Protecting Refunds of Certain Overpaid Deficiency Interest

Disputes regarding interest issues are not uncommon. Taxpayers frequently file refund claims for overpaid underpayment (deficiency) interest or requests for additional overpayment interest. Such a submission generally results from an analysis of the taxpayer’s federal tax accounts and related IRS interest computations that a service provider specializing in interest and other IRS account-related issues performs. Issuance by the Service of a statutory notice of deficiency (90-day letter) to the taxpayer may affect the taxpayer’s ability to file a later refund claim for overpaid interest for the same tax period.

A taxpayer may make a request for additional interest on a tax overpayment within six years from the refund date (see ILM 200532001 and Rev. Ruls. 56-506 and 57-242). A claim for overpaid underpayment interest is subject to the limitation period applicable to refund claims in Sec. 6511. Because in many cases the taxpayer and the IRS would have entered into an agreement (Form 872, Consent to Extend the Time to Assess Tax, or 872-A, Special Consent to Extend the Time to Assess Tax) extending the assessment limitation period prior to issuance of the notice of deficiency, the impact of the deficiency notice on Sec. 6511(c) must be explored.

Limitation Period

Sec. 6511(c) gives a taxpayer six months from the expiration of an agreement extending the assessment period to file a claim for credit or refund. Under Sec. 6503(a), the issuance of a notice of deficiency suspends the running of the assessment limitation period. Accordingly, it appears that once the suspension ends, the unexpired portion of the limitation period—as extended by the Form 872 or 872-A—resumes, and, once it ends, the six-month period for filing refund claims provided in Sec. 6511(c) begins to run (see FSA 200221004). In addition, purely from a statute of limitation standpoint, payment of a deficiency determined by the Tax Court would trigger a two-year period under Sec. 6511(a) during which the taxpayer could file a refund claim for overpaid underpayment interest, up to the amount of the payment.

However, where for the same tax year(s) a statutory notice of deficiency has been issued and a Tax Court petition filed, a more fundamental consideration than the deadline for filing a refund claim for overpaid underpayment interest is whether such a claim can be filed at all, or if the taxpayer must instead raise the interest issues in the Tax Court, even if such interest is not related to the issues involved in the Tax Court case.

Tax Court Jurisdiction

Under Sec. 6512(a), if a taxpayer that receives a statutory notice of deficiency files a petition with the Tax Court, the court acquires exclusive jurisdiction to determine the existence of a deficiency or an overpayment in tax for the tax years covered by the statutory notice. Accordingly, no credit or refund of tax (income, gift, estate, and certain excise taxes) for the same tax year will be allowed or made, and no refund suit in any other court may be brought, except for:

• Overpayments determined by a Tax Court decision that has become final;
• Any amount the IRS collects that is in excess of the tax computed in accordance with the Tax Court’s final decision;
• Any amount collected after the collection limitation period has expired;
• Overpayments attributable to partnership items that are determined at the partnership level in a separate proceeding, according to the TEFRA (Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248) partnership rules of Secs. 6221–6233;
• Any amount that was collected within the period during which the Service is prohibited from collecting by levy or through a court proceeding under Sec. 6213(a); or
• Any claim for credit or refund of an overpayment that is not contested on appeal and that the IRS is authorized to refund under Sec. 6512(b)(1).

In Barton, 97 T.C. 548 (1991) (reviewed by the full court), the Tax Court determined that it had jurisdiction over previously assessed and paid underpayment interest—not related to the determinations set forth in the statutory notice of deficiency—insofar as such interest could be considered in determining whether there was an overpayment for the years before the court. The Tax Court also pointed out that underpayment interest is treated as tax for purposes of Sec. 6512, i.e., that the exception in Sec. 6601(e) to the general rule that interest is treated like tax relates only to the definition of a deficiency and not to Sec. 6512.

Therefore, although it does not appear that either the IRS or the Department of Justice has ever raised the issue, if the term “interest” is read into Sec. 6512(a), that Code section arguably could preclude a taxpayer that has received a statutory notice of deficiency and has filed a petition with the Tax Court from later filing a separate claim or suit for a refund of overpaid underpayment interest that is not related to the Tax Court case.

Observations

If a refund opportunity based on overpaid deficiency interest is identified while a Tax Court case is pending, the taxpayer may want to discuss with its counsel whether the Tax Court petition can or should be amended to raise the interest issues. Simply deferring the interest issues until after the Tax Court decision has become final would appear to entail some risk. Sec. 6512 would not, however, preclude a claim or suit for additional overpayment interest because that would not involve a refund or credit of monies previously paid to the IRS by the taxpayer.

If a dispute arises over the Service’s computation of interest due on a tax deficiency determined by the Tax Court, under Sec. 7481(c) the taxpayer may, within one year from the date the Tax Court decision becomes final, move to reopen the case for the sole purpose of having the court determine whether:

• The taxpayer has made an overpayment of interest (i.e., paid the IRS too much deficiency interest); or
• The IRS has made an underpayment of interest (i.e., failed to pay the taxpayer enough overpayment interest).

Because Sec. 7481(c)(1) speaks in terms of “a redetermination (by the Tax Court) of the amount of interest involved,” a motion filed under that section might be limited to interest directly related to the deficiency or overpayment determined by the court, thereby precluding a motion involving previous instances in the same tax year(s) where the taxpayer may have paid too much underpayment interest or received too little overpayment interest.

EditorNotes

Annette Smith is with Price-waterhouseCoopers LLP, Washington National Tax Services, in Washington, DC.

Unless otherwise noted, contributors are members of or associated with Pricewater-houseCoopers LLP.

For additional information about these items, contact Ms. Smith at (202) 414-1048 or annette.smith@us.pwc.com.