New procedure for the suspension of interest on underpayments.

The IRS released Rev. Proc. 2005-18, which provides taxpayers with procedures to make, withdraw or identify deposits to suspend the running of interest on potential underpayments under new Sec. 6603, added by the American Jobs Creation Act of 2004, Section 842(a). Rev. Proc. 2005-18 supersedes Rev. Proc. 84-58, which set forth procedures for making deposits in the nature of a cash bond before Sec. 6603's enactment.

Sec. 6603

Under Sec. 6603, taxpayers can make a deposit to suspend the running of interest on potential tax underpayments and accrue interest on the "disputable tax" liability eventually refunded after the proposed deficiency is finally resolved. Sec. 6603(d)(2) defines "disputable tax" as the amount of tax specified at the time of the deposit as the taxpayer's reasonable estimate of the maximum amount of tax attributable to "disputable items." Sec. 6603 (d) (3) (A) defines a "disputable item" as any item of income, gain, loss, deduction or credit for which the taxpayer has a reasonable basis for the treatment of such item and reasonably believes that the Service also has a reasonable basis for disallowing that treatment. If the taxpayer received a 30-day letter, the amount of the proposed deficiency noted in the letter is the minimum amount of the disputable tax.

Making a Deposit

A taxpayer may request the return of all or part of a deposit at any time before the IRS uses it for payment of the tax. However, interest is payable only on the portion of the deposit attributable to the disputable tax.

A deposit must be accompanied by a written statement designating the remittance as a Sec. 6603 deposit. The statement must include the types of tax, tax years and the amount of and basis for the disputable tax. To the extent the deposit is used to pay a tax liability, the tax will be treated as paid on the date of deposit.

Calculation of Disputable Tax

According to the IRS, taxpayers may use any reasonable method to calculate the disputable tax. Taxpayers relying on a proposed deficiency in a 30-day letter may simply provide a copy of the letter with the deposit and written statement. However, if the taxpayer's calculation of a disputable tax exceeds the deficiency proposed in the 30-day letter or the taxpayer seeks to remit a deposit before receiving such letter, the statement must also include:

* The taxpayer's calculation;

* A description of the item in question; and

* The basis for the taxpayer's belief that (1) it has a reasonable basis for how it treated such item and (2) the IRS also has a reasonable basis for disallowing such treatment.

The IRS will not allow interest on a deposit that does not properly identify the amount and nature of the disputable tax.

Effective Date

Rev. Proc. 2005-18 was effective as of March 28, 2005, and sets forth transition rules for deposits made under Rev. Proc. 84-58, but taxpayers had to comply before May 27, 2005.

Taxpayers that made a deposit in the nature of a cash bond under Rev. Proc. 84-58, but before Sec. 6603's enactment, had to re-designate the amount as a Sec. 6603 deposit by submitting a written statement to the IRS before May 27, 2005. These deposits will be treated as made on Oct. 23, 2004 for Sec. 6603(d) purposes, if the taxpayer sent a written statement to the IRS before May 27, 2005. Statements submitted after that date on such deposits will be treated for interest purposes as made on the date the IRS receives the statement.

In general, taxpayers should consider making this designation, because cash bonds do not accrue interest and, in most cases, the IRS has already identified the disputable tax in a 30-day letter or in Form 5701, Notice of Proposed Adjustment.

Deposits made after Oct. 22, 2004, the enactment date, and before March 28, 2005, will be treated as Sec. 6603 deposits on the date remitted, if the taxpayer sent a written statement to the IRS before May 27, 2005.

Nothing in Rev. Proc. 2005-18 and Sec. 6603 and its legislative history seem to bar a taxpayer from making an advance payment for all or a portion of a deficiency proposed in a 30-day letter and claiming an interest deduction for the allocable amount of the payment. Such an advance payment would eliminate the need to comply with Rev. Proc. 2005-18 requirements, but would preclude the option of going to the Tax Court if the entire proposed deficiency is paid. FROM JAMES DOUGHERTY, DIRECTOR, THOMAS CRYAN, DIRECTOR, AND SHARLENE SYLVIA, MANAGER, TAX CONTROVERSY SERVICES, DELOITTE TAX LLP, WASHINGTON, DC

Mark H. Ely, J.D., CPA 

Partner

Washington National Tax

KPMG LLP

Washington, DC