The Dbriefs Tax Controversy series presents:

Deposits and Advance Payments: Rules and Strategies to Protect Your Options
Thomas Cryan, Deloitte Tax LLP John Keenan, Deloitte Tax LLP Randy Bessinger, Deloitte Tax LLP August 31, 2011

Agenda
Introduction Deposits and advance payments Options to reduce interest accrual Question & answer

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Deposits and advance payments

Overview Deposits
IRC 6603 Rev. Proc. 2005-18 (superseded Rev. Proc. 84-58)
Implemented IRC 6603 Establishes procedures to make, withdraw, or identify deposits to suspend the running of interest on potential underpayments Provides for interest on the deposit returned to the taxpayer to the extent the deposit is attributable to a disputable tax Enables taxpayers to limit exposure to underpayment interest in a tax dispute without surrendering access to funds for an indefinite term in a non-interest bearing account

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Poll question #1
Have you made a deposit under 6603?
Yes No Not applicable

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Interest on deposits
Interest will be paid on returned deposits at the short-term Federal rate provided for in IRC 6621(b) but only on the portion of the deposit attributable to a disputable tax

Interest will be paid from the date of deposit to a date not more than 30 days preceding the date of the check

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What is a Disputable Tax?

A disputable tax is the amount of tax specified by the taxpayer at the time of the deposit as the reasonable estimate of the maximum amount of tax attributable to disputable items A disputable item is any item of income, gain, loss, deduction or credit if the taxpayer has a reasonable basis for its treatment of the item and reasonably believes that the IRS also has a reasonable basis for disallowing the taxpayers treatment of the item

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Calculating the Disputable Tax

If the deposit is made prior to the issuance of a 30-day letter, any reasonable method may be used to calculate the amount of disputable tax

To the extent that a taxpayers calculation of a disputable tax exceeds the amount proposed as a deficiency in a 30-day letter issued to the taxpayer, or the taxpayer desired to remit a deposit prior to receiving a 30-day letter, the taxpayer must provide a written statement to the Service identifying and describing the amount of the disputable tax at the time the deposit is remitted

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Designating a Deposit Under IRC 6603

Deposit should be sent to the IRS Center where the taxpayer files its return or to the office where the taxpayers return is under examination A written statement designating the remittance as a deposit must accompany the deposit
The statement must include:
The type(s) of tax; The tax year(s); and Statement identifying the amount of and basis for the disputable tax

Interest on an assessed tax liability will be suspended on the date the deposit is received by the IRS

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Statement Identifying the Amount of and Basis for the Disputable Tax
Taxpayers relying on the proposed deficiency in a 30-day letter may provide a copy of that letter with the deposit in lieu of a written statement
However, if the taxpayers calculation exceeds the proposed deficiency in the 30-day letter or the taxpayer wants to remit a deposit prior to receiving a 30-day letter, additional information must be included in the written statement

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Poll question #2
For those taxpayers who made 6603 deposits, which of the following did you deposit? An amount equal to that shown on the 30-day letter An amount less than that shown on the 30-day letter An amount greater than that shown on the 30-day letter Not Applicable

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Statement Identifying the Amount of and Basis for the Disputable Tax
The statement must also include:
The taxpayers calculation A description of the item for which the taxpayer has a reasonable basis for the treatment of the item on its return, and for which the taxpayer reasonably believes that the IRS also has a reasonable basis for disallowing the taxpayers treatment of the item The basis for the taxpayers belief that it has a reasonable basis for the tax treatment and that the IRS also has a reasonable basis for disallowing the taxpayers treatment of the item

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Failure to Identify Amount and Nature of the Disputable Tax

IRS will not allow interest on a deposit that does not properly identify the amount and nature of the disputable tax
If the taxpayer subsequently provides a written statement identifying and describing the disputable tax, interest will accrue on the deposit from the date the additional information is provided to the IRS
In lieu of a written statement, a taxpayer may rely on the amount of a deficiency proposed in a 30-day letter as the amount of the disputable tax, but the taxpayer must provide a copy of the 30-day letter to the Service

