Amended return interest proposal – letter submitted to Representative Dan Rostenkowski in response to Bush Administration’s 1993 Budget proposal
As an organization that represents corporate tax professionals, Tax Executives Institute has a deep and abiding concern for the administrability of the Internal Revenue Code and the overriding fairness of the Code’s provisions affecting the enforcement, collection, and payment of taxes and interest. From this perspective the Institute is distressed that a proposal to restrict the payment of interest on refunds owed taxpayers has been included in President Bush’s 1993 Budget and in the House Ways and Means Majority’s substitute bill. We believe the proposal is both inequitable and at odds with recent strides Congress and the IRS have made toward safeguarding taxpayer rights. We urge Congress to abandon the proposal.
Under current law, the Internal Revenue Service is not required where the refund is paid within 45 days of the filing of the taxpayer’s original return (or the due date of the return, whichever is later). This rule does not apply, however, to other types of taxes (employment, excise, and estate and gift taxes) and does not apply in respect of amended returns. A provision of the President’s 1993 Budget would amend section 6611(e) of the Internal Revenue Code to extend the 45-day grace period to all types of taxes and to amended returns as well as claims for refunds. The Ways and Means substitute contains a somewhat different provision that would not only extend the 45-day grace period to all taxes, but also would preclude payment of any interest for periods preceding the date a claim for refund is filed.
Tax Executives Institute submits that limiting interest payable on amended tax returns and claims for refund under either proposal would violate basic tenets of taxpayer rights, skew the administration of the tax system in favor of the government, and thereby undermine taxpayer perceptions of equity and fairness in tax policy — the foundation of a viable, voluntary self-assessment tax system.
Interest is a charge for the use, forbearance, or detention of money. That the IRS needs time to process a refund claim or an amended return is wholly irrelevant to whether the taxpayer should be paid interest since the government has had the use of the taxpayer’s money. 1 The Code already provides that the running of interest stops 30 days before the refund check is issued (essentially to simplify the IRS’s processing burden), so the simplificatio rationale for the proposal seems, at best, a makeweight.
TEI submits that although the 45-day rule might be defensible in respect of original taz returns (since any processing burden would be magnified by the large number of returns filed within a short period of time), the proposals could work great hardships in respect of amended returns and claims for refund. From an equity perspective and in light of technological advancements since section 6611(e) was originally enacted, the proposal should not be to expand the reach of the 45-day rule but rather to eliminate it completely — to pay taxpayers interest from day one.
The harsh results of the proposals can be illustrated by the following simple examples:
Example 1: A corporate taxpayer files its 1989 return on March 15, 1990, showing that no additional tax is owing. Two years later, the taxpayer discovers an error in the return and files an amended return seeking a refund. Under either proposal, if the IRS processed the refund within 45 days, the taxpayer would receive no interest, even though the government has had the use of the taxpayer’s money for two years.
Example 2: A corporate taxpayer files its 1990 return on March 15, 1991, on which it claimed no deduction for a particular item of expense. A year later, a court overturns an IRS ruling and holds that the item in question does give rise to a deduction. Consequently, the taxpayer files an amended return, citing the court’s decision and claiming a refund. Under either proposal, if the IRS issued the refund within 45 days, the taxpayer would not receive interest on the refund, even though the taxpayer’s “error” was attributable to the IRS’s incorrect interpretation of the law and even though the government has had the use of the taxpayer’s funds for more than a year. Even worse, under the Ways and Means substitute, interest would accrue only from the date of the amended return if the claim is paid more than 45 days after filing.
Example 3: A corporate taxpayer files its 1988 tax return on March 15, 1989. Following an audit, the IRS on February 1, 1992, issues a notice of proposed deficiency, alleging that the taxpayer owes an additional $2 million in tax. Even though the taxpayer believes the assessment is wrong, it immediately pays the entire amount, plus accrued interest of, say $500,000 from March 15, 1989, to the date of payment, to avoid additional interest charges. 2 After pursuing the issue through the IRS Appeals Division for several months, the taxpayer on March 15, 1993, files a claim for refund in respect of the $2.5 million that it paid the previous February. If the IRS subsequently concluded that the taxpayer’s original return was correct and refunds the $2.5 million before April 29, 1993, it would not be obliged to pay the taxpayer any interest, even though it has had the use of the taxpayer’s funds for more than a year. Again, under the Ways and Means substitute, interest would accrue solely from the date of filing the amended return (March 15, 1993) if the claim is paid more than 45 days after being filed. Thus, the proposals would force taxpayers faced with ambiguous facts or tax law to choose between the risk of paying the “hot” interest penalty rate on tax underpayments or making interest-free loans to the government.
