Editor: Valrie Chambers, Ph.D., CPA
Procedure & Administration
The IRS charges interest on deficiencies that are assessed. If the IRS does not compute the deficiency interest correctly, there is a time limit for taxpayers to file a claim for overcharged deficiency interest. Similarly, taxpayers earn interest on certain overpayments. If the IRS does not refund the correct interest, what is the statute of limitation for a claim for additional interest? Related to these issues are questions about the statute of limitation for a claim for refund for interest netting and how long the IRS has to assess the correct amount of deficiency interest. The answers to these questions may surprise even experienced tax professionals.
Tax professionals know the general rule for the statute of limitation for assessments and refunds. Sec. 6501(a) states that additional tax must be assessed within three years after the date the return is filed. Sec. 6511(a) states that a claim for refund of overpaid taxes must be filed within three years from the date the return is filed or two years from the time the tax is paid, whichever is later.
Under Sec. 6601(e)(1), interest on a tax is treated as a tax; therefore the Sec. 6511(a) statute of limitation applies to a request for refund of overcharged deficiency interest. If a taxpayer determines that deficiency interest has been overcharged, the taxpayer must file a claim for refund within three years after the return is filed or two years from the payment date. Unfortunately, the starting date for the two-year period may not be as clear-cut as it would seem. Many times the IRS transfers money from one of a taxpayer’s accounts to another to satisfy an outstanding tax liability. In this situation, the starting date for determining the two-year limitation period is the date the IRS moved the money, rather than the date the taxpayer made the payment (Fitzmaurice, No. H-98-3906 (S.D. Tex. 6/2/99)).
If it is determined that the IRS has overcharged deficiency interest, the taxpayer should file a claim for refund. This claim must be filed before the expiration of the statute.
Sec. 6511 applies only to a refund of amounts paid to the IRS. If taxpayers are entitled to additional statutory interest on an overpayment, they have six years to receive the correct amount of interest. To obtain the overpayment interest, they must file a claim with the IRS. However, that may not be enough to protect a taxpayer’s rights. 28 U.S.C. Section 2401(a) states that civil action will be barred if a suit is not filed within six years “after the right of action first accrues.” Filing a formal or informal claim with the IRS will not be sufficient to toll the running of the statute; if the IRS has not acted on the claim for the overpayment interest, the taxpayer will have to file a civil suit against the United States.
The general rules for statutes of limitation discussed above must be considered together to determine the deadline for filing a claim related to interest netting. While a full discussion on the rules for interest netting is outside the scope of this column, it is important to understand the meaning of interest netting before discussing the related statute of limitation.
Sec. 6621(d), which was enacted in 1998, provides that for corporate taxpayers, to the extent there is both deficiency interest and refund interest accruing for the same time period on equivalent amounts, the difference in the underpayment and overpayment interest rates, which can be as much as 4.5%, will be equalized. In other words, the rate of deficiency interest will be lowered to be the same rate of interest that is accruing on the overpayment, and the net rate of interest will be zero. Sec. 6621(d) and the applicable revenue procedures require that at least one of the periods must be open at the time the claim is filed.
The IRS generally will apply the interest netting provision by reducing the deficiency interest and issuing a refund of the interest. If the deficiency interest statute under Sec. 6601 is not open, the IRS will increase the refund interest rate and issue a refund of overpayment interest.
Statute of Limitation on Deficiency Interest
While the 6-year statute of limitation on statutory interest on an overpayment may be new to many tax professionals, there is also a little-known 10-year statute for the IRS to assess deficiency interest. Sec. 6601(g) relates to the limitation on assessment and collection of interest and states that the interest “may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected.” Sec. 6502 allows the IRS a period of 10 years after the assessment to collect tax. Therefore, if the IRS timely assesses a tax liability and does not properly assess the related interest, it has 10 years to assess and collect the correct amount of deficiency interest. The IRS generally assesses interest at the same time as the tax, and this provision is not widely used, but tax professionals and taxpayers should know that the IRS can assess and collect the correct amount of deficiency interest after the assessment period under Sec. 6501 has expired.
Whether a taxpayer is able to correct an IRS interest error must be determined on a case-by-case basis by examining the facts and circumstances of each situation. Hopefully, for many taxpayers the answer will be yes.
Valrie Chambers is a professor of accounting at Texas A&M University in Corpus Christi, TX. Susan Pick is with Grant Thornton LLP in Edison, NJ. They are both members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at Valrie.Chambers@tamucc.edu.