IRS Issues Guidance as to Interest on Overpayments and Subsequently Determined Deficiencies.
Situation 2. The facts are the same as in Situation I, except that X paid $23x on April 15,1996 and $14x on June 15, 1996, instead of the required payments of $25x on each of these dates.
Situation 3. A, an individual, files Federal income tax returns on a calendar-year basis. In 1995, A made timely estimated tax payments of $100x. On April 15, 1996, A filed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and received a 4-month extension. On Aug. 15, 1996, A filed Form 1040 for 1995, showing tax due of $80x, and requested a refund of the $20x overpayment. The overpayment is deemed to arise on April 15, 1996. The refund was made within 45 days of the date the timely return was filed, by a check dated Sept. 14, 1996. In 1998, the Service examined A's 1995 return and determined that the correct tax was $85x, resulting in a deficiency of $5x.
Situation 4. The facts are the same as in Situation 3, except that A's correct tax liability was $105x, resulting in a deficiency of $25x.
Sec. 6601(a) provides that, if any amount of tax is not paid on or before the last date prescribed for payment, interest will be paid on the amount from such last date to the date paid. Sec. 6151(a) provides, in general, that the date prescribed for payment is the time fixed for filing the return, determined without regard to any extension of time for filing. Sec. 6601(b)(1) provides that, for determining interest on underpayments, the "last date prescribed for payment" is determined without regard to any extension of time for payment or filing.
Regs. Sec. 301.6402-3(a)(5) provides that a taxpayer may elect to apply all or part of the overpayment shown on its return to its estimated tax for the succeeding tax year by so indicating on its return. No interest is allowed on the portion of the overpayment credited and the amount of the credit is applied as a payment on account of the estimated income tax for the year or the installments thereof.
In Rev. Rul. 77-475, revoked by Rev. Rul. 83-111, the IRS held that, if an overpayment of income tax for a tax year occurs on or before the due date of the first installment of estimated tax for the succeeding tax year, the overpayment is available for credit against any installment of estimated tax for such succeeding tax year and will be credited in accordance with the taxpayer's election. If the overpayment occurs after the due date of the first installment of estimated tax for the succeeding tax year, it may be credited only against an installment of estimated tax due on or after the date the overpayment was made. Under these circumstances, Sec. 6655(b)(3) provides that a payment of estimated tax by a corporation is credited against unpaid required installments in the order in which the installments are required to be paid; Sec. 6654(b)(3) provides the same rule for individuals.
The Tax Reform Act of 1984 provides that the application of the Code with respect to the crediting of an overpayment against estimated tax shall be determined without regard to Rev. Rul. 83-111 and with full regard to the rules in effect prior to Rev. Rul. 83-111. The legislative history provides that "[w]here the credit is made to an estimated tax payment arising prior to the election [to credit the overpayment], interest on the overpayment will not be payable, and interest on the underpayment which arises because of a deficiency in tax for the prior year will run from the date the credit is effective:"
Rev. Rul. 84-58 held that, for returns filed after 1983, when a taxpayer elects to have an income tax overpayment credited against the succeeding year's estimated tax, the Service will apply overpayments arising on or before the due date of the return against the first installment payment of the succeeding year's estimated tax, unless the taxpayer requests that it be applied to a later installment.
Rev. Rul. 88-98 held that, when a taxpayer claims an overpayment on a return filed either on the original due date or on extension and the claimed overpayment is applied in full against an installment of the succeeding year's estimated tax, interest on a subsequently determined deficiency for the earlier year runs from the due date of that installment on the part of the deficiency equal to or less than the claimed overpayment and from the original due date of the return on the remainder. Rev. Rul. 88-98 follows Avon Products, Inc., 588 F2d 342 (2d Cir. 1978), in which the court interpreted Sec. 6601(a) to mean that interest on a deficiency can only be charged when the tax is both due and upaid. The date the overpayment becomes a payment on account of the succeeding year's estimated tax determines the date the prior year's tax became unpaid for purposes of Sec. 6601(a). Prior to that date, the government has the use of the funds with respect to the prior year's tax, and no interest is payable on the overpayment that is the subject of the taxpayer's election. In the case of a refund made without interest under Sec. 6611(e), the date on which the tax is both due and unpaid is when the amount in question is refunded, even when that date is subsequent to the date of the refund claim.