The fact patterns become particularly complicated and the results especially egregious where the refund is paid following an IRS examination that results in deficiencies in one year but correlative overpayments in subsequent years.
Both the Administration proposal and House substitute are inconsistent with taxpayer rights legislation that is pending in the House and Senate, which the Institute testified in support of last year. The whole idea behind the taxpayer bill of rights is to restore a sense of fairness in the IRS’s dealings with taxpayers. For example, one of the provisions in Senator Pryor’s version of pending taxpayer rights legislation would equalize the interest paid on tax deficiencies and refunds. The Aministration’s proposal and the Ways and Means substitute represent a step in the wrong direction. Both would exacerbate the unfairness of current law and flout the goal of taxpayer rights. 3
In addition to its policy objections, the Institute has concerns about the scope and meaning of the Aministration’s proposal. 4 For example, under the proposal, the 45-day period will begin to run on the date the taxpayer’s “right to a refund” arises. It is unclear what that term means, especially where the refund is agreed upon in the course of a multi-year audit (e.g., where there is a refund in one year and a deficiency in another) or is paid on account of a taxpayer’s filing a protective claim for refund.
Under current IRS administrative practices in connection with audits of large corporations, taxpayers frequently will not even file a formal claim for refund, but will informally reach an agreement with the IRS Examination or Appeals Division on the amount to be refunded, with the agreement being subject to review before it becomes final. In the Institute’s view, there is no guidance on when a so-called right to refund “arises” — for example, is it when a piece of paper is filed with the IRS, when the IRS agent tentatively approves the refund, when that person’s supervisor signs off on the refund, or when the refund check is actually issued?
Absent clarification of the language, the IRS could argue that the claim for refund does not ripen into a “right” until the IRS says it does. In such a case, the IRS will be able to use the 45-day rule to deprive the taxpayer of any right to interest. If the legislative language of the Administration’s proposal is not changed the IRS will be the final arbiter of whether the taxpayer receives interest, even where the IRS has had the money for years. Requiring taxpayers to give the government interest-free loans is scarcely consistent with Congress’s recent taxpayer rights legislation or the IRS’s recent “customer-service” initiatives.
The Institute would be pleased to discuss this matter with you. If you should have any questions please contact Timothy J. McCormally of the Institute’s professional tax staff at (202) 638-5601.
(1) Nearly 70 years ago, the Senate Finance Committee recognized the unffairness of not paying interest on refunds even with respect to periods prior to the filing of a refund claim. Specifically, the Senate Finance Committee’s Report on the Revenue Act of 1924 states —
[i]f the amounts in question were not legally owing to the Government, it is equitable that the Government should pay a reasonable rate of interest during the period of their retention; and the fact of a protest or a claim does not affect the merits of such an interest payment.
S. Rep. No. 398, 68th Cong., 1st. Sess., reprinted in 1939-1 C.B. 266, 298 (emphasis added).
(2) With the enactment of section 6621(c) — under which the interest rate on tax underpayments will be increased by two percentage points if a proposed corporate tax assessment of more than $100,000 is not paid within 30 days of the IRS’s notice — corporations have an incentive to pay proposed assessments even though they believe the IRS is wrong; in such cases, the only way to get the money back is to file a claim for refund.
(3) In both the 1986 and 1990 tax acts, Congress directed the IRS to issue rules to ensure the most comprehensive crediting of overpayments and underpayments of tax liabilities to mitigate the effect of the interest differential between overpayments and underpayments. The proposals are at odds with these recent expressions of Congressional intent.
(4) These issues do not arise under the House Ways and Means substitute, though, as noted, the substitute is highly objectionable on policy grounds.
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