Losing Interest: Delayed IRS Assessments

0 Flares Filament.io 0 Flares ×

Over the last two years I cannot count the number of times I’ve had to give extraordinarily unsatisfying advice to my clients. That advice being, “please wait.” Wait for the IRS to process your return. Wait for the refund to be issued. Wait for your Collection Due Process hearing.

Of course, waiting can carry a price. I’ve previously posted a bit about the time-value of money, and (especially for low-income taxpayers) the opportunity costs of waiting on a refund. Here, I’ll write about the potential costs to the government and potential arguments taxpayers may have against paying interest. To keep things (relatively) simple, I will be focusing only on IRS delays after Tax Court decisions.

read more...

I’ve come across a lot of practitioners voicing concern about IRS delays in issuing refunds after a Tax Court decision. In those instances, practitioners are well-advised to review Tax Court Rule 260.

Less common (though not unheard of) is the complaint for those that end up owing after their trip to Tax Court. What happens when the parties settle on a deficiency, but the IRS never gets around to actually assessing that (agreed upon) amount? Bob Kamman experienced and posted on something close to this phenomenon (with a bit of a twist), giving the advice to reach out to the IRS counsel’s office to sort things out. In terms of getting the IRS to actually take action, that advice likely still holds, but what about a remedy for all the time you spent waiting?

From the outset, some may see this all as a non-issue. Regardless of the IRS delay in assessment, you can still send payment for the deficiency and maybe throw a little extra on top for the interest accrual you estimate to be due.

But it is important to remember how many people out there don’t have that “little extra” to throw on top. In 2016, approximately 63% of Americans couldn’t cover a $500 emergency. This is not just a problem in the abstract: I have clients that are living on such tight margins that the accrual of interest makes a big difference in their lives. This is all the more true given inflation and the (slight, but real) uptick in interest rates for tax. Perhaps there should also be some relief from the interest that accrues during a delay in assessment…

And perhaps there is…

Rule 260 Redux?

A quick note on where you won’t find relief.

Mere paragraphs above, I advised practitioners to review Tax Court Rule 260 when their clients are waiting on refunds from a Tax Court decision. Some of you no doubt found that Rule so engrossing that you read on to Rule 261… which deals directly with “proceedings to redetermine interest.” Is that where we should look for relief from interest where the IRS fails to assess and send a notice and demand for payment in a timely fashion?

Probably not.

Rule 261 pertains to cases where the Tax Court decision found an overpayment. Imagine two different taxpayers: one we’ll call “Flush” and one we’ll call “Strapped.” Both have identical tax issues, and both bring identical cases to Tax Court. Eventually, both Flush and Strapped reach a settlement with the IRS, agreeing to a deficiency amount less than what was in the Notice of Deficiency.

But here is where things diverge.

Prior to filing the petition, Flush sent in a deposit under IRC § 6603 for the amount listed on the Notice of Deficiency. Strapped, on the other hand, did not. In their stipulated decision documents, Flush will agree to both a deficiency and an overpayment (i.e., the amount by which the deposit for the original deficiency exceeds the agreed upon deficiency). Strapped, on the other hand, will only agree to a deficiency.

It is for taxpayers like Flush that Rule 261 (and IRC § 7481(c)) applies (you can see that situation in action in Hill v. C.I.R., T.C. Memo. 2021-121). But I am concerned with taxpayers like Strapped. What interest-related arguments might Strapped have?

Unreasonable Delay: The Seemingly Obvious Argument

When the Tax Court redetermines a deficiency, the IRS has to assess it. This seems pretty uncontroversial and is enshrined in IRC § 6215(a). If you double-checked my code citation, please note and underline the phrase “shall be assessed.”

If the IRS takes literally over a year to get around to assessing the tax after a final Tax Court decision, it has followed the statutory mandate… but in a sluggish way that perhaps ought to carry consequences. And a fitting consequence for wasting time would be forgoing the time-value of money during that wasteful period. In other words, abating interest.

And it so happens there is a code provision exactly on point for those sorts of issues: IRC § 6404(e), “Abatement of Interest Attributable to Unreasonable Errors and Delays by the Internal Revenue Service.” That sounds promising, particularly the provisions at IRC § 6404(e)(1)(B). What exactly do they entail?

