When Must the IRS Pay Interest on Refunds?

Under Sec. 6611(a), a taxpayer is generally entitled to receive interest on a tax overpayment. Sec. 6611(e), however, provides that no interest is allowed on any overpayment refunded within 45 days after the returns unextended due date or, in the case of a return filed after that date, within 45 days after filing the return. The question arisesdoes the date the refund is allowed or the refund checks date determine whether the IRS has issued a refund within the 45-day period?

Background

Sec. 6611(e) was enacted in 1954 and amended in 1966 to cover returns filed after the original due date. In GCM 39772, the provision was described as essentially an administrative rule designed to provide a grace period for the Service to process a refund, and a certain incentive to do so quickly. GCM 39772 also correctly notes that the applicability of Sec. 6611(e) depends solely on the timing of a specific governmental actionthe making of a refundnot on any factor within a taxpayers control.

Although Sec. 6611(e) seems to be quite straightforward, there is a surprising lack of guidance (and, thus, clarity) on exactly what the IRS has to do within 45 days to avail itself of the interest-free period provided by Congress. The simple answer is that the Service has to refund the overpayment to the taxpayer. The question remains, however, as to when a refund actually takes place.

Refund Date

The two logical possibilities for determining the refund date are the (1) refund checks date and (2) the date on which the refund is scheduled, within the meaning of Sec. 6407. That provision states, [t]he date on which the Secretary first authorizes the scheduling of an overassessment...shall be considered as the date of allowance of refund or credit in respect of such tax. No definitive authority exists on which date is correct; however, based on existing guidance (discussed below), the better answer appears to be that the check date determines when an overpayment has been refunded for Sec. 6611(e) purposes.

Existing Authority

In GCM 39772, the IRS Chief Counsel needed to decide when an overpayment claimed on an original return was refunded, to determine when interest on a subsequently determined deficiency for the same tax year began to run. It concluded, the check date is the appropriate date because it is the payment, not the allowance, of the refund that should govern interest accrual. GCM 39772 goes on to state (without citing any authority), [o]n similar reasoning, the check date, not the schedule date, is used in determining whether the 45-day rule [Sec. 6611(e)] applies.

Significantly, at one time, the last sentence of Regs. Sec. 301.6611-1(j) provided that, for purposes of the 45-day rule, an overpayment shall be considered refunded on the date of allowance as prescribed in section 6407. However, TD 7301 (1/3/74) deleted that sentence. In a Technical Memorandum (dated July 14, 1972), prepared in connection with TD 7301, the Service explained that the deletion was based on (1) the Supreme Courts rejection in Wurts, 303 US 414 (1938), of the Services argument that the two-year period of limitations within which it can recover an erroneous refund began on the date the overpayment was scheduled; and (2) on advice of the Office of Chief Counsel, that the date of allowance of the refund is not the date of the refund under section 6611(e).

The Technical Memorandum also referenced Weyerhaeuser Co., WD WA 5/14/71 (unreported), in which the court apparently rejected the IRSs argument that the critical date under Sec. 6611(e) is the date the overpayment is certified (i.e., scheduled) for refund. In AOD 1971-419, the IRS Chief Counsel recommended that the decision in Weyerhaeuser Co. not be appealed, but voiced some reservations about the courts decision.

Finally, the Technical Memorandum notes that the amendment to the regulations that divorced the refund date for Sec. 6611(e) purposes from the schedule date is favorable to taxpayers since the refund of an overpayment will be less likely to occur within the 45-day period in section 6611(e) and interest will be owing in more cases.

Conclusion

In light of the foregoing, the refund checks date reasonably seems to determine whether a tax overpayment has been refunded within 45 days, in spite of the absence of any reported court cases to that effect.

From Michael A. Urban, J.D., MLT, Washington, DC