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BDO KNOWLEDGE Tax Webinar Series ‒ Don’t Leave Cash on the Table: Recovering Your Overpaid Interest and Underpaid Refund Interest

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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO KNOWLEDGE Tax Webinar Series Don’t Leave Cash on the Table: Recovering Your Overpaid Interest and Underpaid Refund Interest Todd Simmens, National Managing Partner of Tax Risk Management, BDO USA, LLP Cathy Stopyra, Managing Director, Account and Interest Recovery Services, BDO USA, LLP April 24, 2014


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CPE and Support CPE Participation Requirements ‒ To receive CPE credit for this webcast:

You’ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups.

Certificate of Attendance: If you are logged in the entire time and respond to all participation pop-ups, you will be able to print your certificate from the “Participation” section at the end of the webcast. If you log out before printing your certificate:

BDO USA professionals ‒ CPE will automatically be issued in CPE Tracking & Reporting at the end of every week. A copy of your certificate will be sent after you have been issued credit.

All others will be emailed instructions on how to access your certificate.


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CPE and Support (cont’d) Group Participation ‒ To receive credit:

Sign-in sheets must list a Proctor name and CPA license number. BDO USA professionals ‒ Submit your sign-in sheets using a General Training & Development Request

in BDO Service Now found at: BDOWorld > Applications & Resources > BDO Service Now > Click “Service Catalog” in the left menu, then under Training & Development, “Make a Request”.

Clients and contacts ‒ Email sign-in sheets to [email protected] within 24 hours of the webcast. Alliance members ‒ Should proctor their own group participants. This process is detailed in the

LearnLive Participant Guide, which can be found by searching “LearnLive Participant Guide” on the Alliance Portal. Call LearnLive Support below for questions.

Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must register and log in on their own computer.

Q&A: Submit all questions using the Q&A feature on the lower right corner of the screen. At the end of the presentation, the presenter(s) will review and answer all questions submitted. Technical Support: If you should have technical issues, please contact LearnLive:

Click on the Live Chat icon under the Support tab, OR Call: 1-888-228-4088

mailto:[email protected]


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With You Today

Todd Simmens National Managing Partner of Tax Risk Management BDO USA, LLP 90 Woodbridge Center Dr. 4th Floor Woodbridge, NJ 07095 (732) 491-4170, [email protected]

Cathy Stopyra Managing Director, IRS Accounts and Interest — Specialized Tax Services BDO USA, LLP 90 Woodbridge Center Dr. 4th Floor Woodbridge, NJ 07095 (732) 734-1009 [email protected]




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Objectives

Recognize the statutory requirements regarding deficiency interest

Understand the role of IRS Account Processing

Understand BDO’s Account and Interest Recovery Service (AIRSSM)


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Agenda

Payment requirements

Penalties

Interest

Refunds

IRS accounts

BDO’s AIRS offering


PAYMENTS


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Estimated Tax Payments

Section 6655 imposes addition to tax when a corporation (C or S) makes underpayment of estimated tax

Corporation must make estimated payments if tax shown on return (income minus credits) is $500 or more

Penalty rate equals the §6621 underpayment interest rate


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Estimated Tax Payments - Corporations

Corporations make quarterly payments

Each installment is 25 percent of required annual payment, which is the lesser of:

100 percent of tax shown on return for taxable year

100 percent of tax shown on corporation’s return for preceding taxable year

Amount determined under the annualized method

Amount determined under the adjusted seasonal method


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Estimated Tax Payments - Individuals

Individuals/estates/trusts must pay four minimum income tax installment payments throughout the year

Each installment is 25 percent of required annual payment, which is the lesser of:

90 percent of tax shown on return for taxable year

100 percent of tax shown on individual’s return for preceding tax year

If adjusted gross income exceeds $150,000, percentage is 110 percent (historically a favorite revenue raiser)

Failure to make payment subjects taxpayer to same addition to tax as corporations under §6655

April 15, June 15, September 15, January 15 (next year)


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Electronic Federal Tax Payment System (EFTPS) Free tax payment system provided by Department of Treasury

Businesses and individuals can pay all their federal taxes using EFTPS

Secure government Web site

Fast, accurate, and convenient

All deposits must be made electronically

www.eftps.gov

http://www.eftps.gov/


PENALTIES


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Purpose of Federal Tax Penalties (or Additions to Tax) I.R.M. 20.1.1.2 (02-22-2008), Purpose of Penalties.

Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code.

For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Most penalties apply to behavior that fails to meet any or all of these obligations.

Penalties encourage voluntary compliance by:

Defining standards of compliant behavior

Defining remedial consequences for noncompliance

Providing monetary sanctions against taxpayers who do not meet the standard


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Failure-to-File and Failure-to-Pay Penalties

Failure to File Tax Return (IRC §6651(a)(1))

Five percent of the amount required to be shown on return as tax per month, with a 25 percent maximum

25 percent maximum interacts with §6651(a)(2)

Reasonable cause exception


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Failure-to-File and Failure-to-Pay Penalties (continued) Failure to Pay (IRC §6651(a)(2))

0.5 percent of tax shown on return per month with 25 percent maximum penalty if tax not paid by the due date (without regard to extension) of that return

25 percent maximum interacts with §6651(a)(1)

Can be increased to 1%

Applies to:

Income, employment, excise, gift, and estate tax returns

Reasonable cause exception


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Estimated Tax Penalty

IRC §6654 and §6655

Installments based on pay-as-you-go system

Failure to timely pay installment will result in penalty

Amount based on number of days the installment is late, times the interest rate in effect


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Other Federal Tax Penalties

Other penalties apply for failure to file certain returns or make payments:

Information returns (See IRC §§6721 and 6722)

Reasonable cause

Payments of estimated tax (See IRC §6655 below)

No reasonable cause

Partnership returns (See IRC §6698)

Reasonable cause

Accuracy-Related (See IRC §6662)

Reasonable cause


INTEREST


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Interest

What is interest?

Not a tax

Not a penalty

How is it assessed?

Code sections dealing with interest

Section 6601: Underpayments

Section 6611: Overpayments

Section 6621: Rates


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Interest (continued)

Interest is due on underpayments from the last date prescribed for payment of a tax until the date such amounts are paid

Deficiency interest is charged only when a liability is both due and unpaid

Avon Products Inc. v. U.S.; May Department Stores v. U.S.; Sequa Corp. v. U.S.

Rev. Rul. 88-98; Rev. Rul. 99-40

IRC §905(c)


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Overpayment Interest

Generally, interest is allowed on overpayments from the date the overpayment arises to the date such amount is refunded or credited

Allowable interest is subject to the 45-day rule, whereby the government has 45 days to process a return before incurring allowable interest. Applicable to:

Original return filed reflecting overpayment

Amended return reflecting overpayment

Carryback claims

IRS-initiated adjustment


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Interest Rates as for Q2 of 2014* (rates change quarterly) Three (3) percent for overpayments [two (2) percent in the case of a corporation];

Three (3) percent for underpayments;

Five (5) percent for large corporate underpayments; and

One-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000

In Q2 of 2007…

Underpayments – eight percent

Large corporate underpayments – 10 percent

Overpayments – eight percent

Corporate overpayments – eight percent

• Five and a half percent for portion of corporate overpayment exceeding $10,000


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Limitations Period on Interest

Taxpayer has six years from allowance of a refund to receive correct amount of overpayment interest

If not received prior to expiration of six years, suit must be filed to protect right to such refund

Statute of limitations for requesting a refund of overpaid underpayment interest is the same as for requesting refund of overpaid tax

Generally, three years from date the return is filed or two years from date interest was paid


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“Hot” Interest

IRC §6621(c) provides for an increased interest rate charged on certain large corporate underpayments in excess of $100,000

Trigger date:

A balance due notice for more than $100,000 tax due may create trigger date

Issuance of a 30-day or 90-day letter for greater than $100,000 in tax may set a trigger date

Trigger date not set if amount shown as due is paid within 30 days of issuance of notice or letter

Trigger date often times incorrect on account transcript


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Advanced Payments and Deposits To stop the running of interest

Advance Payments Deposits (per IRC §6603 and Rev. Proc. 2005-18)

Is the remittance considered a payment of tax on the date it is received by the IRS?

Yes No

Does the remittance stop deficiency interest on portion of deficiency equal to the deposit the date it is received by the IRS?

Yes Yes

Will the remittance, depending on amount, prevent the setting of the “hot interest” trigger date for corporate taxpayers under IRC §6621(c)?

