Interest Abatement

Several years ago, client had a payroll tax audit and a deficiency was asserted. The client agreed with the deficiency calculation. In addition, the IRS agent did a rough interest calculation and gave it to us verbally over the phone. The interest was about $2,300. IRS agent said, "It's not exact, but should be good within a few hundred dollars or so." So, client cuts a check for $2,500 (plus the deficiency) to account for the fudge factor.

A lot of time passes and now the agent contacts my client (by way of a letter) indicating that the $2,300 was incorrect and the amount should have been $4,300, which has now grown to like $6,700. If you subtract off the $2,500 payment made, this results in a balance due of $4,200.

I'm wondering about an interest abatement for unreasonable IRS error/delay...Do we have a case?

"the Secretary may abate the assessment of all or any part of such interest for any period. For purposes of the preceding sentence, an unreasonable error or delay shall be taken into account only if no significant aspect of such unreasonable error or delay can be attributed to the taxpayer involved, and after the Internal Revenue Service has contacted the taxpayer in writing with respect to such deficiency or payment."

Did this happen?

Yes.

What about 6404(g)? It's odd, but all of the discussion in BNA concerns Income or Estate & Gift taxes, not payroll.

Where's the delay here? If the client cut a check to pay the deficiency and $2,500 of the interest, then there shouldn't be any interest for the period after the check was received because the deficiency had been paid at that point. This seems to be just a mistake in estimating the amount of the interest, and I don't think that the abatement of interest provisions apply to such a mistake.

It's odd, but all of the discussion in BNA concerns Income or Estate & Gift taxes, not payroll.

Not sure, we'll have to investigate that.

Where's the delay here? If the client cut a check to pay the deficiency and $2,500 of the interest, then there shouldn't be any interest for the period after the check was received because the deficiency had been paid at that point. This seems to be just a mistake in estimating the amount of the interest, and I don't think that the abatement of interest provisions apply to such a mistake.

The mistake came first. And then the delay second. The mistake (difference between $4,300 "revised" interest amount and $2,500 initial interest amount, which was paid up front) cost my client $1,800. So, I get it if the IRS wants this $1,800, even though I don't like it. The delay cost my client $2,400 ($6,700 total due less $2,500 paid up front less $1,800 attributable to mistake). And $1,800 + $2,400 = $4,200, which is what the IRS is asking for now. Given all this, I am hoping to get an interest abatement for the $2,400. And note, there should be interest for the period after the initial check was cut only because the check didn't cover the full balance due, although we thought it did.

Doc, I did a little digging regarding the point you raised. Here's what I found, as it relates to the OP situation:

6404(e) Abatement of interest attributable to unreasonable errors and delays by Internal Revenue Service.

6404(e)(1) In general.

In the case of any assessment of interest on —

6404(e)(1)(A) any deficiency attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial or managerial act, or

6404(e)(1)(B) any payment of any tax described in section 6212(a) to the extent that any unreasonable error or delay in such payment is attributable to such an officer or employee being erroneous or dilatory in performing a ministerial or managerial act,

So, 6404(e)(1), the provision at play, has two parts: and "A" and a "B." You will note that "B" specifically references Section 6212(a). Section 6212 cover taxes such as those on income, estate, gift and public charities...but not employment taxes. So, statutorily, a taxpayer cannot raise a 6404(e)(1)(B) argument in the case of employment taxes.

I should also point out, however, that 6404(e)(1)(A) uses the words "any deficiency." I assume that "any deficiency" means "any deficiency," including a payroll tax deficiency. This would mean we could make an (e)(1)(A) argument with respect to payroll taxes...unless I'm missing something.

I still don't think the interest abatement provisions apply with the facts you've given us.

I would consider a 2+ year delay an unreasonable one.

What I'm saying is that I don't think you're giving us all of the facts because I fail to see how $2,400 of interest could accrue on an unpaid $1,800 liability in 2 years when the IRS interest rate is only 3%. You're obviously not telling us the whole story.

