The Internal Revenue Service is notorious for being slow in doing its work, and its delay often results in taxpayers being charged with interest on their tax liabilities.
While the IRS has the authority to abate or remove interest on tax liabilities, the process for getting the IRS to exercise this discretion can be challenging.
The case of Select Steel, Inc. v. Commissioner, T.C. Summary Opinion 2008-79 highlights the difficulties taxpayers can face in requesting interest abatement from the IRS.
Facts & Procedural History
This case involves a steel contracting firm that used the cash method of accounting for its taxes. The IRS audited the taxpayer’s 1996 tax return.
The principal issue during the examination was whether the taxpayer was required to convert to the accrual method of accounting. Between February 1997 and August 1999, Petitioner and the IRS executed four agreements that collectively extended the period of limitations on the assessment of tax by approximately three years.
Computational errors by the IRS agent happened throughout the examination of the tax return, and the errors resulted in multiple recalculations that were the primary cause of the lengthiness of the audit.
On September 28 and 29, 1999, the examiner sent letters to the taxpayer summarizing the IRS’s audit findings which resulted in the taxpayer changing its method of accounting. The examiner acknowledged in the letters that the audit was lengthy and that the IRS assigned to the audit four different audit managers, each of whom gave the taxpayer different advice and information at different times in the audit process.
In 2005, the IRS issued a lien notice, and the taxpayer mailed to the IRS Form 12153, Request for a Collection Due Process Hearing, and, separately an interest abatement claim. The taxpayer’s request for a collection due process hearing and its request for abatement of interest were assigned to different Appeals officers at the IRS Office of Appeals. The Appeals officer reviewing the request for abatement of interest denied the request in full because she found that Petitioner did not raise “qualifying ministerial arguments” in its request.
About Abating IRS Interest
The IRS may abate interest on tax liabilities in certain circumstances, as set out in Section 6404(e). The regulations thereunder provide guidance on the requirements and procedures for requesting an abatement of interest, including the circumstances under which the IRS may grant such relief. These regulations are found in Treasury Regulation §301.6404-1 through -5.
The rules for interest abatement are:
- Errors or delays by the IRS: Interest may be abated if there was an error or delay by the IRS in performing a ministerial act, such as processing a tax return or refund claim, that resulted in additional interest being charged.
- Errors or delays by the taxpayer: Interest may be abated if there was an error or delay by the taxpayer in performing a ministerial act, such as providing necessary information, that prevented the IRS from timely processing the taxpayer’s return or refund claim.
- Other reasons: Interest may be abated in other limited circumstances, such as when the taxpayer can demonstrate that he or she was affected by a federally declared disaster, or when the IRS determines that interest abatement is in the best interest of the government and the taxpayer.
To request interest abatement, the taxpayer must file Form 843, Claim for Refund and Request for Abatement, with the IRS. The request must include a detailed explanation of the circumstances that led to the additional interest being charged, and any supporting documentation. The IRS will review the request and determine whether it believes that interest abatement is appropriate.
It should be noted that to qualify for interest abatement, no significant aspect of the error or delay can be attributed to the taxpayer.
Is the IRS Required to Abate Interest
The rules make it clear that interest can be abated, but that this is in the IRS’s discretion. This case was before the court on a collection due process hearing, however. The standard for review is an “abuse of discretion,” which makes it even more difficult for taxpayers to prevail.
In court, the IRS contended that on the basis of the “available evidence,” the taxpayer’s request for abatement of interest was properly disallowed because the taxpayer failed to show error or delay by IRS employees in performing a ministerial act. The court noted that “However, “the available evidence is scant primarily because of respondent’s destruction or loss of petitioner’s case file.”
The U.S. Tax Court made the following observations about the IRS audit and interest abatement process:
- Computational errors by the examining agent were common throughout the examination of petitioner’s return, and such errors resulted in multiple recalculations that were the primary cause of the lengthiness of the examination process.
- [T]he IRS assigned to petitioner’s examination four different audit managers, each of whom gave petitioner different advice and information at different times in the audit process.
- The Appeals officers considered almost exclusively the letters and documents petitioner submitted when requesting abatement of interest and challenging the tax lien because the IRS could not find its own case file regarding petitioner’s examination.
- [T]he available evidence is scant primarily because of [the IRS’s] destruction or loss of petitioner’s case file. The few documents in evidence have been supplied by petitioner, whose access to the information and documents most pertinent to resolution of this case is severely limited.
- The Appeals officer did not, however, inform petitioner that its case file was missing until after petitioner had petitioned the Court challenging the determinations.
The court ended up finding that the IRS abused its discretion in not abating a portion of the taxpayer’s interest.
Alternatives to IRS Interest Abatement
The taxpayer in this case waited for the IRS to try to collect and then filed a collection due process hearing. This got him before the tax court, which was able to get his interest abated.
In cases where the IRS refuses to abate interest and there is no option for a collection due process hearing, taxpayers may have other options to address their tax debt.
One option is to enter into an installment agreement with the IRS, which allows taxpayers to pay their tax debt in smaller, more manageable monthly installments. Interest and penalties will continue to accrue on the unpaid balance, but at a lower rate than if the taxpayer had not entered into an agreement.
Another option is to submit an offer in compromise to the IRS, which allows taxpayers to settle their tax debt for less than the full amount owed. The IRS will consider the taxpayer’s ability to pay, income, expenses, and assets when determining whether to accept the offer.
Taxpayers may also be eligible for penalty relief, such as the first-time penalty abatement program or the reasonable cause penalty relief program. These programs can provide relief from certain penalties assessed by the IRS if the taxpayer meets certain criteria.
This case highlights the difficulties taxpayers can face in requesting interest abatement from the IRS. The rules for interest abatement are outlined in Section 6404(e), and while interest may be abated in certain circumstances, it is ultimately at the discretion of the IRS. The process for requesting interest abatement can be challenging, and taxpayers who incur interest on tax debts should contact a tax attorney to discuss whether all or a portion of the interest may be abated.