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Withdrawal of Deposits
Deposits may be withdrawn at any time before the IRS uses the deposit as a payment of tax
A written statement to withdraw the deposit should be sent to the office where the deposit was remitted The statement must include:
The date(s) and amount(s) of the original deposit(s); The type(s) of tax to which the deposit was intended to be applied; The tax year(s) to which the deposit was intended to be applied

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IRS Ability to Credit/Offset IRC 6603 Deposit

The Service cannot unilaterally credit an excess IRC 6603 deposit to an outstanding liability under IRC 6402(a) The Service does not have the authority to offset excess IRC 6603 deposits to pay other outstanding balances

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Poll question #3
Has the Internal Revenue Service returned to you a Section 6603 deposit attributable to a disputable tax and paid interest on the deposit? Yes No Not Applicable

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Options to reduce interest accrual

Strategies for Making a Deposit Prior to Issuance of a 30-Day Letter

Make deposit when there is reasonable certainty IRS will examine and challenge the taxpayers treatment of an item
Schedule M-3 permanent items Schedule UTP items Form 8275 or Form 8275-R Form 5701 Identified in audit plan or LIFE MOU

Emphasize why taxpayer has reasonable basis for the tax treatment of an item
Use IRS published guidance or Form 5701 to explain why IRS has reasonable basis for disallowing the taxpayers treatment of the item
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Strategies for Making a Partial Advance Payment after Issuance of 30-Day Letter
No requirement to identify items in dispute and basis for taxpayers belief with regard to taxpayers treatment of an item and IRS disallowance of an item

Stops hot interest on portion of proposed deficiency

Preserves the right to go to Tax Court

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Strategies for Making a Full Advance Payment after Issuance of 30-Day Letter
Eliminates future accrual of any interest Eliminates ability to petition Tax Court

Accelerates ability to file refund claim and bring suit in District Court or Court of Federal Claims
Prevents Appeals Officer from speculating on taxpayers view of issues

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Strategies for Making a Full Advance Payment after Issuance of 90-Day Letter
Eliminates future accrual of any interest Hot interest accrues from 31st day after issuance of 30-day letter to advance payment Allows taxpayer to petition Tax Court Allows taxpayer to file refund claim and bring suit in District Court or Court of Federal Claims

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Completion of Examination
If the taxpayer executes a waiver of restrictions on assessment and collection or agrees to the full amount of the deficiency, the deposit will be treated as a payment of tax as of the date of assessment.
Interest on any underpayment will accrue from the due date of the original return (without regard to an extension) to the date the deposit was made by the taxpayer.

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Completion of Examination
If the taxpayer does not execute a waiver of restrictions on assessment and collection and agree to the full amount of the proposed deficiency, a 90-day letter will be issued
Taxpayer may file a petition with the Tax Court and request, before the expiration of the 90 or 150-day period, that the deposit continue to be treated as a deposit during the Tax Court proceedings
Failure to make such a request will allow IRS to convert the deposit to an advance payment

Taxpayer may decide to not file a petition with the Tax Court but the deposit will be treated as a payment of tax upon expiration of the 90 or 150-day period during which assessment is stayed

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Poll question #4
A taxpayer who makes a 6603 deposit will be precluded from petitioning the Tax Court. True False Not Applicable

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Excess Deposits of Disputable Tax

Taxpayer may elect, in writing, to have excess deposits applied against another assessed or unassessed liability
Request must be sent to same office where original deposit was made If excess deposits are applied to another assessed or unassessed liability, interest will continue to accrue from the date of the original deposit provided that the excess on the original deposit relates to a disputable tax For example, a deposit of $200 is made on 5/1/2005 (the disputable tax is $200) for a 2008 liability and the taxpayer has an excess deposit of $100 which is then applied to the 2009 liability. The taxpayer will receive interest on the excess deposit from 5/1/2005 to 3/15/2010 (due date of the 2009 liability)

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Question & answer

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Contact info
Tom Cryan tcryan@deloitte.com +1 202 378 5238 John Keenan jkeenan@deloitte.com +1 202 879 5605 Randy Bessinger rbessinger@deloitte.com +1 816 802 7219

Copyright 2011 Deloitte Development LLC. All rights reserved.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

Copyright 2011 Deloitte Development LLC. All rights reserved.

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