Ask The California Employment Tax And Payroll Tax Attorney – Making An IRS Tax Payment Vs. Making A Deposit In The Nature Of A Cash Bond – Timing Is Everything

By Robert S. Schriebman
2022

Introduction

Let’s start our discussion by pointing out the differences between a tax payment and a deposit in the nature of a cash bond (deposit).  Making a tax payment is fairly straightforward.  You either write a check to the IRS or pay online.  Most of us never heard of a deposit in the nature of a cash bond.  What’s the difference?  Payment of the tax either pays off the IRS in whole or in part.  If you owe the IRS, there may be accruing interest and perhaps late penalties.  A deposit, on the other hand, is not a payment, but it may stop the running of interest or the potential assessment of penalties.  A deposit does not start the running of the statute of limitation for filing a claim for refund, whereas, payment of the tax starts the statute.  A deposit may be refundable whereas a payment is not.

A deposit should be made before an assessment is issued by the IRS.  For example, a person being audited by the IRS is informed that there will be a future assessment.  Before the assessment is issued, the taxpayer may make a deposit to stop the running of interest and possibly avoid or minimize a penalty.  What happens, however, when a taxpayer makes a deposit after the assessment has been issued?  The answer was provided in the recent US Tax Court decision of Faisal Ahmed v. Commissioner, TC Memo. 2021-142, December 28, 2021.

The Case of Faisal Ahmed

Faisal owed the IRS for income taxes for the years 2013 – 2016.  He was also assessed the Trust Fund Recovery Penalty (TFRP) for all four payroll tax quarters during the year 2016.  Faisal fully paid his income tax liabilities but not the TFRP.  His lawyer sent the IRS a check for $625,000 along with a well-drafted letter that clearly stated that those funds were to be considered as a deposit in the nature of a cash bond.  Normally, a cash bond payment would stop the running of interest and late payment penalties and give Faisal an option to turn the deposit into a payment of the tax.  The IRS treated the deposit as a payment of the TFRP and released all liens against Faisal.  Faisal took the IRS to the Tax Court and argued that he did not make a payment according to the rules set forth in the revenue procedures, discussed below.

The Tax Court judge was perplexed at why Faisal was in court in the first place.  The judge held that the case was moot.  All the taxes were paid and the liens released.  A deposit in the nature of a cash bond only applies when a payment is made before the IRS issues any type of assessment.  However, once an assessment has been made, a taxpayer cannot make a remittance and call it a deposit. This is exactly what Faisal did.  The IRS ignored his designation and treated the “deposit” as a payment in full of the TFRP assessment.   The Tax Court did not have jurisdiction to issue a refund to Faisal.

Rev. Proc. 84-58 (updated to Rev. Proc. 2005-18)

“Rev. Proc.” stands for Revenue Procedure.  This was enacted to provide procedures for taxpayers making remittances to stop the running of interest on tax debts.  The Rev. Proc. distinguishes between a payment made, in whole or in part, to satisfy a tax liability as opposed to a deposit in the nature of a cash bond.  A deposit in the nature of a cash bond is not considered a tax payment so the rules relating to refund claims and time limits do not apply.  See also the U.S. Supreme Court case Rosenman v. U.S., 323 US 658 (1945)

Conclusion

When making a deposit in the nature of a cash bond, timing is the key.  The deposit must be submitted prior to the issuance of an assessment.  If the deposit is made post-assessment, the IRS has the legal right to treat that deposit as a payment of the tax.  Like many things in life, timing is everything.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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