Source: https://procedurallytaxing.com/category/abatement/
Timestamp: 2019-04-21 10:12:41+00:00

Document:
This is an update to a case on which Stephen posted when the Tax Court rendered its opinion last July. Oral argument was heard in the Seventh Circuit in an appeal in the case on May 27, 2016.
King is an employment tax Collection Due Process (CDP) case based on a notice of federal tax lien (NFTL). The only issue left in the case on appeal is interest abatement under IRC § 6404(a). That’s not a typo for § 6404(e). § 6404(e) allows abatement of interest with respect to taxes that are deficiencies (income, estate, and gift), not employment taxes, where there have been unreasonable IRS errors or delays. By contrast, § 6404(a) provides: “The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which–(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.” While § 6404(a) abatement clearly authorizes abating tax, the IRS agrees that “any liability in respect” of the tax includes interest.
In H & H Trim & Upholstery Co. v. Commissioner, T.C. Memo. 2003-9, the Tax Court held that interest on a tax liability could be abated under § 6404(a) when the amount seemed “unfair”, since anything that was unfair was “excessive in amount”. In King, the Tax Court granted interest abatement under section § 6404(a) for a period of less than two months — involving, by my estimate, just over $200 of interest abated. The government was so hopping mad about losing King (and the existence of H & H Trim), that it appealed King to the Seventh Circuit, arguing that § 6404(a) abatement could never apply to interest that was correctly calculated. The government clearly doesn’t care about the $200 in this case, but wants to get a ruling from some appellate court that taxpayers can’t use § 6404(a) as an end run around the limitations in § 6404(e). No other appeals court has ever considered interest abatement under § 6404(a).
The taxpayer was an elderly solo practitioner lawyer who had one or more employees over a number of quarters that the IRS audited. After the audit was completed and certain proposed adjustment amounts were reduced, the taxpayer agreed to the assessment of employment tax audit changes by signing a Form 2504 showing about $50K in tax and penalties for all the quarters combined. Shortly before sending in the signed Form 2504, he sent two letters to the Revenue Agent saying he would like to pay in installment over 60 months, but not specifying the amount he proposed to pay each month. The IRS assessed the employment taxes and penalties and led him to believe that he was going to be put on an installment agreement, but he never was. After being referred to the Taxpayer Advocate Service (TAS) about a months after the date of assessment, TAS told him that the reason he was not put on an installment agreement was both because he had not stated the amount of monthly payment he wanted to make and he had to submit financial information. When he did eventually submit financial information, the IRS concluded that he had enough assets to pay in full, if he would just sell off some illiquid assets. So, the IRS did not give him an installment agreement.
The IRS filed an NFTL, and the taxpayer requested a CDP hearing in which he sought an installment agreement and sought abatement of the interest and penalties. When the IRS denied him any relief in the notice of determination, he appealed to the Tax Court. Early on during the case, though, he managed to get a reverse mortgage, and he paid off the tax, penalty, and interest assessments in full. But, he did not concede that the CDP case was moot. He still sought penalty abatement under § 6404(f) and interest abatement under §§ 6404(a) or (e).
In King v. Commissioner, T.C. Memo. 2015-36, the Tax Court first noted that it had no overpayment jurisdiction in CDP, citing Greene-Thapedi v. Commissioner, 126 T.C. 1, 12 (2006). So, the CDP portion of the case in which the taxpayer had, in his petition, complained about not getting an installment agreement was now moot.
Next, the court noted that under its jurisdiction at § 6404(h), it can only resolve disputes about interest, not penalties. Thus, it had no power to review the IRS’ failure to abate penalties under § 6404(f).
Third, the court noted that interest abatement under § 6404(e) couldn’t apply in King’s case because that subsection does not apply to employment taxes, only such taxes that can give rise to a “deficiency” — i.e., income, estate, gift, and certain excise taxes.
However, the court considered the notice of determination in the case as one denying interest abatement under § 6404(a) — over which the court had jurisdiction — even though at this point, the taxpayer, if successful, would be getting a refund.
King sought interest abatement for three different periods, citing H & H Trim for the proposition that interest should be abated if it was “unfair” under the circumstances. The IRS argued that H & H Trim was incorrect and that interest abatement under § 6404(a) should only be done if there was some procedural defect in its assessment, the assessment was late under the statute of limitations, or the numerical calculation of the interest was excessive.
The Tax Court stuck by its H & H Trim ruling and gave interest abatement for one of the three periods. In the period in which King was successful, the Tax Court held that it was “unfair” for interest to accrue from the date of assessment of the liabilities to the date the TAS employee explained to the taxpayer that the taxpayer needed to supply financial information. The court thought that the IRS employee who originally told the taxpayer that he was going to get an installment agreement should have communicated the problems with the original proposal on or before the date of the assessment.
Even though the amount of interest abated here was only about $200 by my estimate, the DOJ filed an appeal with the Seventh Circuit, wanting to nip in the bud other taxpayers arguing for interest abatement under § 6404(a) simply because the amount assessed was “unfair”. No Circuit court has ever ruled on this issue. H & H Trim had not been appealed. Nor had the IRS appealed another Tax Court opinion that followed H & H Trim, Law Offices of Michael B.L. Hepps v. Commissioner, T.C. Memo. 2005-138.
