In Uncategorized on 02/03/2012 at 22:21

When is interest on unpaid taxes abated? And what does it take for Tax Court to make abatement happen? Judge Goeke tells the story in John Hancock and Lynn Hancock, 2012 T.C. Mem. 31, filed 2/1/12.

John and Lynn got nailed on audit, but their accountant Mr. Biegler got them an offer from IRS that John and Lynn couldn’t refuse: no interest on the deficiencies if they signed at once. So John and Lynn signed the Form 4549 and went away happy.

Until IRS woke up to their mistake, and sent John and Lynn a demand for payment of interest. John and Lynn replied, asking that IRS honor their agreement. IRS replied by grabbing their tax refund to apply to the interest. So John and Lynn correspond with IRS, and IRS offers a partial abatement, but then backtracks.

IRS claims they mistook the date when John and Lynn were informed of the correct amounts of interest, and reduces the partial abatement. John and Lynn claim abuse of discretion, which IRS rejects, so John and Lynn petition Tax Court.

Judge Goeke: “Section 6404(e)(1)(A) provides that the Commissioner may, at his discretion, abate the assessment of interest on any deficiency in tax attributable, in whole or in part, to any unreasonable error or delay by an IRS officer or employee in performing a ‘managerial’ or ‘ministerial’ act.” 2012 T.C. Mem. 31, at p. 7. [Footnote and citations omitted.]

Finding Tax Court jurisdiction pursuant to Section 6404(h)(1), Judge Goeke examines the managerial and the ministerial: A ‘managerial act’ is an administrative act which occurs during the processing of a taxpayer’s case and involves the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. ‘Ministerial acts’ include procedural or mechanical actions not involving the exercise of judgment or discretion that occur during the processing of a taxpayer’s case after all prerequisite action has taken place.

“Section 6404(e) applies only after the Commissioner has contacted the taxpayer in writing about the deficiency, and this Court will give due deference to the Commissioner’s use of discretion.” 2012 T.C. Mem. 31, at p. 8. [Citations omitted.]

That said, the taxpayer bears the burden of proof. “To qualify for abatement of interest, the taxpayer must: (1) identify an error or delay by the IRS in performing a ministerial or managerial act; (2) establish a correlation between the error or delay by the IRS and a specific period for which interest should be abated; and (3) show the taxpayer would have paid his or her tax liability earlier but for such error or delay.” 2012 T.C. Mem. 31, at p. 9.

If IRS misinforms the taxpayers about their liability, that’s ministerial. And IRS agrees they did misinform John and Lynn. But did John and Lynn provide answers to the three questions: Did they identify the error? Did they tie the error in to the specific period for which they seek abatement of interest (and seeking 100% abatement won’t get it)? Finally, could John and Lynn have paid the liability but for the error?

“Petitioners are not merely searching, groundlessly, for an exemption from interest, nor have they contributed to the many errors by respondent. Instead, petitioners validly seek an interest abatement on account of respondent’s professed errors.

“Petitioners’ inartful attempt to expressly articulate the period for which interest abatement is warranted is a direct function of the confusion and inconsistency which pervaded respondent’s actions following petitioners’ execution of the Form 4549. Initially, respondent appeared to agree that no interest accrual was warranted on petitioners’ deficiencies when he approved the executed Form 4549. In an unexplained change of posture, respondent then issued a notice and demand to petitioners on November 3, 2008, stating that they owed interest for their 2005 and 2006 tax years. Petitioners, continuing to rely on the executed Form 4549 In an unexplained change of posture, respondent then issued a notice and demand to petitioners on November 3, 2008, stating that they owed interest for their 2005 and 2006 tax years. Petitioners, continuing to rely on the executed Form 4549 and uncertain as to the propriety of the notice and demand, subsequently wrote two letters to respondent seeking clarification of respondent’s position and also requesting that respondent abide by the terms of the executed Form 4549. During the period in which petitioners waited for respondent’s official response to their letters, respondent applied a tax refund from petitioners’ 2008 tax year to their tax liabilities at issue, satisfying the liabilities in full. It was only at this point that petitioners realized that respondent had disregarded what petitioners perceived as the clear calculations in the executed Form 4945 and instead relied on the calculations in the November 3, 2008, notice and demand. Respondent’s position was altered twice thereafter, further complicating matters.

“Given the confusion engendered by respondent’s actions, we find that petitioners’ request for interest abatement is framed by the period following the their receipt of Form 4549 and ending with the payment in full of the liabilities on April 15, 2009. Respondent’s posttrial brief underscores this point by conceding that he was in error from the “date the erroneous interest amounts were provided to the taxpayers until the date on which respondent provided corrected interest amounts.” We find that the date respondent unequivocally provided corrected interest amounts was April 15, 2009.

“Thus, petitioners have satisfied their burden.” 2012 T.C.Mem. 31, at pp. 12-13. [Footnote omitted.]

But what about paying the tax? “The argument that petitioners did not present evidence of their ability to pay the interest liabilities, irrespective of respondent’s error, applied equally to the conceded period; yet respondent accepted that he abused his discretion in failing to abate interest for the period from June 19 to November 3, 2008. As respondent has abandoned the argument in part, we find as a corollary that he abandoned it in whole. We need not address it further.” 2012 T.C. Mem. 31, at pp. 14-15.

John and Lynn raised equitable estoppel, that is, “. . . a judicial doctrine that ‘precludes a party from denying his own acts or representations which induced another to act to his detriment.’” 2012 T.C. Mem. 31, at p. 16.

But Tax Court’s jurisdiction is limited,  so there will not be any excursion around equitable estoppel. Taxpayers must show affirmative misconduct by IRS, and even more, that the misconduct results in serious injustice and the public interest will not be injured by the estoppel sought. Here, that’s not the case.

But the taxpayers win this one.



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