More on IRS Interest Abatements

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[1] 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, “20.2.7.3. Not Legally Due[2],” 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). 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[3] 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, “20.2.7.6.3 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, “20.2.7.6.4 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 send must be in writing and contain adequate information related to the proposed examination liability. 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[4]
• 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[5], 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.

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