Yes No

Will the remittance prevent taxpayer from going to Tax Court?

May prevent taxpayer from going to Tax Court if deficiency is fully satisfied

Will not prevent taxpayer from going to Tax Court

When is deficiency interest deductible (assuming such interest is deductible)?

Interest included in advance payment may be specifically identified and deducted when paid

Deficiency interest included in deposit is not deducted until applied as payment of tax


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Advanced Payments and Deposits (continued) To stop the running of interest

Advance Payments Deposits (per IRC §6603 and Rev. Proc. 2005-18)

When does the statute of limitations on amount under IRC §6511 begin?

Generally begins on date payment is received

Begins on date deposit is converted to a payment

Can taxpayer request that the remittance be returned?

No. Refund not made until overpayment determined. May have to file claim for refund.

Yes, at any time prior to it being used as a payment of tax or the IRS determines that collection of tax is in jeopardy

If remittance returned to payer, is allowable interest payable?

Yes (federal short term plus 3% points, or 2% points for corps., or 0.5% for corp. refunds over $10,000)

Yes (but only at the federal short-term rate, and only if it is attributed to a “disputable tax”)

Can remittance be returned to taxpayer if assessment is determined to be barred or invalid?

Not if paid prior to the expiration of the statute of limitations on assessment

Probably

Can returned remittance be used in interest netting under IRC §6621(d)?

Yes No, not prior to date it is converted to a payment


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Restricted Interest

Interest computed where start and/or stop dates are other than due date of return to payment/refund date

In general, term applies in situations where interest might be statutorily prohibited or limited to specific time frames:

45-day rule on overpayments

Signing of Form 870 or 870AD

Carrybacks/Recaptures

Processibility

General adjustment combination


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Interest Netting

IRC 6621(d)

The application of a zero-rate of interest to the extent that there are overlapping tax underpayments and overpayments; different tax modules

Interest rate differential for corporations ranging from one to four and a half percent


REFUNDS AND OVERPAYMENTS


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What is an Overpayment?

No refund until there is an overpayment

No definition in Internal Revenue Code

Section 6401 gives some examples, including:

Tax assessed or collected after the expiration of the statute of limitations

Supreme Court gave definition:

Any payment of tax in excess of the amount that is rightfully due

Remember, though, that not all remittances are payments


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Requirement for Valid Claim

IRS does not have authority to release an overpayment until the taxpayer files a claim for refund (except in cases of math errors)

Taxpayer must submit:

Identifying information (i.e., year, taxpayer, explanation)

Grounds on which the refund is claimed

Most important

Computation of refund not necessary

On a timely basis

Signed


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Types of Claims

There are three general types of refund claims:

Formal claims

Informal claims

Protective claims


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Limitations Period on Filing Interest and Penalty Claims If return was filed, claim must be filed within three years from date return was

filed or two years from date tax was paid, whichever is later

If return was not filed, claim must be filed within two years from date tax was paid

If taxpayer agreed to extend statute of limitations on assessment of tax, claim may be filed at any time during the extended period provided in the agreement, plus an additional six months


IRS ACCOUNT PROCESSING


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IRS Calendar Date v. Cycle

All accounts have IRS codes specific to each transaction

The calendar posting date may not be the date for interest or penalty computations

Account transactions are posted in weekly cycles

Account transactions are subject to IRS quality review


BDO’S ACCOUNT AND INTEREST RECOVERY SERVICES – AIRSSM


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BDO’s Account and Interest Recovery Services – AIRSSM

A highly valued, specialized service for all clients in which we complete a comprehensive review of their IRS accounts. The sophistication of our analysis allows us to determine if the corporation or individual is entitled to any refund of penalties or interest in connection with its federal taxes. Our analysts have the in-depth knowledge and expertise necessary to make such determinations.


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(continued) Contingency-based fee

Findings-based

Tiered

Phased

SEC BDO Attest

Flat fee

Time and expense

Phase determination


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(continued) Who benefits from an AIRS project?

…Sold, liquidated, or acquired an entity?

…Filed a carryback?

…Had an IRS audit?

…Had an overpayment on an original return?

…Filed an amended return?

…Owed tax in one period, but had an overpayment in another?

…Received any IRS refunds?

…Paid any IRS penalties?

…Had an offset between accounts?


