Advance Payments of Tax Liabilities
When your return is under examination, you may wish to make a payment of part or all of the anticipated tax due (deficiency) to stop the further running of interest. It is important to properly characterize this payment as a “Deposit” if you wish to preserve your right to contest the proposed adjustments in the United States Tax Court. If you make an error and your check is posted as a “Payment” (not as a “Deposit”), you may have no “deficiency” if the case is not settled and a Notice of Deficiency is issued. In that situation, the U. S. Tax Court will not hear your case because there is no “deficiency” for the Court to consider. In other words, you have lost your right to appeal the proposed tax assessment in Tax Court.
Therefore, whenever making a payment to stop the further accrual of interest on a proposed deficiency, be sure to send your check with a letter instructing the IRS to post the payment as a “Deposit.” Be sure to include your name, address, social security number, tax period (or periods – if making deposits against more than one year – in which case, you need to specify how much of your deposit should be applied to each year). You will also need to attach a copy of the IRS 30-day letter (if issued), or explain the basis for making the deposit and your calculation of the amount.
I also tell my clients to write in the MEMO section of their check the following:
DEPOSIT – [TAX YEAR] – [SSN]
Here is a link to the 2005 Revenue Procedure that discusses the process in depth. Please read it carefully.