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GT Alert

Act by May 27, 2005 to Ensure Interest Accrues on IRS Cash Deposits

March 2005

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In general, interest on unpaid taxes continues to accrue during the period that a taxpayer and the Internal Revenue Service (“IRS”) dispute a tax liability. A taxpayer that wants to limit its interest exposure on such underpayments has a limited number of options, one of which is to make a cash deposit with the IRS that may subsequently be used to pay the disputed liability. This deposit will stop the running of interest on the underpayment in an amount equal to the deposit. The American Jobs Creation Act, enacted on October 22, 2004, added new Section 6603 to the Internal Revenue Code, which improved this deposit system.

“Rev. Proc. 2005-18 provides that bonds previously remitted to the IRS pursuant to Rev. Proc. 84-58 will earn interest so long as the taxpayer submits a written statement to the Internal Revenue Service Center.”

Prior Law

Revenue Procedure 84-58 (“Rev. Proc. 84-58”) provided procedures for taxpayers to make deposits in the nature of a cash bond to suspend the running of interest on tax deficiencies. A “deposit in the nature of a cash bond” (a “bond”) is a remittance that is (1) made before a notice of deficiency is mailed, and (2) designated by the taxpayer in writing as a deposit in the nature of a cash bond. The bond itself did not earn interest. Thus, if the amount of the deposit exceeded the amount ultimately determined to be due, the taxpayer was not credited with interest on the excess. The bond could be returned to the taxpayer prior to a final determination upon request, but if the bond was returned and the liability was subsequently assessed, interest on the deficiency was computed without regard to the period during which the IRS held the bond. In other words, the taxpayer received no credit for a returned bond.

New Law

Section 6603 was added to the Code to improve the deposit system. Taxpayers can still make cash deposits with the IRS to suspend the running of interest on underpayments (such deposits are now referred to as “deposits under Section 6603”). However, Section 6603 provides

that interest will accrue on any overpayment to the extent (and only to the extent) the deposit is attributable to a disputable tax. Also, if a taxpayer makes a deposit under Section 6603 with respect to a disputable tax and later requests that the deposit be returned, the taxpayer will receive the deposit plus interest for the period during which the IRS held the deposit. A “disputable tax” means 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 the disputed items. The interest rate will be the Federal short-term rate, compounded daily. As under Rev. Proc. 84-58, a deposit under Section 6603 can be returned to a taxpayer prior to a final determination upon request, but if a liability is subsequently assessed, interest on the deficiency will be computed without regard to the period during which the IRS held the deposit.

On March 15, 2005, the IRS issued Revenue Procedure 2005-18 (“Rev. Proc. 2005-18”), which supercedes Rev. Proc. 84-58, to implement the requirements of Section 6603.

Designating a Bond Under Rev. Proc. 84-58 as a Deposit Under Section 6603

Rev. Proc. 2005-18 provides that bonds previously remitted to the IRS pursuant to Rev. Proc. 84-58 will earn interest so long as the taxpayer submits a written statement to the Internal Revenue Service Center or the examining office to which the original deposit was remitted that identifies the amount previously deposited under Rev. Proc. 84-58 and includes: (1) the date(s) and amount(s) of the original deposit(s) of the bond; (2) the type(s) of tax to which the bond was applied; (3) the tax year(s) to which the bond was applied; and (4) a statement identifying the amount of and basis for the disputable tax.

The statement of disputable tax must include: (a) the taxpayer’s calculation of the amount of disputable tax; (b) a description of any item of income, gain, loss, deduction or credit that is in dispute between the taxpayer and the IRS; and (c) the basis for the taxpayer’s belief that its treatment of the item is reasonable and that the IRS’s disallowance of the item is also reasonable. If the taxpayer has received a 30-day letter, the taxpayer may provide a copy of the 30-day letter in lieu of providing a statement of disputable tax.

“The deposit will be treated as made on October 23, 2004, and hence interest will begin accruing from such date, if the taxpayer provides a written statement that meets the requirements discussed above before May 27, 2005. ”

Effective Date

Generally, interest on deposits will begin accruing on the date the IRS receives the required written statement. However, if a taxpayer deposited a bond pursuant to Rev. Proc. 84-58 on or before October 22, 2004, the deposit will be treated as made on October 23, 2004, and hence interest will begin accruing from such date, if the taxpayer provides a written statement that meets the requirements discussed above before May 27, 2005. If a taxpayer notified the IRS that it wanted to designate a bond under Rev. Proc. 84-58 as a deposit under Section 6603 prior to the issuance of Rev. Proc. 2005-18, the taxpayer should determine whether its prior statement contained all of the information required by Rev. Proc. 2005-18. If not, the taxpayer should submit a new statement, which includes the remainder of the required information.

Deposits Under Section 6603 made after October 22, 2004

Rev. Proc. 2005-18 also provides procedures for making deposits under Section 6603 after October 22, 2004. Generally, a taxpayer makes the deposit by remitting a check or money order to the Internal Revenue Service Center at which the taxpayer is required to file its return, or to the appropriate office at which the taxpayer’s return is under examination, along with a written statement designating the remittance as a deposit. The written statement must also include (1) the type of tax; (2) the tax year; and (3) a statement identifying the amount of and basis for the disputable tax. The disputable tax statement must include the same information discussed above. If the taxpayer made a deposit under Section 6603 after October 22, 2004 and before March 28, 2005, the taxpayer must file the required written statement before May 27, 2005 in order to earn interest on the amount of the deposit. If a taxpayer notified the IRS that it wanted to make a deposit under Section 6603 prior to the issuance of Rev. Proc. 2005-18, the

taxpayer should determine whether its prior statement contained all of the information required by Rev. Proc. 2005-18. If not, the taxpayer should submit a new statement, which includes the remainder of the required information.

Conclusion

This discussion provides a simplified description of the rules under Section 6603 and Rev. Proc. 2005-18 and does not address all of the technical requirements that must be met. Therefore, taxpayers, especially those with long-standing bonds on deposit with the IRS, should discuss the requirements of Section 6603 and the new revenue procedure with their tax advisors well before the May 27, 2005 deadline.

 

This Alert was written by Barbara T. Kaplan and Jessica Westbrook in the New York office. Please contact Ms. Kaplan and Ms. Westbrook at 212.801.9200 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig


Additional Information:

For more information, please review our Tax Practice description, or feel free to contact one of our attorneys.


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.