Remittance to IRS -- Is it a Payment or a Deposit? (8/19/13)

Whether a remittance to the IRS is a payment of tax or a deposit can have significant consequences.  For example, if it is a payment of tax, there is a statute of limitations to obtain refund of the repayment; if it is a deposit, the refund statute of limitations does not apply.  Further, if it is a payment, the taxpayer can only get the remittance back by filing a claim for refund showing that he is entitled to the refund; if it is a deposit, the taxpayer can get it back simply by asking. There are complexities in this example, but in broad strokes that is the distinction.  The IRS has procedures whereby, in submitting a remittance, the taxpayer can designate whether the remittance is a payment or a deposit and the designation will (usually)  be honored by the IRS.

In Syring v. United States, 2013 U.S. Dist. LEXIS 111712 (D WI 8/15/13, amended order), here, a taxpayer, an estate, confronted this distinction.  The taxpayer had remitted tax of $170,000 to the IRS along with a timely request for extension of time to file the estate tax return.  The taxpayer did not designate the remittance as either payment of tax or deposit.  More than 3 years later (and just after the 3-year lookback limitations period for refunds), the taxpayer filed the estate tax return (then well over due), showing no tax due.  After audit the IRS determined that about $25,000 tax was due.  The taxpayer then requested return of the balance.  The IRS denied the request because, it determined, the original remittance was a payment and the return, effectively requesting the refund, was not filed within the required lookback period under Section 6511(b).

The court held that the original remittance was a payment rather than a deposit.

Despite having strong equities on its side, the court finds that the Estate has failed to meet its burden of putting forth sufficient evidence from which a reasonable trier of fact could find that the remittance was a deposit.  Plaintiff’s motion for summary judgment will, therefore, be denied and defendant’s motion for summary judgment will be granted.

The court looked at the facts and circumstances in making this test concluding:

Although the first factor articulated by the Seventh Circuit in Moran [there was no determination of tax due] weighs in favor of the plaintiff’s position, its intent to make a down payment on its tax liability and the fact that IRS treated the remittance as a tax payment tip the balance strongly to a finding of a tax payment. Based on this, the court finds that the Estate’s remittance does not constitute a deposit. This result may seem unfair -- after all the government is allowed to keep a payment that it concedes was not due -- but tax laws are “not normally characterized by case-specific exceptions reflecting individualized equities.” United States v. Brockamp, 519 U.S. 347, 352 (1997). Despite the equities, the court concludes that plaintiff is unable to meet its burden of demonstrating that the remittance was a deposit and, therefore, this court has no jurisdiction over its claim for refund. Dalm, 494 U.S. at 609

For those desiring further discussion of the general payment / deposit distinction, I cut and paste below my Federal Tax Procedure discussion of this issue (footnotes omitted):

4. The Payment/Deposit Distinction. 

a. The Distinction.

In Rosenman v. United States, the Supreme Court made the critical distinction between a payment toward a tax liability and a deposit against any tax liability that may be due.  This distinction is important in several contexts.  In the current context of the statute of limitations for refunds, it is important because the refund statute of limitations applies to payments and not to deposits.  

In Rosenman, the taxpayer (an estate acting through its executors) was under audit, but before assessment remitted a then large sum of money to the IRS.  The cover letter stated that the remittance was “a payment on account of Federal estate tax. . . . made under protest and duress, and solely for purposes of avoiding penalties and interest, since it is contended by the executors that not all of this sum is legally and lawfully owed.”  The Court held that, because the taxpayer made clear that he did not agree to the taxes and none had been assessed, the remittance was a deposit rather than a refund and therefore the taxpayer's right to recover the amount was not subject to the limitation periods set forth in the predecessor to § 6511 

Rosenman established an important and enduring principle of tax law that a taxpayer may advance a remittance to the IRS and, at the taxpayer's option, have it treated as either a payment or a deposit.  Taxpayers and their advisors usually considered remittances in advance of an assessment for the same reason as the taxpayer in Rosenman did -- i.e., to stop the running of interest on the underlying deficiency and on penalties that bear interest. 

Congress codified the Rosenman rule permitting a deposit with some modifications.  Since the primary application of the distinction relates to interest, I defer more detailed discussion of this codification to that portion of this text. 

What are other practical differences between a deposit and a payment in the current refund context?  Here are the more obvious: 

First, a deposit, not being a payment, is simply held by the IRS pending assessment and must be returned to the taxpayer upon the taxpayer's request.  The request for return of the deposit is not a claim for refund. 

Second, if the amount were a payment, of course, the taxpayer must file a claim for refund and pay careful attention to the refund statutes of limitation.  If it is a deposit, there is no statute of limitations. 

Third, if the IRS were to erroneously return to the taxpayer an amount remitted as a payment, it would have to follow the erroneous refund procedure to recover the amount, which allows a general two year statute of limitations, with a five year statute if the refund were caused by the taxpayer’s fraud or misrepresentation.  By contrast, if the IRS were to erroneously return to the taxpayer an amount the taxpayer had remitted as a deposit, the Government must seek recovery under a general cause of action for return of money either without a statute of limitations or subject to the general Government claim six-year statute of limitations.  Alternatively, of course, if the underlying statute of limitations is still open on the underlying tax liability, the IRS could proceed through the normal procedures to obtain an assessment. 

b. Examples and Strategies. 

