005-18, which provides taxpayers with procedures to make, withdraw or identify deposits to suspend the running of interest on potential underpayments under new Sec. 6603, added by the American Jobs Creation Act of 2004, Section 842(a). Rev. Proc. 2005-18 supersedes Rev. Proc. 84-58, which set forth procedures for making deposits in the nature of a cash bond before Sec. 6603's enactment.

Sec. 6603

Under Sec. 6603, taxpayers can make a deposit to suspend the running of interest on potential tax underpayments and accrue interest on the "disputable tax" liability eventually refunded after the proposed deficiency is finally resolved. Sec. 6603(d)(2) defines "disputable tax" as the amount of tax specified at the time of the deposit as the taxpayer's reasonable estimate of the maximum amount of tax attributable to "disputable items." Sec. 6603 (d) (3) (A) defines a "disputable item" as any item of income, gain, loss, deduction or credit for which the taxpayer has a reasonable basis for the treatment of such item and reasonably believes that the Service also has a reasonable basis for disallowing that treatment. If the taxpayer received a 30-day letter, the amount of the proposed deficiency noted in the letter is the minimum amount of the disputable tax.

Making a Deposit

A taxpayer may request the return of all or part of a deposit at any time before the IRS uses it for payment of the tax. However, interest is payable only on the portion of the deposit attributable to the disputable tax.

A deposit must be accompanied by a written statement designating the remittance as a Sec. 6603 deposit. The statement must include the types of tax, tax years and the amount of and basis for the disputable tax. To the extent the deposit is used to pay a tax liability, the tax will be treated as paid on the date of deposit.

Calculation of Disputable Tax

According to the IRS, taxpayers may use any reasonable method to calculate the disputable tax. Taxpayers relying on a proposed deficiency in a 30-day letter may simply provide a copy of the letter with the deposit and written statement. However, if the taxpayer's calculation of a disputable tax exceeds the deficiency proposed in the 30-day letter or the taxpayer seeks to remit a deposit before receiving such letter, the statement must also include:

* The taxpayer's calculation;

* A description of the item in question; and

* The basis for the taxpayer's belief that (1) it has a reasonable...