Trust Fund Recovery Penalty Case Raising Issues Regarding Deposit and Last Known Address

In Ahmed v. Commissioner, No. 22-10191 (3rd Cir. 2023) the taxpayer appeals from a decision of the Tax Court that an attempted deposit of the amount of his liability was properly categorized as a payment ended his Collection Due Process (CDP) case due to mootness.  On appeal, Mr. Ahmed gets another chance to prove the money he paid to the IRS should not moot his CDP case.

Along the way to its decision, the Third Circuit provide good background on the Trust Fund Recovery Penalty (TFRP), proper addressing of notices, deposit vs. payment and mootness.  Because it has so many procedural issues packed into one case, it provides a good case for a multifaceted procedural discussion.


Mr. Ahmed ran a business which failed to pay over the withheld income and social security taxes from its employees.  The IRS determined that he was a responsible officer who willfully failed to pay over the money the corporation held in trust for the IRS.  It sent Mr. Ahmed a notice setting out his liability and giving him the right to discuss the proposed assessment with Appeals.  He says that he never received the notice.  The court states that the envelope shows the street address as 5B but his CDP request form indicated that he lived at 58.  The court noted other possible problems with the address.

Because he did not receive the notice giving him the right to go to Appeals as part of the TFRP determination process, his case went into the collection stream and eventually led to a CDP notice of federal tax lien filing (NFTL).  When he received his CDP notice, he timely filed.  Appeals sustained the filing of the NFTL resulting in a determination letter from which he filed a Tax Court petition.  The Tax Court partially granted summary judgement to the IRS but remanded the case to Appeals for verification of the mailing of the TFRP notice to his last known address.

While Appeals began its reconsideration of the case, Mr. Ahmed remitted $625,000 to the IRS with the statement “Deposit in the Nature of a Cash Bond Under IRC 6603.”  The accompanying letter also instructed the IRS to treat the remittance as a deposit.  The IRS, however, determined he was ineligible for treatment of the payment as a deposit because a liability under 6672 does not fall within the sections covered by 6603 deposit procedures.  So, the IRS treated the remittance as a payment and the payment mooted the CDP proceeding by satisfying his liability.  It moved for dismissal of the CDP case as moot, the Tax Court dismissed the case for lack of jurisdiction and Mr. Ahmed appealed.

The Third Circuit states that the threshold question it must answer is whether the payment qualifies as a deposit.  It then provides historical background on this issue pointing out that common law initially served as the basis for making this determination.  The Supreme Court recognized tax deposits in Rosenman v. United States, 323 U.S. 658, 662-662 (1945).  At the time of the Rosenman decision the IRC contained no provision regarding deposits versus payment.  Following the Rosenman decision courts began using a facts and circumstances test which the court illustrates through a string citation of six cases decided between 1965 and 2013.  Congress entered this area of the law in 2004 when it enacted 6603.

The court notes, as the IRS had determined, that 6603 does not apply to money remitted to the IRS with respect to a 6672 liability.  Although 6603 does not apply to allow a deposit in this situation, 6672 has its own deposit provision in 6672(c) which allows a taxpayer to post a bond.  Here, Mr. Ahmed was arguably prevented from using the specific provision due to the lack of receipt of the 6672 notice because the IRS mailed it to someplace other than his last known address.  So, the issue turns back to whether the IRS sent a valid notice.  Because the issue of the validity of the notice required by 6672(b) remains unresolved, the court notes that his remittance may have occurred prior to an appropriate assessment in which case the facts and circumstances test could render the remittance a deposit rather than a payment.

The court then notes that if the 6672 notice was sent to his last known address, then he should have used the bond provision of 6672(c) rather than seeking to make a deposit under 6603.  If a valid notice was sent, the Tax Court’s decision was correct, and the payment mooted the CDP case with one possible exception.  The court finds that he may be entitled to request interest abatement under 6404(h).  The court explains the ability of the Tax Court to view his CDP request as also encompassing an interest abatement request and leaves it to the Tax Court to determine whether the request could be construed to cover interest abatement once the remittance issue is resolved.

