The IRS has a track record of not acting timely. Its failures in this regard are frequent and, sadly, they are expected. The bar has been set so low that we actually expect the IRS to go slow.
This can be extremely frustrating for taxpayers and it can even cost taxpayers a considerable amount of money. There are numerous instances of inequity in this. The interest rules are an example. The IRS is authorized to abate or remove interest charges if the charges are due to the IRS’s delay. While this sounds promising, the standard is not that of the private sector. What counts as a “delay” can and will include months and months of doing nothing, with one entry in a time record saying that the IRS is doing something. This one-second time entry is enough to justify charging the taxpayer interest for many many months. This is the standard.
This can be even more problematic when the IRS delays for even longer, the taxpayer submits reasonable requests, only to find out that they are not entitled to a tax benefit or adjustment. The end result is years and years of compounding interest–all of which would have been avoided had the IRS simply acted diligently. The recent Scanlon White, Inc. v. Commissioner, 472 F.3d 1173 (10th Cir. 2006) case is an example of this. It involves employment taxes and the taxpayer’s belief that the IRS had the authority to abate interest on employment taxes.
Facts & Procedural History
The taxpayer submitted an interest abatement claim to the IRS in 2004 for his 1997, 1998, and 1999 employment tax liabilities.
The taxpayer had apparently submitted an offer in compromise to try to settle his taxes in or around 2000. The IRS did not get around to rejecting the offer until 2004.
The taxpayer’s claim was premised on the idea that the IRS delay was unreasonable.
The taxpayer eventually filed a collection due process hearing request and got the issue before the U.S. Tax Court. The U.S. Tax Court held that the IRS cannot abate interest on employment taxes. The taxpayer then filed this appeal.
About IRS Interest
The IRS is authorized to charge interest on unpaid tax liabilities. It is also authorized to pay interest on overpayments.
Underpayment interest is charged when a taxpayer has an unpaid liability comprised of tax, penalties, additions to tax, or interest.
The interest accrues daily and starts on the due date of the amount owed, and it continues to accrue until the balance is paid in full. Tax is due on the return filing date, and extensions to file do not extend the date for payment of the tax. Penalties and additions to the tax due dates vary by penalty type. If a taxpayer receives a notice, they will not be charged interest on the amount shown if they pay the amount owed in full on or before the “pay by” date. The interest rate charged varies and may change quarterly. Note: the court has said that an IRS audit closing report that fails to include interest is not a bar to the IRS later imposing interest.
On the other hand, overpayment interest is paid by the IRS on the amount a taxpayer overpays. The IRS pays interest on the amount starting from the later of the tax return filing due date, late filed tax return received date, date they get the return in a format they can process, or date the payment was made. The interest rate paid varies and may change quarterly. The IRS stops paying interest on overpayments on the date they refund the overpayment (and interest) or offset it to an outstanding liability. There is an administrative time, typically 45 days, for the IRS to issue a refund without paying interest on it.
Getting the IRS to Abate Interest
Section 6404(e)(1) authorizes the IRS to abate the interest on —
(A) any deficiency attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial or managerial act, or
(B) any payment of any tax described in section 6212(a) to the extent that any unreasonable delay in such payment is attributable to such an officer or employee being erroneous or dilatory in performing a ministerial or managerial act.
Thus, if a taxpayer thinks that the IRS underpaid interest owed to them on refunds or credits they are eligible for, they can file an informal claim or complete and send Form 843 to request additional overpayment interest. The request must be received within six years of the date of the scheduled overpayment.
What About Employment Taxes?
This brings us to the subject of this post–interest accrued on employment taxes. The taxpayer argued that the IRS could abate interest on employment taxes.
The court started–and ended–the analysis with the tax code:
The first sentence of § 6212(a) states, “If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitles A [income taxes] or B [estate, gift, and generation-skipping taxes] or chapter 41, 42, 43, or 44 [excise taxes], he is authorized to send notice of such deficiency to the taxpayer. . . .” Thus, the reference to § 6212(a) in § 6404(e)(1)(B) un-ambiguously limits the application of that subparagraph to income, estate, gift, generation-skipping, and certain excise taxes, which are the taxes described in § 6212(a). Employment taxes are not included; they are the subject of subtitle C of the Internal Revenue Code — that is, chapters 21 to 25.
Given these rules, the court concluded that the IRS was correct in not abating the interest as it did not have the authority to do so.
The IRS frequently does abate interest. It does not do so for interest on employment taxes. There may be other options for dealing with this type of interest, however. For example, taxpayers can reduce the interest they owe by paying their balance in full to stop underpayment interest from accumulating daily or by applying for a payment plan if they can’t pay the full amount of their taxes on time. Taxpayers may also be able to reduce the amount of tax or penalties they owe by filing an amended return or qualifying for penalty relief, which will automatically reduce the related interest.
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