Stopping Interest on Proposed Liabilities

You may not know this unless you’ve been through it, but when the IRS makes proposed adjustments to your taxes, interest begins to accrue beginning on the tax return due date.  And it is an even lesser known fact that one can completely stop interest from accruing on proposed tax balances by making what is called a “remittance.”  There’s a special term for it because we’re talking about proposed liabilities (before anything has officially been assessed).  After taxes are assessed, it is simply called a payment.

Why would anyone want to make a remittance?  The primary reason for making a remittance is that the taxpayer plans on disputing the adjustment, which could take a long time (especially if taken through the appeals process), and the taxpayer could potentially be on the hook for quite a bit of interest.  Paying a remittance sufficient to cover the total tax, penalties, and accrued interest will stop interest from running on the date it is received.  And if the taxpayer is successful in getting the liability reduced, the IRS will either return the excess or apply it to other tax liabilities.

There are two types of remittances: a deposit and an advance payment.  If you clearly designate your payment as a deposit, the IRS must return it to you, upon request, unless the IRS has already applied it against an assessed liability.  You may even qualify for interest being paid to you for the time that the IRS held your funds.  To qualify, you must provide a written statement that includes the tax type, tax year, and a copy of the 30-day letter.  An advance payment, on the other hand, is treated just like a regular tax payment and will only be refunded to you if you make a valid claim for a refund.

This is all fully explained in IRS Notice 1016 (Feb. 2006) which is often included as an insert in various IRS correspondence.  Be careful not to confuse this process with the cessation of interest on assessed tax liabilities.  The procedures above apply to proposed liabilities only.  Who knows how many of my clients have received this insert and read the title only (“How to Stop Interest on Your Account”) and assumed there is a way to stop interest on their assessed liabilities without paying in full.  The IRS should probably modify the title of this insert so that it is absolutely clear.

 

What’s the Point of IRS Letter 2645C?

Are you wondering what does IRS letter 2645c mean? 2645C is my all-time favorite and most ambiguous IRS letter. The Internal Revenue Manual refers to them as “interim letters” (IRM 4.19.23), which is a nice label given to a letter that is simply saying the IRS has received something from the taxpayer but has not acted on it yet.  And when I say the IRS has received “something,” I literally mean anything — it is up to the taxpayer to figure out what that might be based on the receipt date in the letter that is often inaccurate.  The IRS inquiry letter does give a few options as if to jog one’s memory:

  • Correspondence
  • Telephone inquiry
  • Payment
  • Form
  • Response to our inquiry or notice
  • Penalty abatement request
  • Installment agreement
  • Other

Yes, it says “other.”  This list is taken directly from the form letter 2645C.  It goes on to say that the IRS hasn’t resolved the matter because they haven’t completed all the processing necessary for a complete response.  This letter is completely baffling to me, and I am always wary of those times I am told that the IRS hasn’t “finished processing” something.  What that usually means is they haven’t even looked at it.  If they had looked at it, then would it really be that difficult to specify if this something is a payment, a phone call, penalty abatement, or “other”?

Probably the most perplexing option in the list above is “payment” because what kind of processing is really necessary when a payment is received?  Yes, a determination needs to be made as to where to apply the payment (what tax year or period), but what else?  It seems to me that the processing of a payment is the one thing that the IRS would not put off for later.

Next this letter states that the IRS will contact the taxpayer within a specified time frame (usually 45 days).  The letter ends with a friendly reminder about how to make installment payments, including how to annotate your check.  In other words, we’re not sure what you sent us, and we won’t get to it for 45 days, but in the meantime be sure you don’t miss a payment.  Sincerely, IRS.