The court also drops a footnote swatting away Mr. Ahmed’s effort to argue for a refund citing to McLane v. Commissioner, 24 F.4th 316 (2022) and Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006).  In the same footnote it also notes the CDP case involving the NFTL is moot because the IRS released the liens after treating the remittance as a payment.

So, Mr. Ahmed gets a trip back to Appeals where he will argue that the 6672 notice was improperly addressed.  If he fails to convince Appeals, he can make the argument to the Tax Court and if he fails there head back to the Third Circuit.  If he wins on the address issue, the remittance will be changed to a deposit, the IRS will send a new notice if it is still within the assessment period or he will have a complete victory if the statute has run.  In the end the deposit issue is really a sidelight to the issue of proper notice.  Based on the facts presented in the opinion the notice issue will be close if it is based on a typo of “5B” versus “58.” 

When Regulatory and Sub-Regulatory Guidance Collides… (Part One)

Being tasked with “administering” the Internal Revenue Code is no easy job. Congress sometimes makes it even more difficult by having the IRS distribute direct payments (like the Economic Impact Payments (EIPs)) or by changing the law when filing season has already started (for example, by excluding unemployment benefits from income). Notice and comment rule-making takes time, and sometimes the IRS relies on the “quick guidance” that can be delivered through online FAQs or other sub-regulatory means.

While understandable as an interim action (really, just letting people know what the IRS “thinks” about the statute, but without force of law) it is problematic when “rights and obligations” flow from the guidance -believe it or not, sometimes the guidance is not well rooted in the statute (see posts on the incarcerated individuals and the EIP here, here and here).

It is similarly problematic when the quick guidance subtly morphs from temporary to permanent after years of inaction on finalizing regulations. And it is even more problematic (dare I say, inexcusable) when that quick guidance directly contradicts prior (still valid) notice and comment regulation. To hear more about one such instance that many PT readers have likely encountered without even realizing it, you’ll need to…


Dream with me, if you will, of an individual that currently makes $35,000 but can’t afford to pay their back taxes. They used to work as an Uber driver where they were hammered with SE taxes. They’ve since become an employee, but they have virtually no disposable income. They submit an Offer in Compromise proposing to pay a $1,000 “lump-sum” to settle the back taxes. Per the Offer instructions, the individual includes $200 as a 20% payment on the Offer, as well as a $205 application fee.

Time passes. Months later, this individual gets a letter returning the Offer as “non-processible” because they have not made required quarterly tax payments. Oh, and on top of that, the $405 they sent in is not coming back.

Now this individual is in your office, regaling you with this tale of woe. You want to help them at least get back the 20% payment. You look at the Treasury Regulation (301.7122-1(h)) on point. Your eyes light up:

Sums submitted with an offer to compromise a liability […] are considered deposits and will not be applied to the liability until the offer is accepted[.] If an offer […]is determined to be nonprocessable […] any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest.

You recall from your law school years that Treasury Regulations are basically the highest authority of agency rulemaking. Good as gold! Your client is getting the 20% payment back, right?

And yet you’ve grown so cynical over the years you doubt yourself: if the answer is so obvious, why is your client even here? You look over the IRS Form 656 that your client submitted. Under Section 7, Offer Terms, it reads:

(h) The IRS will keep any payments that I make related to this offer. I agree that any funds submitted with this offer will be treated as a payment. I also agree that any funds submitted with periodic payments made after the submission of this offer and prior to the acceptance, rejection, or return of this offer will be treated as payments.

You wonder why the IRS Form would include terms that seem to go against their own regulations. So you continue digging…

It turns out the regulations you were so thrilled with are a bit dated. The 20% payment requirement at issue was added as part of TIPRA in 2006 and the Offer regulations are from 2002.

Fortunately, in lieu of updated regulations there is an IRS Notice on point.

Unfortunately, that IRS Notice is IRS Notice 2006-68.

Yes, that same IRS Notice 2006-68 that I lambasted in no less than three separate posts. It is here again to haunt you. In relevant part, the Notice reads:

The Service will treat the required 20-percent payment as a payment of tax, rather than a refundable deposit under section 7809(b) or Treas. Reg. § 301.7122-1(h).

