Ask The EDD Attorney – How To Properly Abate Penalties And Interest

By Robert S. Schriebman

August 11, 2016

Introduction

On August 10, 2016 the US District Court in the State of Washington decided the Duggan case. It seems that Mr. Duggan sought to remove or abate IRS penalties as well as interest on his IRS tax bill by filing a formal written Claim for Refund (IRS Form 843). Mr. Duggan did not pay any penalties or any interest that he wanted abated. The judge threw Mr. Duggan’s case out of court. Why?

This article will discuss the basic rules for filing a refund claim and the abatement of penalties and interest.

How To Abate Penalties

The judge threw Mr. Duggan’s matter out of court because Duggan violated one primary rule of making claims for abatement. The IRS Form 843 is the proper form to use when you are trying to abate penalties or seek a refund on your IRS taxes. However, all Mr. Duggan did was file the 843 claim without first paying the penalties. In other words, Duggan put the cart before the horse. In order to properly use Form 843, you first have to pay the taxes, interest and penalties, in full for the specific income tax year or the specific payroll tax period in issue. For example, if you are seeking refunds for three years of income taxes you must file three separate 843 claims one for each year. The same goes for payroll tax quarters – each quarter requires a separate 843 form.

Mr. Duggan wanted his penalties abated without first having to pay them. This is why the judge threw h his case out of court.

The best time in a tax audit to abate penalties is during the audit itself. The IRS loves to assert penalties, especially the negligence of 20%. The best time to abate this penalty, assuming you have reasonable cause, is at the agent level or with the agent’s supervisor or manager. At this level you do not have to pay the penalties first before they can be abated.

Where Mr. Duggan made his mistake was that he simply filled out and filed the 843 form but he didn’t pay the penalties, and interest before he filed the Claim for Refund.

How To Abate Interest

Internal Revenue Code § 6404(e) is a short code section that deals with the abatement of interest. There are procedures for interest abatement that provide an avenue for you without first having to pay the interest. In this manner interest abatement procedures differ from penalty abatement procedures. Of course, you can always pay the interest and seek abatement by filing Form 843.

In order to abate interest, you must prove that the actions of the IRS caused an unreasonable error or delay by an employee of the IRS acting in a ministerial or managerial capacity. This is not as easy as it sounds. It is tough to abate interest and an overwhelming number of taxpayer attempts at doing so fail. Clearly, both the IRS and the courts disfavor interest abatement cases.

Conclusion

The lesson in the Duggan case is clear: abatements of both penalties and interest have strict rules of procedure that must be followed to the letter if you want your claim to succeed.

***

Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Web Site Article 235