By Steven Katz
On January 27, 2014, the United States Tax Court issued an important decision for taxpayers challenging IRS interest charges. In Corbalis v. Commissioner of Internal Revenue, the Tax Court held that it has jurisdiction to review the IRS’s denial of interest suspension under Internal Revenue Code Section 6404(g). Although the Court did not decide whether the taxpayers inCorbalis were in fact entitled to interest suspension, the decision provides a critical litigation option for taxpayers in cases where the IRS has denied interest suspension pursuant to Section 6404(g).
By way of background, Section 6404(g) provides, for IRS notices issued after November 25, 2007, that in the case of an individual taxpayer, if the IRS fails to notify the taxpayer of a change in his or her liability within three years of the later of the filing date of the tax return in question or the original due date of the return, the IRS must suspend the imposition of interest as of the three year deadline. For notices issued prior to November 25, 2007, the IRS was required to suspend interest if it did not provide notice of a change in liability within 18 months of the filing of the return or original due date of the return at issue. Although Section 6404(g) has a number of limitations, including, among others, cases of fraud, tax liabilities shown on a filed return and liabilities related to “tax shelters,” the section applies in most cases where the IRS has failed to abide by the notification deadline. While Section 6404(g) is less frequently implicated when the three year deadline applies, numerous audits involve notices issued subject to the 18 month deadline. Depending upon the size of the tax liability, the amount of interest at issue can be quite substantial where the IRS fails to suspend interest in these cases. Moreover, the author has encountered numerous situations where the IRS failed to properly apply Section 6404(g). While these errors or oversights can usually be corrected with the IRS interest unit or appeals office, Corbalis now offers an additional avenue in the Tax Court where IRS disputes the application of Section 6404(g) and refuses to suspend and abate interest.
Taxpayers and practitioners should also be aware of the opportunity for interest abatement under Section 6404(e). Section 6404(e) provides that the IRS may abate interest attributable to “unreasonable errors and delays” by the IRS. This applies to both “ministerial” and “managerial” acts of the IRS. Section 6404(e) interest abatement does not apply where the delay is attributable to the taxpayer. Common situations where Section 6404(e) applies include unreasonable delay in issuing notices, failure to work cases for an unreasonable period of time and losing a taxpayer’s file. Not surprisingly, the IRS does not typically acknowledge that there was an unreasonable delay and voluntarily abate interest. Thus, taxpayers and their representatives must be aware of this provision and the circumstances in which interest abatement may apply. As with Section 6404(g), the amounts of interest at issue can be substantial in unreasonable delay situations. Prior to Corbalis, Tax Court jurisdiction to review denials of abatement requests under Section 6404(e) was already established (subject to net worth limitations).
Besides the specific provisions of Sections 6404(e) and (g), numerous additional scenarios arise in which the IRS overcharges interest. Taxpayers are well advised to seek professional counsel whenever they face or have paid an IRS interest assessment to determine whether a claim for abatement or refund of interest should be pursued.
This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.
Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.