There you have it. The Treasury Regulation clearly says money sent with an Offer is a deposit. The Notice clearly says, “not so, if it is part of the 20% payment.”

We are now at the title of this post: When regulations and sub-regulatory guidance collide, which one controls?

A Look to the Statute Before We Look to Admin Law

If the statute is clear about how to treat the payments than it shouldn’t really matter what the regulatory or sub-regulatory guidance says. The problem is when the statutory language is unclear, and there is at least some room for interpretation delegated to the agency.

And that is what we have here. To me, this is a “clearly unclear” statute.

We know that a 20% payment is (generally) required to accompany an Offer. Per IRC § 7122(c)(1)(A)(i) “In General- The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.”

But our question is whether you can get that payment back, not whether you must submit a payment in the first place. Is the payment a deposit towards the Offer, or a payment towards the underlying tax? TIPRA doesn’t quite address this, though it does provide some more guidance. Per IRC § 7122(c)(2)(A):

Use of payment- The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

There is a comfortable amount of wiggle room in this otherwise dry language.

The taxpayer gets to specify the “application” of the 20% payment towards “assessed tax or other amounts imposed under this title.” If it just read “assessed tax” that would be much clearer and reasonably read as limited to designating among the assessed taxes comprising the Offer. But the very broad phrase “other amounts imposed under this title” seems to leave the door open. Is the “TIPRA” payment an amount imposed under this title? 

Note also that the statute does not say that all payments “must” be applied towards “assessed tax or other amounts imposed under this title.” It merely says that when such payments are applied, the taxpayer gets to choose how they are applied. This says literally nothing about if a returned, non-processed offer must have the payment applied to assessed taxes. That is an IRS (not Treasury) interpretation only.

You won’t find much illumination in the legislative history, though I would suggest that if anything it cuts against the IRS Notice 2006-68 interpretation. The Conference Report distinguishes the “user fee” from the “partial payment” by saying that the user fee “must be applied” to the tax liability. But it is silent as to whether the “partial payment” must be. In other words, it creates more ambiguity on the issue rather than resolves it.

Fundamentally, the question remains about the required 20% payment. Is it always a payment towards tax (non-refundable), or might it sometimes be a payment towards the Offer (potentially refundable)?

At present, all we have are the thoughts of IRS Counsel as memorialized in Notice 2006-68. Without further going into depth on the merits of its interpretation, it is time to turn to the admin law question: what about the fact that Notice 2006-68 seems to be contradicted by an actual, still enforceable, Treasury Regulation?

Let’s look to the admin law authorities… in our next post.

Overpayment, or Not?

We welcome back guest blogger Bob Probasco. Today Bob untangles the issue of deposits versus payments in relation to stipulated decision documents filed with the Tax Court. The character of the taxpayer’s remittance matters here, as it determines whether they are entitled to overpayment interest. For those looking to make a deposit rather than a payment, the IRS gives detailed instructions in Rev. Proc. 2005-18, which Stephen discussed in a post here. Christine

A Tax Court memorandum opinion, dismissing the case for lack of jurisdiction, came out recently in Hill v. Commissioner, T.C. Memo 2021-121 (Oct. 25, 2021).  I almost didn’t read it, because lack of jurisdiction is usually clear-cut and (by definition) memorandum opinions don’t address novel or unsettled issues of law.  This sounded like something I could skip, without missing much.  But that would have been a mistake. 

The jurisdictional issue was not quite as clear as I assumed, and the opinion included a lot of helpful little nuggets along the way.  Reminders of nuances that I rarely think about or skip when discussing a topic; or explanations of things that I’ve seen for years without giving them much thought.  When you read nuggets like that, you may think “Of course, that makes sense; why didn’t I think of that?”  This sometimes qualifies as a Blinding Flash of the Obvious, or, for persons of a certain age, perhaps a “V-8 moment.”  These nuggets were that for me anyway, and hopefully also for at least a few of the readers of Procedurally Taxing.


