Interest that accrues on taxes can be abated due to IRS errors or delays. The law that implements this general rule often fails to provide a meaningful remedy in most interest abatement cases. But what about contract law? Can contract law provide another means for obtaining a remedy in interest abatement cases? The court addresses this in Goldberg v. Commissioner, T.C. Memo. 2020-38.
Facts & Procedural History
This case involved an IRS audit and adjustment to the taxpayers’ 2003 and 2004 income tax returns. The IRS started the audit in 2007–three years after the 2003 return was filed. The IRS closed the audit in 2011–eight years after the 2003 return was filed.
The IRS sent the typical audit closing forms, including the Form 4549, Income Tax Examination Changes. The IRS apparently sent several versions of this form. In the blank for interest, the final Form 4549 noted that the interest was $0.00.
As is customary, the IRS then assessed the tax listed on the Form 4549 and then sent the taxpayer a bill for the tax assessed and interest imposed on the tax. The interest is retroactive back to the date the original tax returns were filed, i.e., 2004 and 2005.
This dispute focuses on the interest the IRS imposed. From 2011 until 2020–the taxpayer attempted to get the IRS to abate the interest assessed in the case. This included filing a claim for interest abatement, an appeal, and then tax court litigation.
About Interest Abatement
Our tax laws impose interest on any underpayment of tax. They also provide a means for having the interest removed or abated.
Section 6404(e)(1) provides that the IRS “may abate” an assessment of interest due to IRS errors or delays.
The error or delay is only considered if it is not due to the taxpayer (“no significant aspect of such error or delay can be attributed to the taxpayer involved”).
Our tax laws go on to say that this only includes situations where the assessment of interest is attributable to any unreasonable error or delay by an IRS officer or employee in performing a (1) managerial act or (2) ministerial act.
What is a Managerial Act?
A managerial act is “an administrative act that occurs during the processing of a taxpayer’s case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel.”
General administrative decisions, “such as the IRS’s decision on how to organize” tax-return processing, are not managerial acts.
What is a Ministerial Act?
A ministerial act is “a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place.”
It is often described as the government doing what the government is supposed to do. It is a government function in action. Here is a more in depth explanation as to what is a ministerial act.
The Exception for IRS Deliberations
Decisions about the “proper application” of law are neither managerial nor ministerial acts. This is essentially the time the IRS is deliberating about the case.
This means that an IRS agent spending an unlimited amount of time thinking about how to handle a case does not justify the abatement of interest.
Is the Form 4549 a Binding Contract?
With this background, we can consider the case addressed in this post. Given the above-cited rules, the IRS is authorized to abate interest. It is able to do so if there is an IRS error or delay.
In this case, the IRS auditor sent the taxpayers a Form 4549 with the interest space noted as $0.00. The taxpayers apparently signed this form and the form was used by the IRS to assess the tax listed on the form. Then, after the IRS audit was closed, the IRS then assessed interest on the tax.
The taxpayer argued that the For 4549 was a binding contract and that the parties contractual agreement was that there would be $0.00 interest. Is an executed Form 4549 that was used by the IRS to assess the underlying tax a contract that is binding on the IRS? Is this another justification for abating interest, i.e., is the general rule that interest can be abated due to ministerial or managerial acts by the IRS and by contract law? This is the question the court considered in this case.
The court noted that Section 7121 sets out how agreements as to tax, penalties or interest are settled with the IRS. Section 7121 addresses closing agreements. There are several types of closing agreements.
The court in this case compared the Form 4549 to the documents that qualify as closing agreements under Section 7121. The court noted that the From 4549 does not include the words “agreement” and “agreement is final and conclusive.” Thus, the court concluded that the Form 4549 was not a closing agreement and it was not contract the IRS was bound by.
The IRS audit and appeal process can take several years.
The interest abatement rules often do not provide an adequate remedy. This is particularly true where the IRS makes entries in its records that it is “working” on the case, even though it is really doing nothing to advance the case (this includes holding a routine IRS audit open for 14 years).
Given this court case, should taxpayers take the step to write on the Form 4549 the terms “agreement” and “agreement is final and conclusive?” Maybe even reference Section 7121? The courts analysis suggests that this language would suffice.