ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PAYING THE IRS – THE DIFFERENCE BETWEEN A PAYMENT MADE IN SATISFACTION OF A TAX LIABILITY VERSUS A DEPOSIT IN THE NATURE OF A CASH BOND
By Robert S. Schriebman
We all know what it means to make a tax payment. But what is a deposit in the nature of a cash bond? The difference is critical when it comes to trying to get your money back from the IRS (i.e., a refund). Refunds have all kinds of rules relating to making a claim for refund and timely filing your refund claim. However, a deposit in the nature of a cash bond is not governed by strict statutes of limitations for timely filing a claim for refund. The IRS is required to return a deposit at anytime requested. On the other hand, a valid claim for refund is entitled to accruing interest at the rate of 1% less than what the IRS charges when you have a deficiency. No interest is paid by the IRS on a returned cash deposit.
On August 11, 2021, the US Tax Court issued a rare decision involving the differences between tax payments and cash bonds. This article will discuss the recent (Mohsen case. Amr M. Mohsen v. Commissioner, T.C. Memo 2021-099, Aug. 11, 2021).
The Mohsen Case
This case concerns the tax year 2001 and the rules concerning the timeliness of an IRS claim for refund. On April 15, 2002, Amr Mohsen (Amr) filed an extension for the year 2001. Along with the extension form he sent a $43,000 check. Nothing was written on the check to inform the IRS what was the payment was for. So, the IRS routinely applied the payment to an eventual tax liability. Amr did not do anything more until October 29, 2015 when he finally filed his 2001 Form 1040 Individual Income Tax Return. On the same day Amr also filed a claim for refund for over $49,000. The IRS denied the refund claim as being way too late. Then, in February 2017 Amr filed Form 1040X, Amended US Individual Income Tax Return for 2001. He claimed that his payment made on April 15, 2002 was not a tax payment but a deposit in the nature of a cash bond entitling him to file a claim for refund with no time limit. Amr could not prove that he filed any other paperwork with this 2001 extension that would have informed the IRS that the $43,000 payment was not a tax payment but a deposit. This is what the Amr case was all about.
Basic Refund Claim Time Limits
IRC § 6511(a) requires that a claim for refund of an overpayment of any tax must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later, or if no return was filed by the taxpayer, within two years from the time the tax was paid. This is the basic limitations period for the IRS. The EDD and the FTB have different time limits. Unfortunately, many attorneys and accountants falsely believe that the IRS rules apply to all California taxing agencies as well.
Amr paid $43,000 on April 15, 2002. He did not file his 2001 return until October 29, 2015 and a subsequent amended 2001 return in February 2017. It is clear that he was very late indeed! The Tax Court held no refund allowed; Amr lost the argument.
Amr did not give up. He argued that he did not make a tax payment on April 15, 2002, he made a deposit in the nature of a cash bond. While IRC § 6511(a) sets a period of limitations on claims for credit or refund of tax overpayments, this period of limitation does not apply to a deposit in the nature of a cash bond. (See Rev. Proc. 84-58, 1984-2 C.B. 501.) This procedure states that a taxpayer may request the return of all or part of a deposit at anytime before the IRS is entitled to assess the tax. If this was a true cash bond, Amr would be entitled to the return of his deposit, without interest, or he could have a credit to be applied to any outstanding deficiency.
Rev. Proc. 84-58
“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)
No Credit Available
If a claim for refund of a tax payment is too late, as in the case of Amr, the money is gone forever. This means that the lost funds cannot be applied for future tax payments. The IRS simply keeps the money.
How do you designate a deposit in the nature of a cash bond? This must be clearly set forth on the check as well as any letter of transmittal accompanying the payment. The following language is suggested. After putting down the taxpayer’s name, Social Security number, or EIN, the following words are essential: “this check is intended as a deposit in the nature of a cash bond, pursuant to Rev. Proc. 84-58 and Rev. Proc. 2002-26.” The latter Rev. Proc. is an updated version of Rev. Proc. 84-58.
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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