In Situation 2 of Rev. Rul. 88-98, the IRS applied the taxpayer's 1983 overpayment to the first installment of its 1984 taxes because the taxpayer did not indicate the installment to which the overpayment was to be applied. Because the overpayment was applied to the first installment, interest ran from April 15, 1984 on a subsequently determined deficiency for 1983 that was equal to or less than the claimed overpayment. However, Situation 2 did. not indicate whether the taxpayer had actually made all or part of the April 15 estimated tax payment. Thus, it is not clear whether the taxpayer received any benefit of the overpayment as a payment of the April 15 installment.
In May Department Stores Co., 36 Fed C1 680 (1996), the taxpayer elected to credit an overpayment shown on its 1983 tax return to the succeeding year's estimated tax liability, but did not attach a statement to its return indicating the installment to which the Service should credit the overpayment. Pursuant to Rev. Rul. 84-58, the IRS applied the overpayment to the first installment. A deficiency was determined for the taxpayer's 1983 tax year and interest was assessed by the Service on the deficiency from the due date of the first installment in accordance with Situation 2 of Rev. Rul. 88-98. However, the taxpayer had made estimated tax payments sufficient to avoid the addition to tax imposed by Sec. 6655 for 1984 for the first and second installments of estimated tax due for 1984. The court concluded that the IRS's application of the taxpayer's 1983 overpayment to the first installment did not change the fact that the government had the use of the taxpayer's overpayment from the due date of the first installment (May 15) to the date the overpayment was applied to the third installment (October 15), as the overpayment was not needed to satisfy any installment of estimated tax due during that period.
In light of May Department Stores, the Service has reconsidered the manner in which interest on a subsequently determined deficiency is computed under Sec. 6601(a) when the taxpayer makes an election to apply an overpayment to the succeeding year's estimated taxes. When a taxpayer elects to apply an overpayment to the succeeding year's estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose, in the order in which they are required to be paid to avoid an addition to tax for failure to pay estimated income tax under Sec. 6654 or 6655 with respect to such year. The IRS will assess interest on a subsequently determined deficiency for the overpayment year from the date(s) the overpayment is applied to the succeeding year's estimated taxes.
Because the overpayment will be applied in the order necessary to avoid the addition to tax for underpayment of estimated tax, designation of all or part of the overpayment to a specific estimated tax installment is not necessary. Accordingly, the Service will not accept such designations after Oct. 4, 1999.
In Situation 1, interest on the $5x deficiency for 1995 runs from Sept. 15, 1996, the date on which the $10x overpayment is applied to X'S third installment of 1996 estimated taxes. The overpayment was not needed to satisfy an installment of estimated tax prior to Sept. 15, 1996.
In Situation 2, interest on the $5x deficiency for 1995 mm from June 15, 1996, the date on which the overpayment is applied to X's 1996 estimated taxes. A portion ($2x) of the overpayment is applied to the April 15 installment of 1996 estimated tax. The remaining $8x of the overpayment is applied to X's June 15 installment of 1996 estimated tax. Became the $8x portion of the return overpayment exceeded the subsequently determined deficiency of $5x, interest does not begin to run for 1995 before the date that portion was applied to X's 1996 estimated taxes.
In Situation 3, interest on the $5x deficiency runs from Sept. 14, 1996. Although A's 1995 taxes were due on April 15, 1996, A's 1995 taxes were not underpaid until the $20x was refunded without interest to A on Sept. 14, 1996.
In Situation 4, interest runs from Sept. 14, 1996 on $20x of the deficiency and from April 15, 1996 on the remaining $5x of the deficiency. Because A's 1995 taxes of $105x were due on April 15, 1996 and A had only paid $100x as of that date, A's 1995 taxes were underpaid by $5x on April 15, 1996. Nevertheless, A was not underpaid with respect to the $20x until that amount was refunded to A on Sept. 14, 1996.
In all situations, the estimated tax rules in effect for the tax year for which the election to credit a return overpayment is effective are used to determine when the overpayment is applied to that tax year's estimated taxes and, thus, for determining when interest begins to run on the subsequently determined deficiency.
When a taxpayer reports an overpayment on its income tax return, interest will be assessed on that portion of a subsequently determined deficiency for the overpayment return year that is less than or equal to the overpayment as of the date on which (1) the IRS refunds the overpayment without interest or (2) the overpayment is applied to the succeeding year's estimated taxes. Interest will be assessed on any remaining portion of the deficiency from the original due date of the tax for the overpayment return year.
REV. RUL. 99-40, IRB 1999-40
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|Author:||Fiore, Nicholas J.|
|Publication:||The Tax Adviser|
|Date:||Dec 1, 1999|
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