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, “220.127.116.11. 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).