IRS Errors Get Taxpayer Partial Abatement of Late Payment Interest

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1 IRS Errors Get Taxpayer Partial Abatement of Late Payment Interest King, TC Memo Where a taxpayer was unable to pay his employment tax liabilities on time and asked for an installment payment agreement, and IRS made procedural errors and bad judgments, the Tax Court has held that some of the interest that accrued on his late payments were excessive. As a result, the Court abated that interest but not the rest of the late payment interest. Code Sec. 6404(a) provides: "IRS 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." Code Sec. 6404(e) authorizes IRS to abate the assessment of interest on (1) any deficiency attributable to IRS' unreasonable error or delay in performing a ministerial or managerial act, or (2) any payment of tax described in Code Sec. 6212(a) to the extent that unreasonable error or delay in such payment is attributable to IRS' being erroneous or dilatory in performing a ministerial or managerial act. IRS's power to abate an assessment of interest involves the exercise of discretion, and the Tax Court gives due deference to IRS's discretion. In order to prevail, a taxpayer must prove that IRS exercised this discretion arbitrarily, capriciously, or without sound basis in fact or law. (Woodral, (1999) 112 TC 19 ) IRS has the authority to prescribe the procedures, form, and manner of proposing installment agreements. ( Reg (b)(1) ) The Internal Revenue Manual (IRM) pt outlines the ways in which a taxpayer may request an installment agreement. According to the IRM, "proposals to enter into installment agreements may result from letters, phone contacts, voic , , or other communications between taxpayers and Service personnel." (IRM pt (1)) The IRM further provides that an installment agreement request must do the following 1

2 four things before an IRS employee may identify a taxpayer's account as having a pending installment agreement: (1) provide sufficient information to identify the taxpayer, (2) identify the tax liability that the request addresses, (3) propose a periodic payment of a specific amount, and (4) be in compliance with filing requirements. If the taxpayer does not satisfy these four requirements, the IRS employee is instructed to ask the taxpayer for the missing information. The IRM provides an example: If no payment amount is specified, the employee should ask how much can be paid per month. Once IRS receives a perfected installment agreement request, it must enter a computer input code within 24 hours of the request for pending agreements; that code prevents levy actions. (IRM pt ) Mr. King, the taxpayer, agreed that he was liable for unpaid employment taxes and penalties of $50,000 but he didn't have the cash to pay that amount in a lump sum. He owned several items of real property in which he had significant equity. On Mar. 5, 2009, he sent the examining IRS agent from the IRS Cincinnati office a letter that requested an installment agreement; the request indicated that he pay an undisclosed amount per month for a period of five years and that, thereafter, he would have funds to pay off the remaining balance. Mr. Oliver in the Cincinnati IRS office responded that it would be happy to honor his request, but first King would have to sign Form 2504, an agreement to assessment and collection. On Mar. 12, 2009, King returned the signed Form 2504, together with another letter that contained the same request as the Mar. 5 letter. IRS did not send King Form 9456, Installment Agreement Request, nor did IRS give him specific instructions that he would need to complete that form. It did not respond to either of King's letters. Instead, on Apr. 13, 2009, IRS assessed the $50,000 plus interest, and, on May 18, 2009, it sent several notices that stated that it intended to levy and implored King to respond immediately. King then contacted the IRS Cincinnati office, was told that Mr. Oliver was out on medical leave and that he might be entitled to some relief if he contacted the Taxpayer 2

3 Advocate Service (TAS). King contacted the TAS and spoke with Taxpayer Advocate (TA) Morrell on June 10, After significant correspondence between King and Morrell in which King complied with all of Morrell's requests, on Aug. 5, 2009, Morrell told King that he needed to pay more than the $1,000 per month that he had proposed to her, that he should mortgage his real estate in order to raise money, that she didn't have the authority to process an installment request, that a revenue officer (RO) had to process such a request, and that he needed to send additional financial information before she could forward the matter to a RO. On Aug. 18, 2009, IRS, acting on King's Mar. 5 letter, put a code into King's file that indicated that there was a pending installment agreement. On Sept. 4, 2009, Morrell indicated that she had all of the financial information. On Jan. 13, 2010, Morrell recommended that a RO be assigned to assist King with establishing an installment agreement. IRS told TAS that its ROs had a full inventory of cases and couldn't get to King's request then. On Mar. 15, 2010, IRS assigned a RO. The RO recommended that King file Form 9456, which King did on Apr. 30, On June 16, 2010, the RO called King to tell him that she was recommending his installment agreement request be denied and suggested that he sell or mortgage an interest in real estate to pay the tax liabilities. On Aug. 5, 2010, the RO called King to tell him that his installment agreement request had been denied because King had significant property that he could sell or mortgage. In July 2010, IRS Appeals held a collection due process (CDP) hearing and subsequently issued a notice of determination upholding the denial of the installment request. King sought to have IRS abate his late payment interest, and, when it refused, he petitioned the Tax Court to have the late payment interest abated. The Tax Court abated the late payment interest that accrued for the period from Mar. 5, 2009 to June 10, 2009 but did not abate any of the other interest. 3