The parties had entered a stipulated decision in the case on July 19, 2019.  (Docket no. 794-18; the stipulated decision is not available in DAWSON.)  Then the petitioner filed a motion on August 14, 2020, to redetermine interest under section 7481(c) and Tax Court Rule 261.  Those rules allow the petitioner to challenge either (a) excessive underpayment interest assessed pursuant to the court’s decision and paid or (b) insufficient overpayment interest allowed on an overpayment determined by the court.  The first category was a good reminder for me of a nuance I occasionally skip when explaining procedure to students: underpayment interest is not subject to deficiency procedures but there is still a route to a refund suit in Tax Court for such amounts. 

But this case involved the second category.  The IRS had not paid any overpayment interest on a check received from the government for this case after the stipulated decision was entered, and the petitioner argued that it should have.  A basic requirement of a motion to redetermine overpayment interest is that the court finds in its previous decision that the taxpayer made an overpayment.  The stipulated decision, however, determined a gift tax deficiency but did not determine an overpayment.  I was generally aware of this type of motion but somehow had never dealt with it before.  So the opinion offered a useful explanation, but the conclusion that there was no jurisdiction seemed straight-forward. 

Money Due to Petitioner, But . . . It’s Not an Overpayment

The jurisdictional issue was not as easy to resolve as I had assumed.  The petitioner did get a $3,473,750 check (without interest) because of the decision, but the court decided that there was no overpayment.  The gift tax deficiency for tax year 2011 was $6,790,000 but the petitioner had given the IRS a check for $10,263,750 back in 2012.  Why wasn’t that an overpayment??  Because the 2012 remittance was a deposit under section 6603, not a payment.  A deposit does not become a payment until it is used to pay a tax, which happens after the assessment, which happens after the Tax Court decision.

The petitioner didn’t argue that the 2012 remittance was a payment.  That would have been very difficult to do, as the opinion cites multiple times that the petitioner had referred to it as a deposit and cited section 6603 specifically.  The petition itself referred to “depositing” that amount and the petitioner alleged that it was “intended as a deposit pursuant to I.R.C. § 6603(a)” in the motion to redetermine interest.  Apparently, the petitioner did not refer to the 2012 remittance as a payment until his reply to the IRS response to the motion.

He did, however, argue that the 2019 stipulated decision had in substance determined an overpayment.  It was an ingenious argument (kudos to counsel) but ultimately unsuccessful.  I’ll get to what that involved, and why the judge disagreed, after a brief digression.

Asking For the Return of a Deposit

When explaining the differences between “deposit” and “payment” to my students, I usually explain one key difference much the way the court did here.  A taxpayer “could demand the immediate return of his deposit at any time” but could get back a payment “only by pursuing the IRS’ formal refund process, which could be lengthy.”  That certainly is an important benefit, as the court points out, particularly when the statute of limitations for refund claims has expired.  Of course, that is a slight simplification.  Section 6603(c) says that the right of return on request is not absolute and does not apply “in a case where the Secretary determines that collection of tax is in jeopardy.”  This was another nuance that I sometimes skip when explaining deposits; I hadn’t really given it much thought.  I have some questions/concerns about the process for jeopardy determinations, in this context or others, but that’s a topic for another day.

In this case, the petitioner requested in 2014 that the IRS return the deposit.  Did the IRS return the deposit right away?  No.  It asked for additional information about the potential gift tax liability, citing the limitation on return when collection in jeopardy.  (This may have sounded strange to some Texans – worry that a member of the extended Hunt family, as in “Hunt Oil Company,” would not be able to pay the tax?)

The IRS apparently resolved its concerns about ability to collect the tax, but it still did not return the deposit.  The gift tax liability arose from a settlement of civil litigation in district court over division of wealth among family members.  Under the settlement reached, the petitioner was required to assign his rights to installment payments from his father (total amount $30,675,000) to trusts for the benefit of his children.  Because of the potential gift tax liability, the registry of the district court, rather than the taxpayer, issued the check for $10,263,750 payable to Treasury.  The IRS eventually concluded that, if the petitioner insisted on return of the deposit, it would have to be returned to the district court registry instead.  So the funds remained with the IRS.

