A common complaint I receive from many of my clients is that their IRS liability has increased substantially due to the penalties and interest that have been tacked on to the account (most of these clients are considering submitting an IRS penalty abatement).
It does not seem fair, but not everything in life is fair, and it seems x1,000 when dealing with the IRS. If it helps, you can think of the IRS as just another business. Even though the IRS hates to be thought of as a “bank” or “lender,” compare owing taxes to being late with a credit card payment. You usually have to pay a late fee and if you are not paying off the balance in full, you will be charged interest.
The IRS has a different structure with assessing interest and how much you pay depends on the amount due, how many years you are behind and the circumstances surrounding your delinquency. Somebody who is suffering a true financial hardship and cannot make their quarterly tax payment will likely pay less interest than a person who has been knowingly cheating on their taxes (in significant dollar amounts) for many years.
In the former example, this only happens if the taxpayer has kept in communication with the IRS and made a good faith effort to find a workable debt repayment solution. In the latter, it is highly unlikely that a person who is actively defrauding the IRS is going to call them up and come clean.
Any balance due that is owed to the IRS government will continue accrue interest on the amount of the outstanding tax obligation. The interest rate is generally pretty low in comparison with other types of debt, but over time the amount of interest can add up and turn a small liability into a sizable one.
Unfortunately there is not too much to be done about your liability accruing interest and it is simply the cost of doing business with the IRS. However, there are certain mitigating circumstances where a taxpayer is able to do an IRS interest abatement in order to avoid the accrual of interest on some or all of the liability.
When an IRS interest abatement occurs, then the interest on a balance due can be abated altogether or specific periods of time can be excluded from the interest calculation.
While being granted in IRS interest abatement is difficult, it is not impossible. If you believe that the amount of interest you have been assessed is either incorrect or you are unable to pay them, give me a call. I have pulled rabbits out of hats before, so let me see what we can do for you.
Requirements of an IRS Interest Abatement
Please understand that an IRS interest abatement is a fairly difficult thing to accomplish and that its requirements are often rigid and inflexible. First, I want to note that “reasonable cause” can never be the basis for an IRS interest abatement.
In other words, unlike IRS penalty abatements, ordinary business care and prudence are not sufficient grounds for having interest abated or mitigated. Rather, interest can only be abated if certain conditions are met under statute. Internal Revenue Manual Section 20.2.7 explains the circumstances for an IRS interest abatement. They are:
- Excessive, barred by statute, erroneously or illegally assessed [ IRC 6404(a)]
- Attributed to certain unreasonable errors or unreasonable delays by the IRS [IRC 6404(e)(1)]
- Assessed on an erroneous refund [ IRC 6404(e)(2) ]
- Due on an additional liability that was not identified by the IRS in a timely manner [IRC 6404(g)]
- Disregarded for a period of time due to a taxpayer’s participation in a combat zone [IRC 7508]
- Disregarded for a taxpayer qualifying for Military Deferment [Title 50 Appendix section 570 USC]
- Due on an account for a taxpayer located in a declared disaster area [ IRC 7508A].
And here is an additional short list of the reasonable cause exemptions for penalty abatements:
- Ordinary Business Care and Prudence
- Death, Serious Illness or Unavoidable Absence
- Fire, Casualty, Natural Disaster or Other Disturbance
- Unable to Obtain Records
- Mistake was Made
- Erroneous Advice or Reliance
- Ignorance of the Law
Usually, the majority of these factors are not going to apply to the majority of taxpayer situations. Where I have seen most IRS interest abatements be successful is through claiming that interest accrued because of a managerial or ministerial error on the part of the IRS.
This includes loss of paperwork and delays in processing. The latter is somewhat common given the volume of accounts that the IRS handles. However, these circumstances only apply to situations where the mistake was not caused by an error or delay on the part of the taxpayer.
How to File an IRS Interest Abatement
If you believe that you have a valid claim for an IRS interest abatement, IRS Form 843 is the appropriate IRS interest abatement request form. The taxpayer should include the circumstances of the matter, the period to which the interest or the interest abatement period applies, the type of tax involved, the point in time at which you were first notified by the IRS of the interest owed on the tax obligation, and why an abatement should be given in the interests of justice.
According to Section 20.27.1 Interest Abatement and Suspension Overview, reasonable cause can never serve as the basis for an IRS interest abatement (IRS.gov, 8/14/2013). With this in mind, the interest on a tax liability will accrue from the return due date until the taxpayer pays the tax obligation in full.
Exceptions to the law may allow the authorization of an abatement, or suspension of interest. Exceptions may also consider certain periods relative to computing interest. When exceptions are overlooked, taxpayers may exercise the option for filing Form 843, Claim for Refund and Request for Abatement, or submitting written, signed correspondence requesting consideration.
With this in mind, to request an abatement of interest charges, the taxpayer must “file an interest abatement claim with the campus where they last filed a tax return” (“Interest Abatement and Suspension Overview”).
The campus will then route the claim based upon provisions outlined in section 21.5.3 of the Internal Revenue Manual. Taxpayers cannot submit claims to a particular campus.
Once an interest abatement claim is submitted, it is then reviewed by the Interest Abatement Coordinator (IAC). The IAC reviews the facts and circumstances surrounding the events outlined within the interest abatement claim. The IAC will render a decision based upon those facts.
The duties of the Interest Abatement Coordinator include maintaining inventory controls, reviewing claims and making preliminary determinations, requesting necessary documentation, identifying dates where interest should be abated, securing approval for proposed decisions, communicating the decision to the taxpayer, and providing status updates (“Interest Abatement and Suspension Overview”).
