Taking A Cooperative Approach To Your Legal Issues


by | Jul 1, 2022 | Firm News

Here is a heads up on IRS interest rate increases coming this summer. See https://www.irs.gov/newsroom/irs-interest-rates-increase-for-the-third-quarter-of-2022.

One of the surprises many of our client’s experience is how quickly interest accumulates on amounts owed to the IRS. Generally, interest begins to accrue on any unpaid tax from the due date of the return until the date of payment in full.

What Is Interest?

Interest is the monetary charge for the privilege of borrowing money. It is the amount of money a lender receives as compensation for allowing someone else to use its money. The government does not make interest free loans any more than a credit union or other bank would.

In the context of paying taxes which are due and owing, once a liability is assessed (posted on an IRS computer) but not paid in full after a short grace period, the taxpayer is essentially enjoying the use of the government’s money in the amount of the unpaid balance.

Why Make a Deposit?

Note that under our system of taxation, when a citizen wishes to push the IRS back after an audit, the law does not require the taxpayer to pay anything until the case is resolved and there is an assessment. In contested cases, a taxpayer can go through a full audit, protest, appeal and Tax Court trial with no assessment made until the decision of the Tax Court is final. Only then is there an assessment.

Here’s why this is so important: with no deposit or partial payment, if the client loses the entire case, or loses a large issue (or simply one which should have been conceded,) the government computes interest back to the due date of the return. Tax controversies take a very long time. The interest is often one of the biggest numbers on the bill.

How It Works:

Typically, the cash deposit procedure is used after the audit and before the appeal. Very simply stated, the taxpayer would ideally lodge an amount with the IRS equal to the entire tax and accumulated interest sought by the IRS. A partial deposit of the tax will partially stop interest from running on the tax, but interest runs on interest.

The advantage: the taxpayer has stopped the bleeding because the government is made whole on its money.

With interest rates rising the need to mitigate the cost to the client of an expensive audit now becomes more acute.

We have cases entering their third and fourth year where nothing is happening but for the running of interest.

Mitigating interest in a period of rising rates is now front and center.