In Substance, A Determination of an Overpayment?

OK, back to the jurisdictional argument.  The stipulated decision stated that “there is a deficiency in gift tax due from petitioner for the calendar year 2011 in the amount of $6,790,000” and that “there are no deficiencies in gift tax due from, nor overpayments due to petitioner for the calendar years 2010 and 2015.”  It said nothing about an overpayment for 2011.

The petitioner argued that a stipulation in the decision was, in substance, a determination of an overpayment.  That stipulation provided for the $10,263,750 to be transferred from the 2012 tax year, where it was originally applied, to the 2011 tax year.  It then went on to say: “It is further stipulated that the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10,263,750.”  Since $10,263,750 is more than the $6,790,000 deficiency, that sure sounds like the court had determined an overpayment, doesn’t it?

The court pointed out two problems with that argument.  The second problem was that the stipulation referenced the $10,263,750 as a “prepayment credit” rather than a payment.  There could not have been an overpayment when the 2019 decision was entered, because “a deposit is not a payment of tax prior to the time the deposited amount is used to pay a tax,” and that doesn’t occur until after assessment.  Even then, only the amount used to pay the tax becomes a payment; the remainder is an unused deposit that is returned to the taxpayer.  No overpayment.

One thing that is not intuitively clear to most of my students is that “deficiency” is not the same thing as “amount the taxpayer owes.”  The Form 4549, Income Tax Examination Changes, in a notice of deficiency helps them to see the difference.  (We see the Form 4549 version more often than the Form 5278 version, but they’re very similar.)  At the bottom of page 1 of Form 4549, line 13 includes changes to certain amounts on the return that are subject to deficiency procedures.  Line 14 is the total deficiency.  Line 15 is for changes to that are not subject to deficiency procedures, but which affect how much the taxpayer owes.  And line 16 is the bottom-line amount that either the taxpayer owes the government, or the government owes the taxpayer. 

Line 15, for our clinic clients, tends to be one of two different things: a frozen refund, or additional withholding because the Automated Underreporter program identified an information return not included on the return.  That makes sense to students, that our client would owe less because more was withheld than reported on Form 1040 or the account transcript shows a balance due the taxpayer for a frozen refund.  Page 2 of Form 4549 helpfully lists other things that might be included there: taxes paid by a RIC or REIT on undistributed capital gains, excess Social Security, additional Medicare tax, and other timely payments.

The notice of deficiency, as with virtually all notices, is an opportunity for the IRS to “suggest” payment, so of course they tell the taxpayer how much to send.  They include an estimated amount of interest on page 2 of Form 4549, for the same reason.  But clinic clients don’t always catch that and may be needlessly worrying about having to pay the full amount of the deficiency when the actual amount due might be substantially less.  But I digress.

The stipulation used the term “prepayment credits” but the court concludes that the deposit not only doesn’t affect the deficiency amount but also doesn’t create an overpayment, for the reasons stated above.

I realized something, while reading this opinion, about what I’ve been seeing on stipulated decisions for years.  If something like a frozen refund or additional withholding resulted in an overpayment, there is no stipulation about that on page 2 of the decision.  It’s not necessary, because if those adjustments created an overpayment, the amount of the overpayment is already stated on page 1 of the decision.  The stipulation only appears if such adjustments reduce the balance due, but still leaves a balance due the government.  I think I noticed and understood that subconsciously but had never thought about it consciously that way.  So . . . “Blinding Flash of the Obvious.”

Above The Line versus Below The Line

I’ve always thought of those terms as differentiating deductions, whether one that reduces gross income to adjusted gross income or one that reduces adjusted gross income to taxable income – where the “line” is adjusted gross income.  You likely do, too.  As it turns out, those terms are also used to differentiate parts of stipulated decisions.  In that case, the “line” is the judge’s signature at the bottom of page 1.  As Judge Lauber explained, only the information “above the line” reflects determinations by the court.  That’s all the court has jurisdiction to decide – the amount of the deficiency, the amount of any penalties, and the amount of any overpayment.  The stipulations on page 2, “below the line,” are simply agreements between the parties.  This was another “Blinding Flash of the Obvious” for me; if you asked me, I might have explained it properly, but I hadn’t really given it much if any conscious thought. 