A taxpayer who disagrees with the decision will be instructed to contact the person whose telephone number will be printed on the last notice.
In a general sense, an IRS interest abatement of any unpaid portion of tax or any liability, which includes interest, will typically be because the interest is excessive in amount, the interest is assessed after the expiration of the statute of limitations, and/or the interest is illegally assessed (IRS.gov, “18.104.22.168. Not Legally Due,” 8/14/2013).
The IRS may suspend interest if it is determined that it failed to provide the taxpayer with adequate notice of liability as well as failed to provide information concerning the basis for the liability (IRS.gov, “0.2.7.6 IRC 6404g Interest Suspension,” 8/14/2013).
IRS Timeframe for Review
The IRS has 36 months (or 18 months in certain cases) from the return due date of return filed date (with regard to extensions) whichever is later, to notify the taxpayer of the additional liability without suspending interest” (“Interest Suspension”). This type of interest suspension applies to those individual income tax returns for taxable years filed timely.
In the case of an IRS interest abatement, the IRS applies the interest suspension to “an increase in liability for any taxes reportable on a Form 1040, Individual Tax Return ... ” (“Interest Suspension”). Interest suspension rules are extended also to amended returns received on or before December 21, 2005.
“The 18-month period applicable for amended returns is the return due date or return filed date of the original tax return. If a taxable amended return is received after 18 months from the original return due date (or filed date), interest on the amended return liability is suspended 18 months after the original return due date up through 21 days after receipt of the amended return” (“Interest Suspension”).
The IRS has 36 months (18 months in some cases) to notify the taxpayer of any outstanding and/or additional liability (IRS.gov, “22.214.171.124.3 Notification Period,” 8/14/2013). The IRS is subject to an interest suspension period where it is required to suspend interest due to untimely notification to the taxpayer (IRS.gov, “126.96.36.199.4 Interest Suspension Period,” 8/14/2013).
“Interest, penalties, additions to tax, and additional amounts as shown on the Examination Changes report ... are suspended starting the day after the 36-month (or 18-month) period end date” (“Interest Suspension Period”). Notices that the IRS sent must be in writing and contain adequate information related to the proposed examination liability.
Documentation You Will Need
The following types of documents are considered adequate notices for the sake of meeting the requirement:
- Math error notices
- Underreporter Program notices
- Notice of Final Partnership Administrative Assistant (FPAA)
- Form 4549, Income Tax Examination Changes Report with Form 886-A, Explanation of Adjustments
- 60-day Letter or FPAA with Form 4605-A, Examination Changes-Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations
- CP 2000
- Amended returns
There are exclusions to interest suspensions. For example, section 6404(g) of the Internal Revenue Code excludes a suspension of a penalty that is imposed by IRC 6651, Failure to File.
The section excludes a suspension of any interest, penalty, addition to tax, or additional amount for cases involving fraud, with respect to tax liability shown on the return, with respect to any gross misstatement, and with respect to any undisclosed reportable transaction. The section also excludes a suspension of any criminal penalty.
Given the difficulty in getting an interest abatement, I would recommend that you generally consult with a tax professional before attempting one. That person can make a fair and accurate assessment as to the likelihood of success of your IRS interest abatement claim and may be able to help you in preparing a claim that is more likely to be successful. They can also evaluate the likelihood of getting any penalties associated with the account waived too.
How the IRS Calculates Interest
You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15. This is the “deadline for most people to file their individual income tax return and pay any tax owed” (IRS.gov, “Topic 653 – IRS Notices and Bills, Penalties and Interest Charges,” 7/26/2013).
All U.S. tax returns are checked for mathematical accuracy. In the event that you owe money to the IRS, you will be sent a bill. With this in mind, familiarize yourself with the different types of penalties and IRS interest charged to your tax balance as well as the procedures and methods used to calculate interest and penalties.
For example, there is an IRS interest charge on the unpaid tax. Unpaid tax is determined by the balance due from the date of the return to the date of payment (“Topic 653”). “The interest rate is determined quarterly and is the federal short-term rate plus three percent. Interest is compounded daily” (“Topic 653”).
When filing a return, if you fail to pay all of the balance when due, you will have to pay a late payment penalty “of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25 percent maximum penalty is reached” (“Topic 653”).
It is important to note that the one-half of one percent rate will increase to one percent when the tax is unpaid for 10 days; and this is the time maximum for after the IRS issues a notice of intent to levy. In other words, the IRS will issue the notice when the tax remains unpaid for 10 days.
On the other hand, if you file by the return due date, “the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect” (“Topic 653”). Failure to file on time and pay the tax owed will result in the IRS charging penalties.
IRS interest charges can add a significant balance to your tax liability. It is important to take care of your IRS balance as soon as possible or you will continue to accrue interest.
As I have stated, success in obtaining an IRS interest abatement does not come easy. There are specific criteria that you must meet and the IRS is not very flexible. The important thing to remember is that there is a big difference between not being able to pay your debt and not wanting to pay it. Nobody likes having to pay the IRS but if you owe, you owe. The best you can hope for is to get the interest abated.
One way to avoid having to pay high interest in the first place is to file your taxes on time and negotiate a repayment plan if you cannot pay the full amount. (In other chapters, we discuss the different options available through the IRS.) We can help you with tax planning to keep you off the IRS radar screen or negotiate a better deal.
However, if you are already in over your head and want to try for an IRS interest abatement, call me. I will review your situation with you and see if the odds are in your favor.