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July 8, 2008

Getting Interest Abated Can be Challenging

IRS Audits

Houston Tax Attorney

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The IRS has the authority to abate or remove interest on tax liabilities; however, the process for getting the IRS to exercise this discretion can be challenging. The U.S. Tax Court describes this process in Select Steel, Inc. v. Commissioner, T.C. Summary Opinion 2008-79.

In Select Steel, the taxpayer was required to change its method of tax accounting due to a change in the law. This change resulted in a tax deficiency. Select Steel ended up conceding the accounting period change on audit. The IRS closed the audit two years after Select Steel conceded the only remaining issue in the audit. The taxpayer then submitted an Offer in Compromise to request that the IRS abate the interest. Eight months later the IRS responded by informing the taxpayer that it had lost all but the first page of the taxpayer’s Offer in Compromise (the rest of the offer was located nearly four months later). The IRS then filed notice of a federal tax lien for the interest, which resulted in the taxpayer requesting a Collection Due Process hearing. The IRS Appeals office sustained the lien.

The U.S. Tax Court made the following observations about the IRS audit and interest abatement process:

  • Computational errors by the examining agent were common throughout the examination of petitioner’s return, and such errors resulted in multiple recalculations that were the primary cause of the lengthiness of the examination process.
  • [T]he IRS assigned to petitioner’s examination four different audit managers, each of whom gave petitioner different advice and information at different times in the audit process.
  • The Appeals officers considered almost exclusively the letters and documents petitioner submitted when requesting abatement of interest and challenging the tax lien because the IRS could not find its own case file regarding petitioner’s examination.
  • [T]he available evidence is scant primarily because of [the IRS’s] destruction or loss of petitioner’s case file. The few documents in evidence have been supplied by petitioner, whose access to the information and documents most pertinent to resolution of this case is severely limited.
  • The Appeals officer did not, however, inform petitioner that its case file was missing until after petitioner had petitioned the Court challenging the determinations.

The court ended up finding that the IRS abused its discretion in not abating a portion of the taxpayer’s interest. Taxpayers who incur interest on tax debts should contact a tax attorney to discuss whether all or a portion of the interest may be abated.

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