Most stipulations are routine items.  The court can enter the decision.  Any deficiency stated does not include underpayment interest, which will be assessed as provided by law.  Any overpayment stated does not include overpayment interest, which will be credited or paid as provided by law.  For regular cases, the parties may stipulate that respondent can assess without waiting for the Tax Court decision to become final.  And there may be stipulations of “prepayment credits” that reduce the amount owed by the petitioner but do not create an overpayment.

Since the stipulation that the petitioner relied on was “below the line,” the court (judge) hadn’t even determined that there was a deposit.  This was the court’s first reason for rejecting the petitioner’s argument – not only was there no overpayment, but also the court had not made a determination even about the existence of the deposit.

But All Is Not Lost!

The petitioner got no relief from the court, but that’s not the end of the story.  The IRS hadn’t previously paid any interest on the returned $3,473,750.  While arguing the motion to redetermine interest, at least the IRS conceded that the petitioner was entitled to interest on the returned deposit, although at the lower interest rates applicable to section 6603 deposits.  (That rate is 3% less than the rate for overpayments; from the fourth quarter of 2011 through the first quarter of 2016, it was 0%.)  The IRS said that meant the interest payable would be $218,122 instead of the $1,267,323 that petitioner had claimed.  At least it’s something.

For me, this “simple” dismissal for lack of jurisdiction in a memorandum opinion was a very good explanation/reminder/Blinding Flash of the Obvious!

Why Would the Service Stop Me From Paying Someone Else’s Taxes?

That is an incredibly misleading title.  You obviously can pay someone else’s taxes.  And, its fairly common to do so.  Executives often have their taxes on certain compensation paid by their employer.  I am sure it is also common for a relative to pay taxes for someone if they cannot pay it themselves.  Depending on the circumstances, this may create additional tax issues to work through.  For instance, if an employer pays tax for an employee, it will give rise to additional taxable income, on which you must pay tax…and if the employer pays that tax, it will give rise to taxable income, on which you must pay tax…and so on.  Here is an old Slate article discussing just this in the context of a Survivor winner Richard Hatch.  I vaguely recall he was sort of a jackass, and got dinged for tax evasion.   If a family member pays your taxes, it is likely a gift, giving rise to potential gift tax issues.

So, why the B.S. misleading post title?  Tax procedure.  The government released Legal Advice issued by Field Attorneys (LAFA) 20171801F earlier this month, which considered two questions:

  • May a person making a deposit under I.R.C. § 6603 for a potential transferee liability direct the Service to apply all or a portion of its deposit against the liability of another person liable for the same underlying liability?

  • If a person making a deposit is permitted to apply all or a portion of the deposit to the liability of another person liable, under these facts, may an attorney-in-fact for a person making a deposit under I.R.C. § 6603 direct the Service to transfer the deposit to pay another person’s tax liability?


Based on the title you can probably guess the IRS position on this.  First, though, it might be worth a quick note on what a LAFA is, since this is probably the first time we have devoted a full post to one and perhaps the first time we have discussed them in general. This is advice written by field counsel for local field employees.  As it was not issued by the National Office, it is not Chief Counsel Advice (“CCA”).  We touch on CCAs somewhat frequently.  As defined by the Code, for disclosure purposes, CCAs are:

written advice or instruction, under whatever name or designation, prepared by any national office component of the Office of Chief Counsel which (i) is issued to field or service center employees of the Service or regional or district employees of the Office of Chief Counsel; and (ii) conveys… any legal interpretation of a revenue provision; any Internal Revenue Service or Office of Chief Counsel position or policy concerning a revenue provision; or any legal interpretation of State law, foreign law, or other Federal law relating to the assessment or collection of any liability under a revenue provision.

