Deposits vs. Payments: How to Pay the IRS

Paying taxes is an essential part of being a responsible citizen. The IRS has specific rules and procedures for taxpayers to follow when submitting their tax payments.

However, many taxpayers may not be aware that there is a difference between making a payment and a deposit when paying the IRS. The two are not the same. One of the primary differences is the ability to get the money back from the IRS. There are time limits for requesting a payment back from the IRS, but there is no time limit for requesting a deposit back. This issue often arises after an IRS audit, when payments are remitted to the IRS to stop the accrual of penalties and interest while the appeal and/or litigation is pending.

This distinction was recently highlighted in the Blom v. United States, No. 05-2383 (E.D. Pa. 2006) case, where the Federal District Court of Pennsylvania ruled on a taxpayer’s claim for a refund of a “deposit” made to the IRS.

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 aunt’s 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 the trust litigation, Blom had approached the IRS about getting an extension to file the federal estate tax return for her aunt’s estate. Blom filed 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 a “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 were 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 time for filing a claim for a tax refund for “payments” under Section 6511 had expired. Blom filed suit to recoup the $140,000 held by the IRS and argued that the “payment” was actually a “deposit.”

The Time Period for Filing a Refund Claim

Section 6511 outlines the time limit for filing a claim for a refund of taxes and the maximum amount that can be claimed. The statute establishes two periods of limitation for filing a claim for credit or refund.

The first period of limitation is three years from the time the taxpayer filed the return or two years from the time the tax was paid, whichever is later. If the taxpayer did not file a return, the claim for a refund must be filed within two years from the time the tax was paid. The second period of limitation applies to taxes paid by means of a stamp, which must be claimed within three years from the time the tax was paid.

Section 6511(b) further limits the allowance of credits and refunds. Subsection (b)(1) states that no credit or refund can be allowed or made after the expiration of the period of limitation unless the taxpayer files a claim within such period. Subsection (b)(2) limits the amount of the credit or refund based on whether the claim was filed within the three-year period or after.

If the claim was filed within the three-year period, the credit or refund cannot exceed the portion of the tax paid within the period immediately preceding the filing of the claim, which is equal to three years plus the period of any extension of time for filing the return. If the claim was not filed within the three-year period, the credit or refund cannot exceed the portion of the tax paid during the two years immediately preceding the filing of the claim.

Finally, Section 6511(c) provides special rules applicable in cases of an extension of time by agreement. This section allows for an extension of the time for filing a claim for credit or refund if an agreement under Section 6501(c)(4) extending the period for assessment of a tax imposed by the Internal Revenue Code is made within the period prescribed in Section 6511(a). This provision also limits the amount of credit or refund that can be claimed based on the tax paid after the execution of the agreement and before the filing of the claim.

Difference Between a “Payment” and a “Deposit”

The rules for Section 6511 only apply to payments. They do not apply to deposits. This was the issue raised in the Blom case.

The court in Blom considered the following three factors: (1) the timing of the payment, (2) the intent of the taxpayer in making the payment, and (3) how the IRS treated the payment when it was received. The court found 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.

New 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 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 a “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.”

The Takeaway

It is crucial to understand the distinction between a “deposit” and a “payment.” The Blom case highlights this importance, as following the proper procedures outlined in Rev. Proc. 84-58 could have prevented the need for litigation to recover Blom’s “deposit.”