Seeking to avoid the period of limitations on claims for refund, taxpayers may argue that amounts remitted to the IRS are deposits rather than payments.  If the remittance to the IRS is treated as a deposit, there is no statute of limitations on recovering the remittance. [JAT Note: This may be an overstatement, but if there is a statute of limitations it is a longer one than the one for the refund.]

A quintessential case of this sort is a taxpayer who is overpaid via withholding or estimated taxes but who does not file a return until long past any possibly applicable refund statute of limitations.  That taxpayer would prefer that the IRS treat the withholdings and estimated taxes as deposits rather than payments.  In Baral v. United States, 528 U.S. 431 (2000), the Supreme Court held that those remittances (by the employer as to withholding and by the taxpayer as to estimated taxes) were payments made on April 15 of the tax year involved and were not deposits.  The same rule has been applied to estimated payments made with extension requests. 

Consider the following not untypical setting presenting the issue of whether a remittance to the IRS should be treated as a cash deposit or a payment.  Assume that the IRS is conducting an audit and has preliminarily determined that the taxpayer, a large corporation, has a deficiency of $1,000,000, but has not yet issued a notice of deficiency.  Assume that the corporation will be subject to the “hot interest” penalty of § 6621(c).  (We have not covered interest yet, but suffice it to say for present purposes that this increases the deficiency interest rate by 2% for large corporate underpayments (pp. 262 ff.).)  The taxpayer should think seriously about remitting the $1,000,000 and accumulated interest to the IRS.  But, how should the taxpayer characterize the remittance – payment or deposit?  If the taxpayer wants to contest liability or even just hold open the opportunity to litigate it in the Tax Court, the taxpayer should designate the remittance (or some portion of it) as a deposit, for if the taxpayer paid the entire amount of the deficiency, the taxpayer would lose the opportunity to litigate in the Tax Court.  But, as should be obvious, by designating the remittance as a deposit, in the event for any reason that the IRS does not assert the deficiency or, alternatively some court ultimately holds that the taxpayer does not owe the additional $1,000,000, the deposit will be returned with a lower rate of interest than the taxpayer could have obtained if it were a payment.  Taxpayers in this situation might consider remitting $950,000 designated as a payment of tax and $50,000 designated as a deposit.  Then, the IRS will have to issue a notice of deficiency for $50,000. 

In this example the taxpayer will make the remittance before the IRS has actually made a determination of additional tax due.  What happens if the taxpayer were to simply send a remittance to the IRS with the year properly designated but with no indication as to whether it is a payment or deposit?  The IRS’s records, of course, will not show a tax due against which to apply the remittance.  If the IRS treats it as a payment on its records, it will show as an amount due the taxpayer (i.e., an overpayment).  If the IRS treats it as a deposit, it will be placed in a suspense account designated as such and the taxpayer’s account for the tax year will show a zero balance due to and from the taxpayer.  In such a situation, some courts adopt a per se rule which treats as a deposit an undesignated remittance before the IRS records shows a tax due.  Other courts adopt a “facts and circumstances” test.  The better part of wisdom on a remittance is to state the nature of the remittance with specificity. 

Taxpayers will sometimes seek to avoid their own designation of the remittance as a payment or deposit and may even succeed in doing so.  These adventures are risky, and the arguments were posited ex post facto after there was nothing to lose.  The careful taxpayer and its practitioner will determine in advance the treatment – payment or deposit – it needs and so designate and even follow-through to insure that the remittance was treated as designated. 

Sometimes the IRS with a little nudging will make a taxpayer-friendly blurring of the distinctions between a payment and a deposit.  Consider the following from a recent IRS legal memorandum.  The IRS levied upon and sold the taxpayer’s real property.  The net sales proceeds exceeded the taxes, penalties and interest, so the net was credited on the taxpayer’s account as an overpayment and the taxpayer was entitled to a refund. The IRS so notified the taxpayer that he should file a claim for refund.   The taxpayer nevertheless failed to make a timely claim for refund, apparently because he was suffering under the delusion that the proceeds were the work of the devil.  The equities only generally favored the taxpayer, but, as you know by now,  the application of the refund statute of limitations does not consider the equities.  (In this regard, the special statute of limitations under § 6511(h) for disability did not apply in this case.)  The author nevertheless reasoned that the taxpayer’s failure to claim a refund that was due transformed the payment into a deposit and, therefore, the deposit could be returned to the taxpayer because there is no statute of limitations on deposits.  The cost to the taxpayer of procrastinating, of course, was that he lost interest on the amount during the period the IRS held it.  However, by treating what appeared to be a payment as a deposit, the IRS was at least able to do some good for the taxpayer. 

Finally, strategically, on the front end, is it wise to remit as a deposit rather than a payment?  The only advantage of the deposit is the right to request the payment back without going through the elaborate refund procedures.  There is a cost to exercising the right to request the deposit back – i.e., if the taxpayer is ultimately held liable for the deficiency, then the return of the money will result in the accrual of interest.  Further, if the remittance is a deposit rather than a payment and it is ultimately determined that the remittance exceeded the amount of the tax and interest due, the taxpayer will get a lower interest rate on the excess than the taxpayer would have received if it were a payment.  For these reasons, I have never seen a case where, on the front end, the mere right to request immediate return of the money was so important as to outweigh the benefits of the straight payment of tax.  That is not to say that I cannot imagine a case where a bond would be preferable; I just haven’t seen one.  And, because of the downsides of bonds, I recommend that practitioners be able to articulate a clear affirmative reason for remitting as a bond before recommending that to the client.