Gotchas. You mentioned in one of your other posts that the deficiency had been paid. And I agree. Because of that, the interest here should have been far less. It should have been interest on the interest really. So, I think what has happened is that they continued to accrue/compute interest on the tax deficiency, or at least part of it.

But that aside, whatever they compute above the $1,800 should be eligible for an abatement. So, what I am saying is that the misquote of the original interest cause some additional interest to be accrued, and whatever that additional interest is, should be abated, IMO, whether it is $2,400 or any other amount.

I agree with Mr. Fogel. It simply isn't possible. Get the record of account and review it thoroughly. Either the tax itself changed; there are penalties or there is an error. I'll be happy to review it with you to determine the discrepancy.

So, what I am saying is that the misquote of the original interest cause some additional interest to be accrued, and whatever that additional interest is, should be abated

Interest on $1,800 for 2 years at 3% (including the interest on interest) is about $111. I would have to charge my client more in fees just to file the interest abatement case. Not worth it.

Suggest you stop relying on the agent for interest estimates and wait for the assessment. You can't file an interest abatement case anyway until the interest is assessed.

Guys, thanks for your thoughts on this. I don't have the calculations...and to me, they didn't really matter all that much. It was the underlying principle I was trying to get straight (i.e. a payoff error that leads to additional interest, no mater how big or small, is the type of error that 6404(e)(1) contemplates).

But as it turns out, based on additional research, interest abatement requests, based on 6404(e)(1) at least, don't work on employment taxes in the first place. So, if the IRS error led to a $111 bogus interest charge or a $10,000 bogus interest charge, it wouldn't matter...at least under (e)(1).

So, it's a moot point.

You can't legally rely on an oral representation like this. The client asked for an estimate and go it. He should have asked for an exact amount. You don't state how long it was from the oral estimate until billing.

Here's the "additional research" that Ckenefick is referring to. The courts have held that the IRS lacks authority to abate interest under IRC §6404(e) when the interest is owed on employment taxes. See Woodral v. Commissioner, 112 T.C. 19, 25 (1999); Scanlon White, Inc. v. Commissioner, 472 F.3d 1173, 1177 (10th Cir. 2006), aff'g T.C. Memo. 2005-282; Miller v. Commissioner, 310 F.3d 640, 645 (9th Cir. 2002), aff'g T.C. Memo. 2000-196; Paneque v. Commissioner, T.C. Memo. 2013-48; Hepps v. Commissioner, T.C. Memo. 2005-138.

Exactly. I don't quite understand those decisions, in light of the "any deficiency" language in (e)(1)(A).

The Reg seems to have limited the "any deficiency" language in (e)(1)(A):

(1) Section 6404(e)(1) provides that the Commissioner may (in the Commissioner's discretion) abate the assessment of all or any part of interest on any—

301.6404-2(a)(1)(i) Deficiency (as defined in section 6211(a), relating to income, estate, gift, generation-skipping, and certain excise taxes) attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Internal Revenue Service (IRS) (acting in an official capacity) in performing a ministerial or managerial act; or

...and the courts felt that this was a reasonable interpretation of the statute.

I think that the courts' reasoning is understandable, and that it goes beyond giving deference to IRS regulations.

IRC §6404(e)(1)(A) states that the interest must be assessed on a "deficiency," and IRC §6404(e)(1)(B) states that the interest must be assessed on a payment of a deficiency (tax described in section 6212(a), which refers to a "deficiency").

IRC §6211 states that the term "deficiency" means an additional amount of tax imposed by subtitle A (income taxes), subtitle B (estate and gift taxes), or chapters 41, 42, 43 or 44 (certain excise taxes). But not employment taxes. Hence, since additional employment taxes owed can't be a "deficiency," IRC §6404(e) doesn't apply.

I get it. Just seems a bit contrary if the point is to afford the taxpayer some rights.