Bond Payments to the IRS | What You Should Know

August 04, 2023 by Robin Scott-Hutchens, EA
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There are a number of things one might associate with the word “bond.” Matrimonial bond, parental bond, Gold Bond™, bail bond…You get the idea. Rarely do people associate the word “bond” with the IRS. I mean, why would you want to?!? If you ever find yourself with a pending tax bill, though, putting the IRS and a bond payment together might just be the combination that works for you. This payment has also been called a payment deposit or a “6603 deposit,” referencing the internal revenue code where it is defined. How can a bond payment help you with the IRS? Let’s get into that.

First, let’s talk about when you might experience that pending tax bill. Most often, this occurs when a portion or all of your tax return is under review by the IRS. The IRS may propose a tax amount due if they believe you have left income off your tax return. They can do the same if they are reviewing items claimed on your return and feel that you should not be claiming those things or just not as much of them. Whatever the reason, a tax bill is the IRS’ way of saying you may owe more taxes than what you originally reported on your tax return. If you disagree with the IRS’s proposed changes, you can communicate with them your position and share documentation, and hopefully come to some agreement.

Along with a potential outstanding balance due, the IRS may also impose a penalty of some sort, and they will definitely tack on some interest. The IRS will go all the way back to the original due date of the tax return to start their interest calculations. That interest will continue to accrue while you and the IRS hash out the details and finally settle on some amount. And as you may have heard, the IRS has a considerable backlog of documents to work through. Does that mean interest is accruing while you wait for the IRS to find your documents to review finally? Yes, it does. So even though you met the deadline of their request to provide information, you still must wait for them to do their part…and all the while, interest piles up. It can feel like you have no control over the situation and how much interest you’ll ultimately be paying.

There is something you can do if a proposed balance due is lingering and you would like to mitigate how much interest finally gets tacked on to your tax balance. Here is where a bond payment or 6603 deposit comes in. A bond payment to the IRS for the potential amount due (tax, plus interest and penalties) will generally stop interest accrual in its tracks. While you wait for the IRS to work through your records, you can rest a bit easier knowing your total balance due isn’t growing simply because they have more work than they can handle.

It is very important to know that specific steps MUST be followed to make sure your deposit makes it to the correct department and is applied to your account properly. Bond deposits can only be made on a pending amount due, meaning the IRS has proposed an amount, but it has yet to be officially assessed and recorded on your account. Think of it as being still in “estimate” form. If you have a bill for an amount due, any payment sent to the IRS would simply be a payment. An assessed (recorded on the books) tax amount due continues to accrue interest until you pay it in full, much like an outstanding credit card or loan balance. So, be sure your pending amount is indeed still pending.

Next, you’ll want to make sure you clearly identify your bond payment as such. There are key details you need to write on the face of your payment, whether you are sending a check or a money order. It is also important that you mail in the payment rather than make the payment electronically so that you can include the necessary details for this particular type of deposit. The details that are critical to be included on the payment include the words “6603 Deposit,” your social security number, the tax year for which you are making the bond payment, and the number of the IRS notice. For example, on the memo line of your check, you would want to write: 6603 Deposit, 123-45-6789, 2021, CP2000. If you do have a recent letter from the IRS regarding this proposed tax amount, you may also want to include a copy of the first page of it as well as a short statement about the purpose of this deposit and if you would like any excess funds refunded to you. It’s advised that you send all the pieces via certified mail so you can have proof of delivery. Keep a copy of everything for your own records.

So, what happens when you send a bond payment to the IRS? It’s important to understand that if you mail a check as a bond deposit, the IRS will cash it. They will not simply set it aside with a note. It will be cashed, and the amount will be marked accordingly. When does interest stop accruing? The IRS gives you credit on the date the payment is received – that counts as the payment date. What happens if you work it out with the IRS and don’t owe as much as initially proposed? If you put the request in your letter that you would like a refund of excess funds, the IRS will refund the overage back to you. For example, the IRS proposes that you owe $2,000 in taxes, interest, and penalties, and you send in a bond payment for that amount. After a review of your documents, the IRS determines you only owe $1,500 in tax, interest, and penalties. Then the IRS will refund the remaining $500 to you as requested in your letter that accompanied your bond payment.

What happens if you cannot cover the full amount of the balance due? Are you out of luck? Is it all or nothing? You can still send a bond deposit for as much as you can afford, even if it is not enough to cover the full proposed balance. Your bond will essentially pause interest accrual on that portion of your balance. For example, if the IRS proposes a tax balance of $2,000 and you can only afford to pay $1,500 in a bond payment. The remaining $500 will continue to accrue interest, but it will clearly be less interest than if it was accruing on the full $2,000. It won’t stop the interest entirely, but it will provide a small reprieve.

If you find yourself in a situation where the IRS thinks you may owe more tax than what you paid on your original tax return, you don’t have to work through the situation alone. TaxAudit is here to help you sort out what the IRS is questioning and provide you with guidance and advice about your options, including bond payments. If you have an Audit Defense membership, you can receive audit representation to get you through this seemingly stressful time.

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Robin Scott-Hutchens, EA
Corporate Trainer

 

Robin Scott-Hutchens is an Enrolled Agent who has worked in the tax industry for over a decade.   She has a Bachelor of Science degree in Accounting.  Her love of taxes has led her to prepare taxes with large corporations as well as private practice.  She joined TaxAudit in 2016 as an Audit Representative where she enjoyed working with taxpayers to help them navigate the stressful landscape of being audited.  She then moved to the Learning and Development Team at TaxAudit, where she now serves as a Corporate Trainer.  When she is not preparing tax returns or teaching tax concepts, she enjoys reading and writing about taxes, being outdoors, and petting any dog that will allow her to do so.


 

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