Protecting refunds of certain overpaid deficiency interest.

• Author: Urban, Michael A.

Disputes regarding interest issues are not uncommon. Taxpayers frequently file refund claims for overpaid underpayment (deficiency) interest or requests for additional overpayment interest. Such a submission generally results from an analysis of the taxpayer's federal tax accounts and related IRS interest computations that a service provider specializing in interest and other IRS account-related issues performs. Issuance by the Service of a statutory notice of deficiency (90-day letter) to the taxpayer may affect the taxpayer's ability to file a later refund claim for overpaid interest for the same tax period.

A taxpayer may make a request for additional interest on a tax overpayment within six years from the refund date (see ILM 200532001 and Rev. Ruls. 56-506 and 57-242). A claim for overpaid underpayment interest is subject to the limitation period applicable to refund claims in Sec. 6511. Because in many cases the taxpayer and the IRS would have entered into an agreement (Form 872, Consent to Extend the Time to Assess Tax, or 872-A, Special Consent to Extend the Time to Assess Tax) extending the assessment limitation period prior to issuance of the notice of deficiency, the impact of the deficiency notice on Sec. 6511(c) must be explored.

Limitation Period

Sec. 6511(c) gives a taxpayer six months from the expiration of an agreement extending the assessment period to file a claim for credit or refund. Under Sec. 6503(a), the issuance of a notice of deficiency suspends the running of the assessment limitation period. Accordingly, it appears that once the suspension ends, the unexpired portion of the limitation period--as extended by the Form 872 or 872-A--resumes, and, once it ends, the six-month period for filing refund claims provided in Sec. 6511(c) begins to run (see FSA 200221004). In addition, purely from a statute of limitation standpoint, payment of a deficiency determined by the Tax Court would trigger a two-year period under Sec. 6511(a) during which the taxpayer could file a refund claim for overpaid underpayment interest, up to the amount of the payment.

However, where for the same tax year(s) a statutory notice of deficiency has been issued and a Tax Court petition filed, a more fundamental consideration than the deadline for filing a refund claim for overpaid underpayment interest is whether such a claim can be filed at all, or if the taxpayer must instead raise the interest issues in the Tax Court, even if such interest is...