Interest abatement under IRC 6404(e), and when interest on a penalty comes off

The starting rule

IRM 20.2.7.2 puts it in one sentence: “Reasonable cause is never a basis to abate interest.” Interest under IRC 6601 is compensation for the use of money, assessed and collected like tax. A request for interest relief therefore has to fit a specific provision, and practitioners save time by identifying which one before writing anything. The IRS penalty pages say the same thing in plain terms: by law the IRS cannot remove or reduce interest unless the related penalty is removed or reduced.

Interest on penalties

When a penalty is abated, the interest charged on that penalty goes with it. The IRS relief pages state that the IRS will “automatically reduce or remove the related interest if we reduce or remove any of your penalties.” No separate request is needed, though the transcript should be checked after the abatement posts.

When interest on a penalty starts depends on the penalty. Under IRC 6601(e)(2)(A), interest on an assessable penalty, additional amount or addition to tax is imposed only if it is not paid within 21 calendar days of notice and demand (10 business days if the amount is $100,000 or more), and then only from the notice date. Three categories are carved out of that rule and carry interest from the return due date including extensions, under IRC 6601(e)(2)(B): the failure-to-file addition under IRC 6651(a)(1), IRC 6653, and the accuracy-related and fraud penalties in part II of subchapter A of chapter 68. That is why an accuracy-related penalty or a failure-to-file penalty arrives with years of interest already attached, while a per-partner IRC 6698 penalty paid within 21 days of the notice carries none.

IRC 6404(e)(1): unreasonable IRS error or delay

IRC 6404(e)(1) gives the IRS discretion to abate interest on a deficiency, or on a payment of tax described in IRC 6212(a), to the extent it is attributable to an unreasonable error or delay by an IRS employee in performing a ministerial or managerial act. The statute adds two conditions: an error or delay counts “only if no significant aspect of such 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.”

The six criteria

IRM 20.2.7.5.1 lists what a request must meet, and notes that a request failing any of them “is automatically disallowed by law”:

1. The IRC 6511 period to file a claim is open (3 years from filing or 2 years from payment).
2. The tax year began after December 31, 1978.
3. The interest relates to a tax described in IRC 6212(a): income, estate, gift and certain excise taxes. Employment taxes are specifically excluded.
4. The error or delay was unreasonable and occurred in performing a ministerial or managerial act.
5. It occurred after the IRS contacted the taxpayer in writing about the examination, underpayment or payment.
6. The taxpayer or representative did not contribute to the error or delay.

Ministerial versus managerial

A ministerial act is a procedural or mechanical step that involves no judgment and occurs after all prerequisites (conferences, supervisory review) are done; issuing a notice of deficiency after reviews are complete is the regulation's example. A managerial act involves the temporary or permanent loss of records, or judgment about managing personnel: sending an agent to extended training or leave without reassigning the case, or misplacing the file. Neither covers a decision about how the tax law applies. The IRM caution: “A decision concerning the proper application of federal tax law is not a managerial act, nor is it a ministerial act.”

How much comes off

Only interest accruing during the period of the unreasonable error or delay, and only on the additional liability. IRM 20.2.7.5 tells employees: “Do not abate interest accruing from the return due date up to the date when the IRS first contacts the taxpayer.” If an audit produced additional tax and penalty and the delay happened during the audit, only interest on the audit liability is considered, not interest on an unpaid original balance. If the IRS gave a payoff figure of $70 when it should have been $100, only interest on the $30 difference is in play (IRM 20.2.7.14.2.1). In a partnership examination, a delay during the partnership exam can affect every partner, while a delay after it closes is evaluated partner by partner.

Other abatement and suspension provisions

• Erroneous refunds (IRC 6404(e)(2)). The IRS must abate interest from the refund date to the demand date if the refund was $50,000 or less and the taxpayer (or a related party) did not cause it in any way. Above $50,000, abatement is discretionary and the IRM directs consultation with Counsel. Repaying within 21 days of the demand stops interest after the demand date under IRC 6601(e)(3).
• Failure to notify within 36 months (IRC 6404(g)). For timely filed individual income tax returns, interest is suspended if the IRS does not notify the taxpayer of additional liability within 36 months (or 18 months in some cases) of the later of the due date or the filing date. It is a suspension, not an abatement, and the IRM states there are no appeal rights and no Tax Court review for it.
• Disasters (IRC 7508A). Interest is suspended during the postponement period only for returns whose original due date falls within the disaster period (for disasters on or after January 1, 2015). Balances due before the period keep accruing. See disaster postponements.
• Errors in the computation (IRC 6404(a)). IRS employees are obligated to correct interest errors they find without a request, and the module does not need to be at zero balance.

Requesting abatement

Form 843 is the preferred vehicle, but IRM 20.2.7.14 says the IRS will consider any signed correspondence with the same elements: name, TIN, interest period, signature under penalties of perjury and the reasons. For an IRC 6404(e)(1) request, the Form 843 instructions call for:

• lines 1 through 4, with line 3 showing dates of any payment of interest or tax for the period;
• box a on line 7 (“Interest was assessed as a result of IRS errors or delays”);
• on line 8, the type of tax, when the IRS first notified the taxpayer in writing, the specific period for which abatement is requested, the circumstances, and why failing to abate would be grossly unfair.

One Form 843 is enough when a single ministerial or managerial act affected several years or types of tax; check each box on line 4 and explain on line 8. IRM 20.2.7.14 also requires the request to describe the error or delay and give its time frame by date (from MM-DD-YYYY to MM-DD-YYYY). Build that chronology from the examination file and correspondence; a FOIA request for the exam file can supply the internal dates. See the Form 843 page for addresses.

Requests under IRC 6404(e)(1) are worked by an interest abatement coordinator (IAC) in the function where the delay occurred, not by the campus that sent the bill. Disputes about the arithmetic of interest on a notice go to the person named on the notice, not the IAC.

Appeals and Tax Court review

A disallowance comes on Letter 3010 (full) or Letter 3022 (partial), with appeal rights. IRM 20.2.7.15 says taxpayers “have the right to appeal the denial of an interest abatement request (regardless of account status)”; the protest is a brief statement of why the IRS should reconsider, sent to the office that issued the letter for forwarding to Appeals. If the taxpayer neither agrees nor appeals, the IRS issues a notice of final determination by certified mail (Letter 2392 or 2391).

IRC 6404(h) gives the Tax Court jurisdiction to review a failure to abate interest for abuse of discretion, for taxpayers meeting the net worth requirements of IRC 7430(c)(4)(A)(ii). The petition can be filed after the earlier of the mailing of the final determination or 180 days after the claim was filed, and no later than 180 days after the final determination is mailed. Calendar that date from the certified mailing. See Tax Court petitions and the Appeals overview.

Questions practitioners ask