First, the “unreasonable error or delay” has to involve an IRS employee “in performing a ministerial or managerial act.” Since we’re only focusing on assessing tax, let’s call this the “non-discretionary act” test.

Second, the delay in payment has to be “attributable” to the IRS employee being “dilatory” or erroneous. Let’s call this test the “causation” test.

Third, the taxpayer can’t have played a “significant” role in the error or delay. Let’s call this the “clean-hands” test.

Lastly, the period of abatement must come after the IRS has contacted the taxpayer, in writing, with respect to the deficiency. This is mostly a computational test that we don’t really need to worry about here. It will always be met where the interest at issue has accrued after a Tax Court decision finding a deficiency.

“Non-Discretionary Act” Test

The Treasury Regulations define a “ministerial act” as an act that “does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place.” Treas. Reg. § 301.6404-2(b)(2). I’d say inputting the assessment of a deficiency, after a Tax Court decision has found that deficiency and is final, meets that test. This is especially true since the IRS is mandated to enter the assessment (the “shall be assessed” language of IRC § 6215(a)).

First test = passed.

“Clean-Hands” Test

What does it mean for a taxpayer (or someone sufficiently related to the taxpayer) to play a “significant role” in the delay? Most of the cases I found involved taxpayers filing incorrect forms or taking other actions that would make the IRS “ministerial or managerial” acts more difficult. There are also some cases where the taxpayers renege (or attempt to renege) on settlements, and generally contradict themselves while trying to vie for interest abatement. In other words, cases where the taxpayer did not have clean hands. See Mitchell v. C.I.R., T.C. Memo. 2004-277.

Assuming the taxpayer has done everything right up to the point of the Tax Court entering the decision document, they probably meet this test too…

“Causation” Test

Here is where things get tricky. The biggest obstacle is something that was alluded to earlier: arguably, you could have paid the tax (and stopped the interest) even without the IRS taking the ministerial acts to assess it. In other words, it was not the failure to perform a ministerial act that caused the interest accrual. It was simply the taxpayers’ failure to send in money.

There are at least a few cases that look at the causation issue and cut against the taxpayer. The worst (and in my opinion, least fair) line of Tax Court cases provide that there will be no abatement if there is no evidence that an earlier payment would have been made… for example, because the taxpayer is cash-strapped.

The Tax Court has expressly found that the IRS has the “discretion” not to abate tax if the taxpayer fails “to establish that he had the financial resources to satisfy the tax liability when the claimed error occurred.” See Hancock v. C.I.R., T.C. Memo. 2012-31, listing off cases supporting this proposition. In other words, extremely low-income taxpayers may be the least able to get interest abatement under this line of argument.

This may not always be the case and would likely be fact specific. But it is enough for me to have serious concerns about arguing under IRC § 6404(e) for interest abatement when the IRS delays in assessing tax for my clients.

Fortunately, there may be different line of argument that will get my clients relief. My next post will cover that proposition.

About Caleb Smith

Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

Comments

  1. I stopped doing returns due to the dysfunction with the IRS. I offered preparation (and actually enjoyed it) as part of my estate planning practice. It’s unfortunate. I was accessible and affordable and it was a bitter pill to have my clients find another preparer. I would charge anywhere from $200 to $650 for returns that would take one to three hours to prepare. But, in many cases, it would take me another three to five hours to sort things out with the IRS when notices arrived. As an example, I had about 5% to 10% of clients receive identity verification notices. However, they could never verify their identity because much of the IRS is working at home and only around 5% of phone calls get answered. The dysfunction, nastiness and incompetence is staggering.

  2. Lavar Taylor says

    Where a taxpayer waives the restrictions on assessment of a deficiency, which is typically done as part of a stipulated Tax Court decision, and the IRS fails to assess the deficiency for more than 30 days after filing of the waiver, interest stops running on the 31st day after filing of the waiver until the day on which the notice and demand for payment is sent. IRC 6601(c). You don’t need to rely on 6404 in this situation. I’ve saved clients quite a bit of money over the years using 6601(c). It can apply in several different situations.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*