Is there still time to correct IRS interest mistakes?

• Author: Chambers, Valrie

The IRS charges interest on deficiencies that are assessed. If the IRS does not compute the deficiency interest correctly, there is a time limit for taxpayers to file a claim for overcharged deficiency interest. Similarly, taxpayers earn interest on certain overpayments. If the IRS does not refund the correct interest, what is the statute of limitation for a claim for additional interest? Related to these issues are questions about the statute of limitation for a claim for refund for interest netting and how long the IRS has to assess the correct amount of deficiency interest. The answers to these questions may surprise even experienced tax professionals.

Tax professionals know the general rule for the statute of limitation for assessments and refunds. Sec. 6501(a) states that additional tax must be assessed within three years after the date the return is filed. Sec. 6511(a) states that a claim for refund of overpaid taxes must be filed within three years from the date the return is filed or two years from the time the tax is paid, whichever is later.

Deficiency Interest

Under Sec. 6601(e)(1), interest on a tax is treated as a tax; therefore the Sec. 6511(a) statute of limitation applies to a request for refund of overcharged deficiency interest. If a taxpayer determines that deficiency interest has been overcharged, the taxpayer must file a claim for refund within three years after the return is filed or two years from the payment date. Unfortunately, the starting date for the two-year period may not be as clear-cut as it would seem. Many times the IRS transfers money from one of a Taxpayer's accounts to another to satisfy an outstanding tax liability. In this situation, the starting date for determining the two-year limitation period is the date the IRS moved the money, rather than the date the taxpayer made the payment [Fitzmaurice, No. H-98-3906 (S.D. Tex. 6/2/99)).

If it is determined that the IRS has overcharged deficiency interest, the taxpayer should file a claim for refund. This claim must be filed before the expiration of the statute.

Overpayment Interest

Sec. 6511 applies only to a refund of amounts paid to the IRS. If taxpayers are entitled to additional statutory interest on an overpayment, they have six years to receive the correct amount of interest. To obtain the overpayment interest, they must file a claim with the IRS. However, that may not be enough to protect a taxpayer's rights. 28 U.S.C. Section 2401(a) states that...