Update on IRS Tax Deposits and a Potential Crack in the Door for Interest Abatement?

I recently wrote a blog about whether partners in BBA partnerships can make deposits under IRC Section 6603. That blog can be found here.

Now there are more updates to share about deposits, although this time unrelated (at least directly) to BBA partnerships.

In Ahmed v. Commissioner (link), a taxpayer was charged a sizeable trust fund recovery penalty by the IRS. It is not clear whether the taxpayer received proper notice of the IRS trust fund penalty charges.

The IRS later filed Notices of Federal Tax Lien (“lien notices”) in the public record, which naturally caught the taxpayer’s attention. The taxpayer challenged the filing of the lien notices with the IRS and, after failing to resolve the issue with the IRS, took the matter to Tax Court. The Tax Court eventually concluded that the IRS had failed to verify that the IRS mailed notice of the penalty charges to the correct address. And, as a result, the Tax Court sent the case back to the IRS but kept the case open while the IRS considered the case.

While the case was back with the IRS, the taxpayer, likely to mitigate the impact of interest accruals, sent $625,000 to the IRS with instructions that the IRS treat the remittance as a “Deposit in the Nature of a Cash Bond Under IRC § 6603.” The IRS, however, ignored the taxpayer’s instructions and treated the remittance as a payment of tax. It then filed a pleading with the Tax Court to dismiss the case, arguing that the liability had been paid in full and the case was moot. The Tax Court agreed with the IRS and dismissed the case.

The taxpayer appealed the Tax Court decision to the Third Circuit. In its opinion (linked above), the Third Circuit noted that there is no statute that conclusively frames the taxpayer’s remittance as a payment or a deposit. Also relevant, the Third Circuit stated that when trust fund penalties are charged, taxpayers normally have 30 days to post bond after IRS notice and demand for payment. Here, however, it is not clear if the taxpayer received the legally-required “notice and demand” for payment.

The Third Circuit concluded that if the taxpayer did not receive the legally-required “notice and demand” for payment, the taxpayer made a deposit, not a payment. But if the taxpayer did receive that notice, the remittance should be classified as a payment, which would render the case moot with one possible exception. The Third Circuit stated that the Tax Court has authority to abate interest caused by unreasonable IRS error or delay, which means the case would not be moot. The Third Circuit sent the case back to the Tax Court to consider those issues.

The Ahmed case illustrates the complexity of determining whether a remittance is a payment or a deposit. The case also demonstrates that there may be a possibility for taxpayers to obtain interest abatement, in limited circumstances. Ultimately, if a taxpayer wishes to make a deposit, they should consult with legal counsel to make sure they get it right.

If you have any questions about this article or any tax matter, please contact me at jglassman@meadowscollier.com or 214-749-2417.