In almost every situation, the IRS never abates interest on unpaid taxes since the thinking is that not paying tax is like getting a loan which the IRS is not about to make interest-free.
But in a U.S. Tax Court case decided last week, the Court held that the IRS has the authority to abate interest. The sole issue for decision was whether the IRS’s decision not to abate interest with respect to the taxpayer’s income tax liability was an abuse of discretion.
The relevant part of the Select Steel, Inc. case was the Court’s explanation for its decision that was as follows:
If, as part of a section 6330 proceeding, a taxpayer makes a request for abatement of interest, the Court has jurisdiction over the request for abatement of interest that is the subject of the Commissioner’s collection activities. Katz v. Commissioner, 115 T.C. 329, 340-341 (2000).
Under section 6404(e)(1), as in effect for petitioner’s 1994 fiscal year, the Commissioner may abate part or all of an assessment of interest on any deficiency or payment of income taxes to the extent that the deficiency in payment is attributable in whole or in part to any error or delay by an officer or employee of the IRS in performing a ministerial act.
Although Congress amended section 6404(e)(1) in 1996 to permit the Commissioner to abate interest with respect to “unreasonable” error or delay resulting from “managerial” or ministerial acts, the amendment applies only to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996.
The term “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of a taxpayer’s case after all the prerequisites to the act, such as conferences and review by supervisors, have taken place. Corson v. Commissioner, 123 T.C. 202, 207 (2004).
A decision concerning the proper application of Federal tax law is not a ministerial act. Id. An error or delay in performing a ministerial act is taken into account only if it is in no significant aspect attributable to the taxpayer and only if it occurs after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. Sec. 6404(e)(1).
Section 6404(e) is intended to apply only “in instances 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. Section 6404(h)(1) authorizes the Court to decide whether the Commissioner’s failure to abate interest was an abuse of discretion and, if so, to order an abatement. See Jones v. Commissioner, T.C. Memo. 2008-56.
Generally, the taxpayer must prove that the Commissioner’s discretion was exercised arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). However, “The Commissioner is in the best position to know what actions were taken by Internal Revenue Service officers and employees during the period for which petitioners’ abatement request was made and during any subsequent inquiry based upon that request.” Jacobs v. Commissioner, T.C. Memo. 2000-123.
Do you have a similar situation and believe that interest should be eliminated? Do you have other tax problems you want to discuss with a California tax attorney? Call Mitchell A. Port at (310) 559-5259.