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Seventh Circuit Reverses Tax Court; Taxpayer Not Entitled to Abatement of Interest

(Parker Tax Publishing August 2016)

The Seventh Circuit reversed a Tax Court decision which held that a taxpayer was entitled to a partial abatement of the interest he had paid on overdue payroll taxes. The court did not agree with the Tax Court's use of "unfairness" as a criterion for abatement. King v. Comm'r, 2016 PTC 259 (7th Cir. 2016).

Charles King was a lawyer who failed to pay his quarterly payroll taxes for several years. After the IRS caught up with him, King asked to pay the overdue taxes in installments. Initially, the IRS agreed. However, after formally assessing the taxes and penalties that King owed, as well as the interest on those taxes, the IRS told King that he had to provide additional financial information before his eligibility for an installment plan could be determined. Eventually, the IRS decided that King's income and assets were too high to justify an installment program; he had had enough income and assets to pay the payroll taxes when they were due, together with any penalties and interest that had accrued by that date.

King paid the taxes in October 2011 but requested abatement of the interest that had accrued after March 5, 2009, the date on which the IRS had told him it would honor his request for an installment payment plan. He argued that, had the IRS informed him from the outset that he would not be allowed an installment plan, he would have paid the payroll taxes sooner and, as a result, would have owed less or maybe no interest for having delayed paying the taxes. The IRS turned King down and King took his case to the Tax Court.

Code Sec. 6404(a) allows the abatement of the unpaid portion of an 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 statute of limitations period, or (3) is erroneously or illegally assessed. The IRS told King that the interest he'd been charged was not excessive and had been calculated in the usual and customary way.

The Tax Court held that King was entitled to a partial abatement of the interest he had paid. The court concluded that the IRS's authority to abate interest that is excessive in amount must incorporate a concept of "unfairness" under all of the facts and circumstances. According to the court, the IRS's failure to communicate to King the deficiencies of his proposed installment agreement was unfair to King. The court concluded that the interest that had accrued to the IRS as a result of this unfairness was therefore "excessive," and the IRS's denial of King's request to abate the excessive interest was an abuse of discretion. However, the Tax Court concluded that King was entitled to an abatement only of the interest that had accrued during the two-month period after the IRS had assessed the amount King owed, after which King knew or should have known the requirements for submitting an installment agreement. The IRS appealed.

The Seventh Circuit reversed the Tax Court's decision. According to the court, the IRS was on sound ground in refusing to abate the interest King owed on his overdue payroll taxes for three reasons. First, the court said, was the vagueness of "unfairness" as a criterion for abatement; the word is an invitation, the court noted, to arbitrary, protracted, and inconclusive litigation. Second, the court said, the nebulous standard of "unfairness" could result in a significant loss of tax revenues. Third, the court found that the Tax Court's approach was inconsistent with Reg. Sec. 301.6404-1, which defines the statutory term "excessive in amount" to mean "in excess of the correct tax liability."

For a discussion of when a taxpayer is entitled to an abatement of interest, see Parker Tax ¶261,570.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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