ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE IRS AND THE FTB MAY ABATE INTEREST BUT IT IS A TRICKY MATTER
By Robert S. Schriebman
Both the IRS and FTB have rules that allow interest charged on income taxes to be abated. The rules are restrictive and narrow. Courts usually construe these rules in favor of the government and against the taxpayer. Generally speaking, interest may be wholly or partially abated if the actions of the taxing agency cause unreasonable delay or are the results of ministerial or managerial acts. (IRS § 6404)
On June 8, 2021, a U.S. Tax Court decided the Case of K.P. Verghese, (TC Memo. 2021-70, Dec. 61, 880 (M). The matter involved an assessment resulting from an investment in an illegal tax shelter. Many tax shelters that generated huge losses back in the 1990’s through early 2000’s took many years to litigate in federal courts. Some took decades. The Verghese case is one of them.
This article will discuss the Tax Court’s decision and the Verghese’s attempt to have interest abated that accrued to them while the underlying IRS – promoter litigation was pending.
The Verghese Case-Background
Verghese invested in a tax shelter partnership many years ago. The promoters of the tax shelter apparently made fraudulent charitable contributions on the partnership tax return. The partnership then passed these fraudulent deductions down to individual limited partners who reported them on their individual 1040 returns.
The partnership was governed by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (P.L. 97-248). These rules permit the IRS to audit the partnership and any assessment eventually winds its way down to individual limited partners. If the partnership challenges the IRS in court, the resulting litigation can take many years to finally resolve itself. In the meantime any potential future assessment generates daily compounding interest to the point where the tax owed is dwarfed by huge accruing interest. This is what happened to Verghese.
Verghese Interest Abatement Efforts
When Verghese got the bill after many years of litigation they filed Form 843 seeking interest abatement for the years during which the tax litigation was pending. They sought to have the interest removed pursuant to IRC § 6404. They first sought abatement under subsection (a) on the grounds that they are entitled out of basic fairness. They also sought abatement under subsection (e) for unreasonable delays due to prolonged litigation.
The Tax Court ruled against them. First, subsection (a) of 6404 cannot be used to abate interest assessed on income taxes per (6404 (b). The governing section is 6404 (e). But section 6404 (e) does not apply because the IRS tactically elected to challenge the promoters on fraud charges before going forward with challenging the improper charitable deductions. This decision did not constitute and improper ministerial and managerial act.
The bottom line; Verghese will have to pay both the tax and the huge amount of accruing interest compounded daily.
To abate interest, proper procedures must be carefully followed. Interest does not have to be paid before a request for abatement is made. You must use Form 843, Claim for Refund and Request for Abatement. If you have already paid the interest you must still use Form 843. Filing refund claims are governed by strict statues of limitations that are set fourth in IRC § 6511. A claim for refund must be filed within three years from the time the return was filed or within two years from the time the interest was paid, whichever period expires later.
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 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
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.
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