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Understanding Your Options: Deposits and Payments Toward an IRS Balance

How each one affects the interest that is building up — a plain-language guide

Prepared by NaturalVC to help you understand your choices and discuss them with your CPA and attorney. This is general educational information. It is not legal or tax advice, and it does not tell you whether or how much to pay. NaturalVC prepares supporting materials that you and your advisors review and use; it does not prepare or file tax returns or forms and does not represent you before the IRS.

Why this comes up

While your matter is being worked, interest keeps building on the amount the IRS says you owe. Many partners ask whether they can put money toward that balance now to slow the interest — and if so, how to do it without giving up their rights. There are two ways to do that, a deposit and a payment, and they are not the same. This guide explains how each one works, how each affects the interest, and the trade-offs, so you can make an informed decision with your advisors.

How IRS interest works

A few basics make everything else easier to follow:

Interest is added every day, and it compounds — meaning each day's interest is added to the balance, and the next day's interest is figured on that slightly larger amount. Over time this grows faster than simple interest would.
Interest runs on the tax and on any penalty — not just the tax. A penalty starts building its own interest from the original due date of the return.
Because it compounds, money you put toward the balance earlier saves more than the same money put in later. Every dollar you remove from the balance also removes all the future interest that would have piled up on top of it.

Option 1: A deposit

A deposit is money you send the IRS to hold against a disputed amount without treating it as a payment of tax. From the day it posts, it stops interest from building on the amount you put down. Its big advantages are flexibility:

You can ask for it back in writing while the dispute is open.
It does not start the clock on any deadline to sue for a refund.
It keeps all of your options open, including the ability to take your case to federal court later.

The one trade-off: if you ultimately win and the deposit is returned to you, it earns interest at a lower rate than a refund of an actual payment would. In other words, a deposit buys you flexibility, and the price of that flexibility is a somewhat lower return on the money if it comes back.

Option 2: A payment

A payment is treated as tax paid. On the amount you pay, it stops interest exactly the way a deposit does — dollar for dollar, from the day it posts. But because it is a payment rather than a deposit, the consequences are different:

You cannot simply ask for it back — getting it back means filing a refund claim.
Each payment starts a two-year deadline to sue for a refund of that money. If you make more than one payment, the earliest deadline is the one that counts.
Paying only part of the tax generally does not let you take your case to federal district court or the Court of Federal Claims — those courts usually require the tax to be paid in full first.

The offsetting advantage: if you are going to owe the tax in the end anyway, a payment stops the same interest a deposit would, and if you turn out to have overpaid, a refund earns interest at a higher rate than a returned deposit.

What paying only part of the balance does — and does not do

This is the point most people find surprising, so it is worth stating plainly. Paying part of what you owe slows the interest in proportion to what you paid; it does not stop it. And paying only the tax does not freeze the interest that has already built up. Two things keep growing after a tax-only payment:

the interest that had already accumulated, which continues to compound on itself until it too is paid; and
any unpaid penalty, together with the interest running on that penalty.

Interest stops completely only when the entire balance — tax, the interest already built up, and any penalty — is covered. Short of that, some interest keeps running on whatever is left.

Why a payment is usually directed to the tax first

If you decide to make a payment, you can tell the IRS in writing how to apply it. There is a good reason to direct it to the tax itself rather than to the penalty or the built-up interest:

The tax is the part of the balance that generally is not going away, so putting money against it is money working where it is needed.
We are separately pursuing arguments to reduce or remove the penalty and a large part of the interest — including relief for interest that accrued during the COVID-19 period. If a penalty is removed, the interest charged on that penalty is removed along with it, automatically. So there is usually little reason to pay a penalty, or the interest on it, now if it is being challenged — doing so would tie up your money in amounts we are working to eliminate.

Directing a payment to the tax lets you slow the interest on the part that is likely to stand, while we work to knock down the penalty and the excess interest by other means.

At a glance

	A deposit	A payment
Stops interest on the amount you put down?	Yes, from the day it posts	Yes, from the day it posts
Can you get it back easily?	Yes — by written request	No — only by filing a refund claim
Starts a deadline to sue for a refund?	No	Yes — a two-year clock starts
Keeps your option to go to federal court?	Yes	Only if the tax is paid in full
If you win and the money comes back	Earns interest, at a lower rate	Earns interest, at a higher rate
Turns your money into a tax payment?	No — it is held as a deposit	Yes

On the amount you put down, a deposit and a payment stop the same interest. The choice between them is really about flexibility, deadlines, and your options later — not about the interest math.

A simple example

Suppose the additional tax is $100,000 and you put $40,000 toward it while the matter is open. Because interest compounds daily, that $40,000 stops roughly $6,000 or more of interest from building up over the next couple of years — money you keep. But interest keeps running on the $60,000 that is still unpaid, and on any penalty. The exact numbers depend on your dates and amounts; this is only to show the idea.

Illustration only. Your actual figures depend on your specific tax years, amounts, and dates, and any special relief that applies to you.

Before you decide

Whether to make a deposit, make a payment, or wait is your decision to make with your CPA and attorney. A couple of things to keep in mind as you weigh it:

A deposit preserves the most flexibility; a payment gives that up in exchange for a higher return if you overpaid and win.
If a payment would pay your balance off completely while a collection matter is underway, there are important timing effects on your rights worth understanding first. We are glad to walk you and your advisors through those considerations so you can decide — we will lay out the pros and cons rather than tell you what to do.

If it would help, we can prepare the written designation materials for a payment (so it is applied the way you intend) or the deposit materials, for you and your CPA to review, sign, and submit.

This guide is general educational information from NaturalVC.com to support your own decision-making with your CPA and attorney. It is not legal or tax advice and does not recommend whether you should pay. © 2026 NaturalVC.com.