4 The Court began its analysis by stating that it is well established that IRS does not have authority to abate assessed interest pursuant to Code Sec. 6404(e) with respect to employment taxes. (Woodral; Scanlon White, Inc., TC Memo ; see also Reg (a) ) Therefore, IRS did not commit an abuse of discretion by denying King's claim for abatement under Code Sec. 6404(e) because IRS does not have the authority under Code Sec. 6404(e) to abate interest on employment taxes. The Court then looked to Code Sec. 6404(a) and noted, citing H & H Trim & Upholstery Co., TC Memo , that Code Sec. 6404(a) 's "any liability in respect thereof" language includes interest that has accrued on the underlying tax. And, it said that it interpreted the word "excessive" in Code Sec. 6404(a), as it relates to interest, to include a concept of unfairness under all of the facts and circumstances. The Court then noted that King's Mar. 5, 2009 letter identified him and the employment tax liabilities. It did not propose a specific amount per month, however. Because neither King's Mar. 5, 2009, letter nor the Mar. 12, 2009, letter provided information sufficient to satisfy the four requirements of IRM pt , King did not submit a perfected installment agreement. IRS was therefore not required to enter an input code within 24 hours of receipt of either letter. At that point, an IRS employee should have asked King how much he could afford to pay each month and whether he was in filing compliance. See IRM pt Instead of communicating this to King, however, IRS next corresponded with King over two months later when it sent notices threatening collection action by levy. King followed the instructions in IRS's Mar. 5, 2009, letter by mailing the Forms He did not receive any indication from IRS that his installment agreement request was deficient. IRS did not adhere to the instructions in IRM pt by asking for the information missing from King's proposal. It was reasonable for King to believe, absent communication from IRS, that his installment agreement would be processed once IRS received the Forms IRS assessed the tax on Apr. 13, Therefore, IRS had received and processed the Forms 2504 by that date but did not communicate to King 4

5 about his proposed installment agreement at that time. The delay from IRS's failure to communicate to King the deficiencies of his proposed installment agreement was unfair to King under all the facts and circumstances. The fact that King may not have qualified for an installment agreement at that time was not dispositive, as IRS failed to take even preliminary steps toward determining King's eligibility. It was not until June 10, 2009, when King spoke with TAS, that he was informed of the additional steps necessary to arrange an installment agreement, putting him back in the place he would have been in had IRS's Cincinnati office timely communicated with him. The Court was satisfied that, had IRS timely communicated with King about the proposal, King would have perfected his proposal within a reasonable time. The Court said that it was further satisfied that, but for IRS's delay in communicating with King, he would have paid his employment tax liabilities earlier. IRS contends that King is not entitled to abatement because he could have made voluntary payments but did not. However, unlike Code Sec. 6404(e), Code Sec. 6404(a) does not bar abatement when a significant aspect of the error or delay can be attributed to the taxpayer involved. Therefore, the interest that accrued from Apr. 13, 2009 until June 10, 2009, was excessive, and IRS's denial of King's request to abate this interest was an abuse of discretion. In concluding that no additional interest should be abated, the Court noted the following:... After June 10, 2009, King knew or should have known the requirements for submitting an installment agreement, such as providing financial information. On Aug. 5, 2009, after receiving the requested financial information, Morrell told King that TAS did not have authority to accept collection alternatives. Although IRS may have shuffled King to TAS to resolve its own mistakes, TAS is an independent body, and was not under obligation to assist King with his case. And 5

6 King did not show, but for a particular action that TAS took, his employment tax obligations would have been paid sooner.... IRS had stated that it did not have a qualified RO available until Mar. 15, The RO first met with King shortly thereafter. The Court accepted IRS's testimony that the only qualified RO in the area had a full inventory and could not accept more cases. This delay was not unreasonable under the circumstances. Accordingly, King did not show that the interest that accrued during this time was excessive or that IRS abused his discretion by failing to abate it.... The record did not show that the RO did not follow IRS procedures or otherwise cause unnecessary and unfair delay while processing the Form King's case was promptly and effectively transferred to Appeals, which promptly and effectively conducted the CDP hearing and issued a notice of determination. 6