In a Nutshell

Judge Patrick J. (“Scholar Pat”) Urda has summed up the whole abatement of interest conundrum. Take a look at Jon D. Adams, 2019 T. C. Memo. 99, filed 8/12/19.

Jon went down for tax fraud when he sold one of his Mississippi cabarets and didn’t bother reporting the sale. IRS first went the criminal route, and only later went for the deficiency and civil fraud 75% chop.

Jon wants to claim that Section 6404(e)(1)(A) “unreasonable delay” began with the criminal stuff, long before the civil stuff began. Judge Scholar Pat isn’t having it. “The flush language of section 6404(e)(1) authorizes abatement of interest only ‘after the Internal Revenue Service has contacted the taxpayer in writing with respect to’ the deficiency in question.  In other words, ‘the period pursuant to section 6404(e)(1) may begin when the IRS commences an audit.’  Allcorn v. Commissioner, 139 T.C. 53, 57 (2012); see also Sims v. Commissioner, T.C. Memo. 1999-414, 78 T.C.M. (CCH) 1198, 1200 (1999).  Although Mr. Adams contends that the period should begin with the first issuance of written contact regarding his criminal investigation, he offers no support for deviating from our precedent. So we will not.” 2019 T. C. Memo. 99, at p. 11.

There is no abatement for interest due on income tax. See Section 6404(b). “Section 6404(a)(1) empowers the IRS to abate the unpaid portion of the assessment of any tax or any liability in respect thereof that is “excessive in amount”.  But what section 6404(a) gives, section 6404(b) takes away (in certain circumstances).” 2019 T. C. Memo. 99, at p. 8. Title A taxes (that’s income tax) are expressly excluded from abatement.

The only saver is Section 6404(e)(1)(A) unreasonable delay. But that means abuse of discretion. And IRS trial counsel have discretion how to proceed. And once audit began, Jon’s people delayed the game.

Anyway, a decision how to apply Federal income tax law involves judgement and discretion.

Simply, Section 6404(a) allows abatement. But Section 6404(b) says that doesn’t apply to interest on income taxes. And although Section 6404(e) allows abatement for “unreasonable delay” once IRS has commenced examination, unreasonable delay means moving files and assigning personnel, not exercising judgment and discretion in interpreting and applying tax law. Finally, mere passage of time is not necessarily unreasonable delay.