Deposits vs. Payments: A Distinction Taxpayers Must Understand Before Making Payments to the IRS

There is a difference between making a payment and a deposit when you pay the IRS.  Blom v. United States, a recent case in the Federal District Court of Pennsylvania, highlights the difference between an IRS tax deposit and an IRS tax payment.

Facts & Procedural History

Blom’s aunt died and named Blom as the personal representative of her estate. The aunt’s husband died prior to the aunts demise and the husband had left part of his estate in trust for the benefit of the aunt. Blom asked the trustee of this trust to turn the assets over to her as the personal representative of the estate. The trustee refused and litigation ensued.

Prior to litigation, Blom had approached the IRS about getting an extension to file the federal estate tax return for her aunt’s estate. Blom filed the Form 4768 (Application for Extension of Time to File a Return) and gave the IRS $140,000 for estimated taxes. The IRS applied the $140,000 as “payment” of the estate’s estimated taxes.

Blom missed the extended deadline to file the estate tax return because the estate litigation was still going on. About a year after this deadline, Blom filed a federal estate tax return showing that there was no estate taxes due. The IRS treated this return as a request for a refund of the $140,000 that was already paid.

The IRS refused to issue Blom a refund, even though the IRS acknowledged that no tax debt was due. The IRS’s position was that the IRC 6511 time for filing a claim for a tax refund for “payments” had expired. Blom filed suit to recoup the $140,000 held by the IRS and argued that the “payment” was actually a “deposit.”

The court looked at the following three factors: (1) the timing of the payment, (2) the intent of the taxpayer in making the payment, and (3) how IRS treated the payment when it was received. The court fond that the $140,000 was a “deposit” and not a “payment” because the first two factors favored Blom’s position and only the last factor favored the IRS’s position.

This three part test is unfortunate in that it is not really workable. In almost all cases the third factor will usually favor the IRS and the second factor will usually favor the taxpayer. Thus, the first factor is the only real factor that must be considered, but that factor could be construed to favor either the IRS or the taxpayer – depending on how the judge happens to feel that day. Having to rely on legal analysis like this is just too risky for taxpayers, especially given the amount of money that could be involved. This makes knowing the difference between a “payment” and a “deposit” even more important.

So What Is The Difference Between A “Payment” & A “Deposit?”

New IRC Section 6603 provides that a “deposit” is a payment to the IRS equal to the amount that is under dispute that is made by the taxpayer to suspend the running of interest on a tax debt. Whereas, a “payment” is simply an amount that is applied to an outstanding tax debt. The difference is that the “deposit” does not belong to the IRS upon payment, whereas the “payment” does. As such, the IRS is required to return “deposits” to taxpayers upon receiving a written request from the taxpayer. The IRS is not required to return “payments” to taxpayers.

Section 6603 goes on to provide procedures for making “deposits.” That section also specifies that any payment that does not follow these procedures will be deemed a “payment” and the payment will be applied to the earliest tax year in which there is a tax liability and it will first be applied to the tax, then the penalties and then the interest.

Taxpayers should note that the amount that will be treated as a “deposit” is the amount that is “under dispute.”  When making “deposit” under Section 6603 taxpayers will need to be very careful to ensure that the full amount that they pay will be treated as a “deposit” and not partially a “deposit” and partially a “payment.”

Had Blom followed these procedures (technically the prior procedures, which were outlined in Rev. Proc. 84-58) she probably would not have had to resort to litigation to recoup her “deposit.” The Blom case provides an excellent example of why it is important to know the difference between a “deposit” and a “payment.”