Editor: Annette B. Smith, CPA
Procedure & Administration
Sec. 6402(a) allows the IRS, within the applicable limitation period, to credit the amount of an overpayment, including any allowable interest, against any liability in respect of an internal revenue tax owed by the person who made the overpayment.
Although offsetting is discretionary (see Northern States Power Co., 73 F.3d 764 (8th Cir. 1996) ("Section 6402 is clear: the IRS 'may credit the amount of such overpayment . . . against any liability' ")), the IRS generally will offset to the extent that the liability exists at the time the overpayment is determined (Federal National Mortgage Association, 56 Fed. Cl. 228 (2003)).As a practical matter, such offsets occur routinely.
An offset under Sec. 6402(a) implicates the limitation period on credits or refunds provided in Sec. 6511. One way for a credit or refund claim to be timely under Sec. 6511(a) is for it to be filed within two years from the time the tax was paid; thus, it is critical to determine the date on which a liability satisfied by credit of an overpayment is considered to have been paid.
That same determination also is relevant to the lookback period in Sec. 6511(b)(2)(A), which limits the amount that can be credited or refunded when a timely claim has been filed. That provision describes a period that ends on the date the claim for credit or refund is filed and begins three years before that date. Any amount paid within that lookback period (plus the period of any extension of time for filing the return) may be credited or refunded pursuant to that claim.
The question of when a liability satisfied by a credit offset is considered paid is not answered by Sec. 6513. That section provides that (1) prepayments (including withheld tax and estimated tax) are deemed to have been paid on the unextended due date of the taxpayer's return (Secs. 6513(a) and (b)); and (2) an income tax overpayment the taxpayer elects to have applied to the next year's estimated tax liability is considered a payment for that succeeding year (Sec. 6513(d)) and therefore deemed paid on the unextended due date of that return by operation of Sec. 6513(b). However, Sec. 6513 is silent with respect to Sec. 6402 offsets.
In the case of an offset, one possible "date of payment" is the date on which the overpayment actually is applied or "posted" to the balance due account. This approach not only has some logical appeal, but it also should be easy to administer because the date of the transfer would be set forth on the taxpayer's IRS account transcript.
Note: A credit transfer may have an effective date different than the date the transfer is applied to the new account. For example, assume that in 2014 the IRS determines an overpayment for a corporation's 2012 tax year and applies it to satisfy a balance due for 2010. While the transfer may post to the 2010 account in 2014, the credit generally will have an effective date of March 15, 2013, the unextended due date of the 2012 tax year. Accordingly, underpayment interest on the 2010 balance due will stop as of March 15, 2013.
Sec. 7422(d) may provide a different "date of payment" for an offset. Under that section, "The credit of an overpayment of any tax in satisfaction of any tax liability shall, for the purpose of any suit for refund of such tax liability so satisfied, be deemed to be a payment . . . at the time such credit is allowed." In relation to this, Sec. 6407 provides that the date on which the IRS first authorizes the scheduling of an overassessment is considered the date on which the refund or credit is allowed, and, pursuant to Regs. Sec. 301.6407-1, a credit or refund is considered to have been allowed on the date an authorized IRS employee certifies the allowance of the overassessment.
In General Instrument Corp., 33 Fed. Cl. 4 (1995), the Court of Federal Claims held that an overassessment of income taxes was scheduled within the meaning of Sec. 6407 when the certifying official signed a Form 2188, Voucher and Schedule of Overpayments and Overassessments. Under this approach, the date the credit is posted to the balance due account is immaterial; instead, it is the authorization date of the credit from the overpaid account that establishes when the payment is deemed to have been made. An obvious problem is that it is difficult, if not impossible, for a taxpayer to determine with any certainty when a certifying officer signed the Form 2188 (absent a Freedom of Information Act request or cooperation on the part of the IRS). The taxpayer is not notified that the form has been signed, and the signing date is not recorded on the account transcript.
In Parker Hannifin Corp., 71 Fed. Cl. 231 (2006), the Court of Federal Claims favored the allowance date over the posting date as determining when the payment occurred (but held that the presumption that a credit is allowed and deemed paid on the preposting date when the IRS officer signed Form 2188 did not apply because the form at issue had been destroyed and there was no other evidence of when the officer actually authorized the taxpayer's credit).
That approach is consistent with Internal Revenue Manual (IRM) Section 22.214.171.124.2(5), which provides that an "overpayment . . . credited to an underpayment of another year or to another type of tax . . . constitutes a payment on the date the credit is allowed." After acknowledging that Sec. 6402 does not specify the date on which an amount is considered paid, the IRM states that the date is supplied by Sec. 7422(d) regarding payment dates for civil refund actions, i.e., that a credit is allowed on the date on which the IRS first authorizes the scheduling of the overassessment.
However, in Reynoso, 692 F.3d 973 (9th Cir. 2012), the Ninth Circuit held that Sec. 7422(d) does not establish a "deemed paid" date for purposes of Sec. 6511 but instead deals only with the question of when a credit offset will be treated as a payment for purposes of being able to bring a suit for refund. Because a taxpayer must have paid its taxes in full before bringing a refund suit (Flora, 357 U.S. 63 (1958)), the court in Reynoso observed that if a taxpayer requests that an overpayment be credited against a liability but brings a refund suit before the credit is allowed, the credit is not considered a payment, and therefore the suit is barred.
Even though Reynoso did not involve an overpayment for one tax period that was offset against a balance due for another tax period under Sec. 6402(a)—and therefore did not address directly the issue of when the balance due is deemed to have been paid—the Ninth Circuit's rejection of the date the credit is allowed as the deemed payment date for purposes of the refund period of limitation under Sec. 6511 is significant.
The need for greater clarity also is illustrated by a number of cases that either do not discuss Sec. 7422(d) or cite it but either equate the date on which an overpayment credit is applied to the taxpayer's account with the date the credit is allowed or at least fail to differentiate between those two dates. For example, in Donahue, 33 Fed. Cl. 600 (1995), the Court of Federal Claims held that a 1985 deficiency was satisfied on the date the IRS credited a 1988 tax overpayment against it, and the time the 1985 tax was paid for purposes of Sec. 6511(a) is the date of the credit. In Bazargani, No. 91-4709 (E.D. Pa. 5/26/92), the IRS assessed additional income tax, interest, and penalties for the 1982 tax year. The liability was partially satisfied by offsetting the taxpayer's 1986 tax overpayment, which occurred on April 15, 1987. The court stated that Secs. 6407 and 7422(d) clearly applied but held that the effective date on which the two-year period for claiming the refund began was the date on which the IRS credited the refund to pay the 1982 tax, April 15, 1987.
Finally, it should be noted that even if the date on which the IRS first authorizes the scheduling of an overassessment does not establish a payment date for purposes of the period of limitation on refunds, the date on which Form 2188 is signed still is relevant to actions brought under the general claims statute (Tucker Act claims) for additional overpayment interest. That is because the six-year limitation period that applies to those suits begins to run on the date the refund was allowed.
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.
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