In the Seventh Circuit, before any briefing was done, the taxpayer died. His wife, who was not a party to the case, was invited to take over in the case for him, but she did not respond to a letter from the Seventh Circuit. So, only the DOJ filed a brief. On May 27, 2016, a one-sided oral argument was held before a three-judge panel that included Judge Posner. The audio of the oral argument is freely available on the Seventh Circuit’s website, Docket No. 15-2439.
Judge Posner was the only judge who asked questions. His main concern was to give meaning to the words “excessive in amount” in § 6404(a)(1) that was independent of “is erroneously or illegally assessed” in § 6404(a)(3). The DOJ attorney argued that “erroneously or illegally assessed” might mean that internal steps to authorize assessment had not been completed – i.e., procedural defects other than the statute of limitations – while “excessive in amount” might mean, in the case of interest, that the wrong rate or time period had been used in the calculation, leading to an excessive amount of interest having been assessed. Thus, there was no need to interpret “excessive in amount” as “unfair”.
Judge Posner also got into a colloquy with the DOJ attorney about the interplay between §§ 6404(a) and (e). Although this was not a case where § 6404(e) interest abatement could have applied (since subsection (e) doesn’t apply to employment taxes), the attorney warned that if subsection (a) (which could apply to any tax) applied to “unfair” assessments of interest, then a person who, say, was seeking interest abatement under subsection (e) for interest on income taxes could use (a) abatement as an end run around the limitations of (e) that (1) prevent abatement where a taxpayer contributed to the delay and (2) limit interest abatement to cases of unreasonable errors or delays in IRS employees performing ministerial or managerial acts.
It sounded like the DOJ attorney cleared up all of Judge Posner’s questions, but I am not positive that the IRS will win this case.
In this brief post I discuss informal advice relating to abatement requests and powers of attorney, and also flag the IRS’s release earlier this month of a new Form 2848 that reflects developments in light of Loving.
A recent IRS email advice discusses requests for abatement, a procedure that I found confusing when I first began working in a tax clinic many years ago. The confusion is because Section 6404(b) states no claim for abatement shall be filed by a taxpayer for any income, estate, or gift tax assessment. Despite that statutory limitation, the Internal Revenue Manual states that taxpayers can submit a request for an abatement for income, estate and gift tax assessments, and that the Service will consider those requests. To that end, see for example IRM 25.6.1.10.1(2) Requests for Abatement. One can use an amended return for these purposes.
What happens if the statute of limitations on assessment for the year has closed? There is no sol when it comes to abatement requests, (contrasted with the refund sol). In the email advice, the IRS states, however, that sol on assessment is not irrelevant, as the IRS is supposed to take “special care” on those abatement requests because if the IRS abates an assessment (or part thereof) and the sol on assessment has expired, then the IRS is out of luck because the tax cannot be reassessed.
POA-CAN A REP HOLD ON TO A SIGNED POA?
A recent IRS memo considered another issue worthy of note, namely whether a representative can submit electronically a POA Form 2848 without a client’s signature. We recently discussed POAs in a post Who Can/Must Sign the POA Form by Keith regarding the ability of one rep to sign on behalf of another, where IRS said the reps must sign individually. Similarly, in this PMTA, the IRS said it must receive the POA that is signed by both the client and the rep in order for it to be effective. The rep had stated that it had the client’s signature on file, but wanted to submit the POA electronically and keep the signed POA in its records and submit to IRS upon request. IRS’s Procedural Rule 601.504(c)(4) allows for IRS to receive a copy or a fax of the signed POA, but as per the PMTA the IRS will not allow the unsigned 2848, stating that such a procedure could facilitate identity theft and lead to unauthorized disclosures.
Here is a bit more on the limited representation rights, as this I believe is a major change and reflects the IRS approach of offering a big carrot to those preparers who opt in to the voluntary testing and education program (IRS description of the Annual Filing Season Program is here). Prior to this filing season, all unenrolled preparers had limited representation rights before the IRS relating to an examination of the taxable period covered by the tax return they prepared and signed. As I discussed earlier this year in Some More Updates on IRS Annual Filing Season Program, effective for returns filed as of January 1, 2016, in order for an unenrolled preparer to have those limited representation rights, the PTIN-wielding unenrolled return preparer must also have (1) a valid Annual Filing Season Program Record of Completion for the calendar year in which the tax return or claim for refund was prepared and signed; and (2) a valid Annual Filing Season Program Record of Completion for the year or years in which the representation occurs. Absent the record of completions, the preparer wishing to get information (but not actually represent in an exam) will have to use a Form 8821 which will allow inspection and retrieval of information only.
I am not familiar with data on how often unenrolled preparers in the past had used these rights, but I suspect the ability to communicate and represent in the examination process would be a powerful benefit that an informed consumer would want in a preparer.

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