The Benefits And Potential Pitfalls Of Making A Tax Deposit

Taxpayers who anticipate owing money to the Internal Revenue Service may file a "deposit" with the government. A deposit benefits a taxpayer by stopping the running of interest on an underpayment and penalties.25 Unlike a payment, a deposit does not prevent a taxpayer from challenging a deficiency in Tax Court,26 nor does it trigger the statute of limitations for filing a refund claim.27 And if it is later determined that no tax is due to the government, the taxpayer can simply ask the government to return the money with neither the formality of filing a claim for refund nor the need to show that there had been an overpayment of tax. In addition, if the deposit is requested to be returned, the taxpayer is entitled to the payment of interest on the deposit at the applicable Federal short-term rate to the extent the deposit is attributable to a "disputed tax item"28 (meaning you can't "deposit" funds with the IRS just to earn interest.)

Historically, the genesis of a tax "deposit" has had a tortured path. The concept of a tax deposit was first recognized in the Supreme Court's decision in Rosenman v. United States, which found a basis for the concept in implications from the Internal Revenue Code.29 Mr. Justice Frankfurter, writing for a unanimous court in Rosenman,30 first described a remittance that was not a "payment" of a tax, but rather "a depositmade in the nature of a cash bond for the payment of taxes thereafter found to be due."31 But, neither the term "deposit" nor Justice Frankfurter's concept of one "made in the nature of a cash bond for the payment of taxes thereafter found to be due" could be found in any of the income tax provisions in the 1939 Code.32 The Federal Circuit later interpreted Rosenman in New York Life Ins. Co v. United States,33 concluding that a "circumstances" test controlled the question of whether a remittance was a deposit. Over time, the decisions in this area focused less on the tax attributes of deposits, and more on whether a particular remittance was a "deposit" versus a "payment."

The IRS eventually issued a series of revenue procedures, designed to provide taxpayers with guidance as to how "deposits" should be made and would be processed.34 Rev. Proc. 84-58 and the patchwork of judicial decisions were later replaced by I.R.C. section 6603 (part of the American Jobs Creation Act of 2004),35 which was enacted to permit a taxpayer to make a deposit and suspend the running of interest under section 6601 on a potential underpayment of tax that was not been assessed at the time of the deposit. Today, this Code provision controls the question of whether a remittance is a "deposit" not New York Life.

Section 6603 was enacted to permit taxpayers to make a deposit with the Service that may be used by the Secretary...