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(continued) Notes to remember…

Best practices

No red flags

No revocation of prior POAs

IRS account transcripts

Specialized software

Claims

Referral on out of scope issues

Minimum client time involvement


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(continued) Successes…

Client completed IRS examination; Rev. Rul. 99-40

Individual client; section 6404(g)

Client with assessed FTD penalty; section 6656

Client with processibility issue; section 6611(g)

Client issued refund without interest; section 6611(e)

Client with a credit offset; section 6402


AIRSSM RETURN ACCOUNTS ANALYZED


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Types of Federal Returns

Income tax

Excise tax

Employment tax

Gift tax

Estate tax

Information returns

Other federal returns


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Most Common Return Forms

Form 1120 – Corporations

Form 1065 – Partnerships

Form 1120-S – S corporations

Form 1040 – Individuals

Form 1041 – Income of trusts and estates

Form 720 – Excise tax

Form 706 – Estate tax

Form 709 – Gift tax

Form 940, 941, 944, 945 – Employment tax

Form 990 – Organization exempt from tax (return)

Forms 5471, 8865, 8858, 5472 – International information returns

Form 1042 - Withholding


CONCLUSION


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Objectives

You should now have a better understanding of:

Recognizing the statutory requirements regarding deficiency interest

The role of IRS Account Processing

BDO’s Account and Interest Recovery Service (AIRSSM)


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Contacts

Greg Martinelli Senior Director, Tax Controversy and Procedure BDO USA, LLP 1700 Market Street 29th Floor Philadelphia, PA 19103 (215) 636-5519 [email protected]







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Questions


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Conclusion Thank you for your participation!

Certificate Availability: If you participated the entire time and responded to at least 75% of the polling questions, click the “Support” button below to access the print certificate button. Group Participation Reminder ‒ to receive credit:

Sign-in sheets must list a Proctor name and CPA license number.

BDO USA professionals and Clients and Contacts – email sign-in sheets to [email protected] within 24 hours of the webcast.

Alliance Members ‒ should proctor their own group participants. This process is detailed in the LearnLive Participant Guide on Alliance Portal > Resource Center. Call LearnLive Support for questions at 1-888-228-4088.

Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must have registered and participated from their own computer.

Please exit the course by clicking the “Exit” button in the lower right corner.



SPEAKER BIOGRAPHIES


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Biography Todd Simmens


Todd Simmens is BDO’s National Managing Partner of Tax Risk Management. Todd is responsible for managing tax risk issues for the firm, including tax return preparer issues, client-related practice issues, reportable transaction consulting, and overseeing the tax practice’s Tax Controversy & Procedure practice. Todd served as BDO’s Managing Partner of Tax Controversy & Procedure prior to assuming his current role.

Prior to joining BDO, Todd was a member of the Tax Controversy & Risk Management Services practice of Ernst & Young, LLP. He also practiced law at White & Case LLP, where he assisted in the writing and production of Michael I. Saltzman’s IRS Practice and Procedure (Revised Second Edition).

Additionally, Todd served as legislation counsel to the U.S. Congress Joint Committee on Taxation, where his duties included coordinating issues involving the 2001 repeal of the estate, gift, and generation-skipping transfer taxes, as an associate with Blank Rome LLP, and as law clerk to U.S. Tax Court Judge Joel Gerber.

Todd is the co-author of Tax Management Portfolio (BNA) No.648, Reportable Transactions.



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Biography Cathy Stopyra


Cathy has extensive public accounting and IRS experience and currently analyzes clients’ IRS tax accounts, addresses various client inquiries, and resolves related problems and concerns. She is knowledgeable in the following areas: account analysis, review of IRS tax examination reports, payment application, interpretation and resolution of IRS notices, interest computation, and penalty administration.

Prior to BDO, Cathy served as a member of the accounts and interest group within tax controversy and risk management services at Ernst & Young. She also worked in several capacities while at the IRS, including positions as tax auditor, problem resolution caseworker, internal revenue agent, employment tax specialist, and senior reviewer in quality measurement staff. She coordinated the interest program and implemented required area procedures for examination staff. As the restricted interest coordinator, Cathy gained a thorough understanding of account analyses and the application of the interest provisions of the Internal Revenue Code.



BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 49 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,264 offices in 144 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. www.bdo.com To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to your individual needs. © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

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