Taxpayers may sometimes request the IRS to recalculate their tax liability, and the IRS may grant such a request, but this does not necessarily mean that the IRS accepts all the tax positions set out or omitted from the return.
If the IRS subsequently recalculates the amount of tax due again and increases the amount of tax due, the fact that the prior calculation did not include all items is not a reason for abating or removing interest on the increased tax.
There are nuances, however. The facts matter. The recent Guerrero v. Commissioner, 2006 T.C. Memo 201 provides an example of this.
Facts & Procedural History
The taxpayers were residents of Continental, Colorado. They opted to withdraw approximately $174,000 dollars from their pension plan and 401(k) retirement plan and they used the funds to purchase a house in Denver, Colorado, and to invest in the stock market.
The taxpayers only reported approximately $90,000 of these distributions as taxable income on their federal income tax return and they claimed an approximate $12,000 IRA contribution deduction.
In 2001, the IRS requested an explanation for a claimed IRA deduction from the taxpayers. The taxpayers responded by admitting the deduction was erroneous and requested the IRS to recalculate their tax liability. The IRS did so, and in a notice sent in 2001, advised the taxpayers that they had overpaid their corrected income tax liability for 2000 by about $700.00. The IRS refunded this amount to the taxpayers.
Less than a year later, in 2002, the IRS issued the taxpayers a CP2000 Notice proposing to increase their income for the omitted pension and annuity income. The taxpayers did not petition the U.S. Tax Court to challenge the proposed increase. The tax was assessed and the taxpayers submitted an offer in compromise. The offer was not processed, and the taxpayers ended up paying $40,000 to the IRS revenue officer with a promise to enter into an installment agreement for the balance.
The taxpayers then submitted a refund claim requesting that the accuracy-related penalty be abated, which the IRS eventually did. The IRS did not abate the interest that was also assessed and included in the refund claim.
About Interest Abatement
Section 6404(e)(1) allows the IRS to abate part or all of an assessment of interest on any deficiency or payment of income tax if any unreasonable error or delay in payment is attributable to an erroneous or dilatory performance of a ministerial or managerial act by an officer or employee of the IRS.
A “ministerial act” is a procedural or mechanical act that does not involve judgment or discretion, while a managerial act is an administrative act that involves judgment or discretion relating to personnel management. Congress did not intend the provision to be used routinely to avoid payment of interest. Rather, it is only intended for cases where failure to do so would be widely perceived as grossly unfair.
A request demanding abatement of all interest charged does not satisfy the required link, and the IRS has the authority to exercise discretion in such cases. The burden of proof is on the taxpayer to show that the Commissioner abused his discretion by exercising it arbitrarily, capriciously, or without a sound basis in fact or law.
Is IRS Calculation a Ministerial Act?
The question, in this case, is whether the taxpayers sending the IRS a letter asking it to recalculate their tax, which the IRS initially did, puts the burden on the IRS to catch all errors in its calculation. More specifically, does this equate to a ministerial act?
The taxpayers raised this very question:
petitioners argue that interest should be abated because they requested the Secretary to recalculate their income tax liability for 2000, and the Secretary had all required Forms 1099 and other information to do so accurately and promptly. Petitioners contend that the act of processing their 2000 return accurately was a ministerial act.
The court did not agree. The court held that the processing and evaluation of the taxpayers’ income tax return required the application of Federal tax laws, which was not a ministerial or managerial act. It also noted that it was the taxpayers’ errors that caused the delay in this case, not the IRS’s errors.
While the IRS has the authority to make adjustments to a tax return within the allowed time period, it does not mean that it accepts all of the other tax positions listed or omitted from the tax return. The fact that the IRS makes a late adjustment does not automatically warrant interest abatement. To qualify for interest abatement, there must be a tangible delay in the IRS process after it has started, rather than simply the late timing of an adjustment.