How, What, When, Where, Why: Waving Sayonara to Interest

When Does Interest Begin?

In U.S. taxation, interest does not always begin accruing on the day a tax liability is due. In reality, it depends heavily on the class of tax or penalty in question. These classes can range from withholding tax to employment tax, none of which are exempt from interest. Per the IRS, interest can accrue at any point during the tax period to which the interest is related. Further, for employment taxes and income taxes, interest can be charged without regard to any extensions that may or may not have been filed.

Abatements of Interest

Abatement of interest can be done in a few different ways, following the guidance under Sections 6404, 7508A, and 7508.

Unreasonable Delays or Errors by the IRS

The IRS isn’t perfect, despite the reputation the agency likes to tout. As such, errors do happen, and in some cases, these errors lead to unfair interest charges on top of an unfair tax case. If the IRS is willing to admit to their mistakes — although this isn’t guaranteed — it can be possible to be granted abatement if a managerial or ministerial act caused a delay or error. A managerial act is defined as any administrative act that results in the temporary or permanent loss of records or a discretionary decision that is related to personnel management.

Mathematical Errors by the IRS

Despite the importance of math in the IRS’ daily responsibilities, not all numbers are crunched properly. Covered under 6404(d), if an IRS officer provides calculations to a taxpayer that result in a mathematical error causing less than the proper amount of tax to be reported or paid, the IRS can abate interest for any period within 30 days of the date of notice and payment of the deficiency.

  • Computational errors
  • Use of an incorrect IRS table
  • An inconsistent entry on a return
  • The omission of information to substantiate a part of a return
  • Use of a deduction or credit in an amount that exceeds the statutory limit

Erroneous Written Advice by the IRS

The IRS publishes significant advice for taxpayers, including countless updates and clarifications in any given year. With so much information, it’s not unsurprising that not every word published is perfect. If a taxpayer attaches support to a return to prove a point that is determined to contain erroneous advice, interest related to an incorrect conclusion is required to be abated. To protect against this kind of challenge, it’s best to keep track of all support documentation used to prepare returns, no matter how useless you think it may be.

Small Tax Balances

What is small, exactly? With any luck, your definition matches that of the IRS. The Secretary of the Treasury is authorized to abate unpaid amounts, including interest, if it is determined that the administration and collection costs wouldn’t be worth actually pursuing an amount due. While “small” is left open-ended under Section 6404(c), an amount of, say, $5 or $10 could be considered immaterial enough to qualify for abatement.

Suspension of Penalties and Limitations

In addition to the abatement of interest, it’s also possible to suspend penalty and interest accrual under Section 6404(g). In general, the IRS has three years from the time a return is filed to assess additional tax. However, if a taxpayer files in a timely manner and the IRS fails to send a notice stating the additional liability within 36 months of the date the return, or an extension for a return, was filed, the interest and penalties associated with the suspension period will not be applied. This suspension period begins the day after the end of the three years and concludes 21 days after the IRS mails a notice of the amount of an unpaid liability. This suspension period applies separately to each notice sent.

Interest Netting

Interest netting is another unfortunate occurrence prone to error by the IRS, particularly in cases with multiple periods or partner-level adjustments. Interest netting often occurs when the taxpayer owes interest to the IRS due to an underpayment while the IRS owes interest to the taxpayer due to an overpayment. In these cases, the IRS will figure out the total interest using the same interest rate, with a total interest rate of zero applying up to the amount of the overpayment.

Issues of Interest Computation

Double-checking the IRS’ math is a little less straightforward than it sounds, opening up another can of worms in an already complex and often costly process. However, for taxpayers who do not wish to erroneously fork over too much interest, this is the price that must be paid.

Collection Due Process

For those facing the Collection Due Process phase, it’s important to speak up sooner rather than later, preferably through the use of Form 12153, Request for a Collection Due Process or Equivalent Hearing. This suspends the 10 year period the IRS has to collect taxes as well as opens the door to challenge the settlement officer’s decisions in court should the need arise. This Form must be postmarked by the date included in a lien notice, levy notice, or actual levy. This process should also include a request for evidence that a notice of demand of payment was correctly issued. If this is unavailable, it may be reasonable to request full abatement of the penalty.

  • The type of tax
  • When an initial notice of deficiency of payment was provided
  • The period in question
  • The circumstances
  • The reasons why abatement is necessary

Requesting Interest Abatement

The procedure behind requesting an abatement of interest is actually quite simple, but there are innate complications in every interaction with the IRS.

Appealing a Denial of Abatement

If your abatement request is denied — and, speaking frankly, many will be — there is an opportunity to appeal. Those who wish to press forward should send a protest statement detailing the reasons the IRS should reconsider to the same office that sent the abatement disallowance letter.

Tax Court Review

If an appeal doesn’t work, a trip to Tax Court just might. The Tax Court has jurisdiction to review and potentially overturn an abatement refusal, assuming a timely petition was filed. Interestingly, there are also net worth requirements here; per Section 2412(d)(2)(B), net worth cannot exceed $2 million for individuals, $7 million for unincorporated businesses, partnerships, and corporations with fewer than 500 employees, or any amount for 501(c)(3) organizations.

The Changing Landscape of Interest

Taxes in the U.S. are rarely constant, and that includes the wide world of interest. In 2015, the House Ways and Means Committee approved reforms leading to 6404(h), which allows a taxpayer to seek Tax Court review regarding interest abatement should the IRS fail to provide a final determination. Further, under the newly-created 7463(f)), the Tax Court’s jurisdiction was expanded to include reviews of IRS decisions to reject interest abatement in small tax cases with under $50,000 under dispute.

To Request Abatement — or to Stay Quiet

Successfully securing interest abatement isn’t a walk in the park, but it’s not the completely impossible task it is often made out to be, either. When a clear and reasonable case exists with plenty of support, submitting a request may be worth the effort, particularly when the amounts at stake are sufficiently large. While there’s no guarantee of a win, there’s no harm in trying, either.

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Michael DeBlis

Michael DeBlis

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Michael is an attorney specializing in entertainment law and a professionally-trained actor. He is a partner in the law firm of DeBlis Law.