As such, CCAs often indicate the official IRS position on a matter.  Under the above definition, most field counsel advice is not required to be released, but sometimes the field counsel will seek review by the National Office.  The review probably (definitely?) still does not make the field advice a CCA, but it is generally released to the public anyway.

In the LAFA, the Service determined that no, the depositor could not direct the deposit to be used to pay the liability of another person liable for the tax underlying debt. Although that effectively answers both questions, since the second is contingent on the first, the LAFA also stated the transfer of a deposit could not be done by a POA if it were possible to transfer deposits.

So, what is going on here?  The LAFA is short on facts.  Those two pages are completely redacted.  It appears that there was transferee liability under Section 6901 from a transferor to a transferee (transferee 1), and then to another transferee (transferee 2).  I believe this was a subsequent transfer of the same assets, and transferee 2 was attempting to transfer its deposit to transferee 1. Section 6901 is a procedural provision that allows collection from a transferee based on liability under another federal or state law, so the liability could be for any number of reasons, and I am not sure what it was in this case.  The subsequent transferee, transferee 2, made a deposit for the potential tax outstanding under Section 6603, which allows for deposits to be made on potential outstanding tax.

In making the deposit, transferee 2 stopped interest from running on the potential tax debt, and potentially generated some interest payable to transferee 2 if the amount was returned (it also keeps things out of the refund procedures and statute of limitations).  Transferee 2 apparently was not the person who was going to end up paying the outstanding tax, and sought to transfer the deposit to the transferee 1, who presumably was going to pay the tax.  And, presumably had not made a deposit (or had not deposited sufficient funds).  Since transferee 2 could pay transferee 1’s tax debt, it seems conceivable that transferee 2 should be able to transfer its deposit to transferee 1.

The LAFA’s position, however, was that:

While a person making a deposit may direct the Service to use the deposit as payment of other of his liabilities, Rev. Proc. 2005-18 does not authorize a person to direct the Service to apply a deposit to pay another person’s liability.

Section 6603, which allows for deposits, states a “taxpayer may make a cash deposit…which may be used by the Secretary to pay any tax imposed…which has not been assessed at the time of the deposit.  Such a deposit shall be made in such manner as the Secretary shall prescribe.”  This language doesn’t necessarily preclude the transfer of the deposit to another taxpayer.

In the LAFA, the Service reviewed Rev. Proc. 2005-18 for the Service’s self-prescribed procedural rules under Section 6603.  The Rev. Proc. does have language that treats Section 6603 as allowing deposits for the taxpayer’s tax debts, and not that of others, or potentially shared debts.  It also states that the deposit does not constitute a payment until it is applied against an “assessed tax of the taxpayer.”  But, the Rev. Proc. does also allow the taxpayer to allocate deposit amounts against other assessments, and does not specify the assessments must be that of the taxpayer in other language.

The LAFA concludes though that while transferee liability is derivative of the transferor’s liability, multiple transferees may be liable for different debts, which it believed was evidence that transferees should not be able to transfer deposits.  Further, the Service’s own current guidance does not allow for such a transfer, which it deemed was sufficient reason to preclude the deposit transfer.  The guidance essentially says transferee 2 needs to request the deposit back, and then use the funds to pay the debt of transferee 1.  This does not, however, stop the underpayment interest of transferee 1 from accruing (although transferee 2 might be entitled to overpayment interest, if certain requirements were met – the overpayment and underpayment rates, however, are not necessarily the same.  For those who wish to learn more about deposits, payments, and interest rates, Chapter 6.06 and Chapter 11.05 of SaltzBook were recently updated and they cover these topics in great detail).

As to the POA issue, the guidance indicates that, even if a deposit could be transferred, the Form 2848 does not specifically allow for that action, and therefore would not be authorized.

So, what does this mean?  You clearly can pay someone else’s taxes, but the Service position is that a deposit cannot be shifted between taxpayers.  The reasoning is based on the Service’s own guidance, and not the statute.  For multiple parties potentially responsible for the same tax, to stop interest from running each will need to make a deposit of his, her, or its own maximum liability amount.