The IRS charges interest on unpaid tax, penalties, and interest. This interest can add up as time passes and the amount can be substantial. The IRS will abate or remove interest balances in certain circumstances, but it is up to the taxpayer to make this request. Even experienced tax professionals often forget about this remedy.
About Interest, Generally
Interest accrues on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is the Federal short-term rate plus 3 percent. The amount is higher for certain large corporate tax debts. Interest compounds daily.
The IRS is authorized to abate or remove interest. Congress intended IRS abate interest where failure to abate interest would be widely perceived as grossly unfair. H. Rept. 99-426 at 844 (1985), 1986-3 C.B. (Vol.2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol.3) 1, 208.
Not Legally Due
There are instances where the IRS assesses interest when it is not legally due and instances where the IRS assesses too much interest. The IRS must abate or remove the interest in these instances.
Unreasonable Error or Delay
The more difficult cases are where the IRS has simply failed to act timely, which resulted in additional interest being due.
The IRS is authorized to remove interest in situations where the IRS (1) failed to perform a managerial or ministerial act in a timely manner or (2) made an error performing a managerial or ministerial act. So what is a managerial or ministerial act? These terms are defined in the regulations and court cases.
Managerial Act
Treasury Regulation § 301.6404-2(b)(1) defines the term “managerial act” as 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 the management of personnel.
The regulations go on to say that the following are not managerial acts: (1) a decision concerning the proper application of law and (2) a general administrative decision, such as the IRS’s decision on how to organize the processing of tax returns or its delay in implementing an improved computer system.
The IRS’s policy manual provides the following example of a managerial act: “The manager approves the transfer of the case, but the clerk misplaces the case file. The “misplacing of the case file” is a managerial act. The IRS, in its discretion, may abate interest attributable to any unreasonable delay caused by the misplacement of the case file.”
Ministerial Act
Treasury Regulation § 301.6404-2(b)(2) defines the term “ministerial act” as a procedural or mechanical act that does not involve the exercise of judgment or discretion. It is an act that occurs during the processing of a taxpayer’s case after all prerequisites to the act have taken place, such as conferences and reviews by supervisors. This does not include decisions concerning the proper application of the law.
The IRS’s policy manual provides the following example of a ministerial act: “An audit selection letter is sent to the taxpayer’s old address and then forwarded to the new address. In response to the letter, the taxpayer notifies the IRS of the new address and requests a transfer of the audit to an office closer to the new address. The manager approves the transfer request. The IRS, in its discretion, may abate interest attributable to any unreasonable delay in transferring the case.”
Additional Points to Consider
Before requesting that the IRS abate interest, it should be noted that the IRS will not abate interest if:
- a significant aspect of the delay was caused by the taxpayer.
- the delay occurred prior to the time the taxpayer was contacted by the IRS in writing about the unpaid taxes.
- the time for filing a refund claim is still open.
- the underlying tax debt is not for employment taxes.
It should also be noted that the mere passage of time does not establish error or delay in performing a managerial or ministerial act. In addition, a request to be exempt from interest is different from a claim arguing that interest should not be applied for a specific period of time. The former is generally not allowable, while the latter may be.
To prevail on an interest abatement claim, the taxpayer must (1) identify an error or delay by the IRS in performing a ministerial or managerial act, (2) establish a correlation between the error or delay by the IRS and a specific period for which interest should be abated, and (3) show that he or she would have paid the tax liability earlier but for the error or delay.
The Santana v. Commissioner, T.C. Memo. 2017-14 case provides a good example of how these rules are applied. In Santana, the IRS miscoded the taxpayers’ account and this was found to be a ministerial error. The erroneous bankruptcy code froze the taxpayers’ claimed refunds and prevented the IRS from properly communicating with the taxpayers regarding their claimed refunds. This satisfied the error or delay and the period for which interest should be abated, but the court did not find that the third element was satisfied. The taxpayers argued that they meet the third requirement in that they were waiting for the IRS to communicate with them regarding their unpaid income tax liabilities before making payments, a communication that never occurred until the IRS corrected the coding error after the taxpayers enquired about their missing refunds. The court noted that the IRS did communicate with the taxpayers and the taxpayers chose not to pay the tax liability.
Compare this to the case Douponce v. Commissioner, T.C. Memo. 1999-398. In Douponce, the taxpayer asked an IRS employee what the total amount due was for 1988, 1990, and 1991. The IRS employee told the taxpayer the total amount due, and the taxpayer promptly paid those amounts. However, the employee did not include all of the accrued but unassessed interest in the amounts given to the taxpayer. The court concluded that it was reasonable to assume the only reason for the delay of in excess of five months was caused by the IRS’s failure to tell the taxpayer the correct amounts due when the taxpayer requested that information. Thus, the court ordered the interest to be abated.
We help taxpayers with interest abatement claims. If you have been charged interest, be it unlawfully or due to an unreasonable delay on the part of the IRS, we want to hear from you. Contact us today to see how we can help.