CCA: Interest abatement claims require final determinations when disallowed

Plain-English summary

Chief Counsel advised that a processable interest-abatement claim that is disallowed should receive a final determination letter, not a no-consideration letter. A final determination preserves the taxpayer's right to seek Tax Court review under IRC § 6404(h), while a no-consideration letter is appropriate only when the taxpayer has not provided the information needed to consider the claim. The memorandum also concluded that an Interest Abatement Coordinator does not have authority to enter into a closing agreement resolving an interest-abatement issue. That authority rests at least with the SB/SE Director of Examination.

Ruling snapshot

• Question: Must the Service issue a final determination for a disallowed interest-abatement claim, and can an Interest Abatement Coordinator sign a closing agreement?
• Outcome: Advice given
• Key authorities: IRC §§ 6404(e)(1) and (h), 6511(a), and 7121(a) and (b); IRC § 6212(a); Hinck v. United States, 550 U.S. 501 (2007); Bourekis v. Commissioner, 110 T.C. 20 (1998); Woodral v. Commissioner, 112 T.C. 19 (1999).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201215006
       Release Date: 4/13/2012
       CC:PA:03:MAJARBOE:
       POSTS-139082-11

UILC: 6404.00-00

date: February 15, 2012

 to:   Lindsay A. O'Neil
       Interest Abatement Coordinator
       (Technical Services)

from: Gerald R. Ryan
Senior Technician Reviewer
(Procedure & Administration)

subject: Authority of Interest Abatement Coordinators

                                                  ISSUES

          1) Can interest abatement claims be resolved with a no consideration letter instead
             of a final determination letter?

          2) Can an Interest Abatement Coordinator (IAC) enter into a closing agreement to
             resolve the disallowance of an interest abatement claim?

                                           BACKGROUND

       SB/SE Technical Services provided the following information in this request for advice.
       Under current procedures, when the Service receives an interest abatement claim, it is
       considered by an IAC who makes the initial determination as to whether the claim
       should be allowed, partially allowed, or disallowed. The taxpayer is then sent a letter
       that informs him of the IAC’s initial determination and also informs him that he has 30
       days to seek additional consideration with the Office of Appeals (Appeals) if he
       disagrees with the determination. If 30 days passes and the taxpayer does not contact
       Appeals, then the IAC sends a final determination letter to the taxpayer. If, however,
       the taxpayer contacts Appeals within the 30 day period, Appeals will consider the claim
       anew. If the requested abatement is ultimately disallowed, Appeals will issue the final
       determination letter to the taxpayer. The final determination letter, whether issued by an
       IAC or Appeals affords the taxpayer the ability, pursuant to section 6404(h), to

POSTS-139082-11 2

challenge the Service’s decision in the Tax Court within 180 days. If the taxpayer does
not petition the Tax Court within 180 days, then the Service’s decision is final and the
Service closes its case. Under the Service’s current procedures an IAC must wait until
the Service’s decision is final, sometimes in excess of six months, before closing the
case.

In an attempt to streamline the procedures for resolving interest abatement claims,
SB/SE Technical Services requested advice on issues concerning the denial of a
taxpayer’s claim for interest abatement. The first issue is whether IACs are required to
send a final determination letter, as opposed to a no consideration letter, for all interest
abatement claims that contain the required information for processing. There are two
specific situations where you ask whether a no consideration letter could be used
instead of a final determination letter: 1) where the taxpayer is making a claim for
abatement of interest that has been paid, but the statutory period of limitations under
section 6511 on filing a claim for refund has expired, and 2) where the taxpayer
requests interest abatement claiming that the Service was not timely in processing the
taxpayer’s amended return which reported a reduction in tax. Our understanding is that
the no consideration letter proposed would be comparable to the Letter 916C, Claim
Incomplete for Processing; No Consideration currently used by Exam in various cases
where a taxpayer’s claim is not processable. Additionally, advice is sought whether a
section 7121 closing agreement may be used to resolve claims where the taxpayer
agrees to a determination disallowing interest abatement. It is proposed that the use of
a closing agreement would allow a taxpayer who agrees to a partial or full disallowance
of his abatement to settle the issue conclusively, and with finality. By issuing a no
consideration letter or entering a closing agreement, an IAC would immediately close
out the case, rather than waiting for the expiration of the period during which the
taxpayer may administratively appeal or petition the Tax Court to challenge the
disallowance of the interest abatement claim.

                                LAW & ANALYSIS

Section 6404(e)(1) provides that “[i]n the case of any assessment of interest on- (A) any
deficiency attributable in whole or in part to any unreasonable error or delay by an
officer or employee of the Internal Revenue Service (acting in his official capacity) in
performing a ministerial or managerial act, or (B) any payment of any tax described in
section 6212(a) to the extent that any unreasonable error or delay in such payment is
attributable to such an officer or employee being erroneous or dilatory in performing a
ministerial or managerial act, the Secretary may abate the assessment of all or any part
of such interest for such period. For purposes of the preceding sentence, an error or
delay shall be taken into account only if no significant aspect of such error or delay can
be attributed to the taxpayer involved, and after the Internal Revenue Service has
contacted the taxpayer in writing with respect to such deficiency or payment.”

IRM 20.2.7.4.2 IRC 6404(e)(1) Criteria (03-09-2010), sums up the criteria for making a
claim under section 6404(e)(1) as follows:
POSTS-139082-11 3

(1) the statutory period of limitations on filing a claim per IRC 6511 is open;
(2) the claim is for tax years beginning after December 31, 1978;
(3) the claim relates to interest on taxes described in IRC 6212(a) i.e., income,
    estate, gift, and certain excise taxes (employment taxes are specifically
    excluded);
(4) an unreasonable error or delay occurred in relation to the performance of a
    ministerial or managerial act;
(5) the error or delay occurred after the taxpayer was contacted in writing with
    respect to the examination, deficiency, or payment; and
(6) no significant aspect of the error or delay can be attributed to the
    taxpayer/representative.

A request for abatement of interest previously paid also constitutes a claim for refund of
that interest. A claim for refund of interest is subject to the normal period of limitations
under section 6511. Such a claim must be filed “within 3 years from the time the return
was filed or 2 years from the time the tax was paid, whichever of such periods expires
the later . . . .” Section 6511(a). If a taxpayer requests an abatement of interest paid,
and his claim is made after expiration of the section 6511(a) period of limitations, the
Service does not have any discretion to abate interest under section 6404(e). Likewise,
when a taxpayer requests interest abatement because the Service did not timely
address his amended return which reported a reduction in tax, section 6404(e) is not
applicable because the tax shown on the original return is a self-assessed liability and
the subsequent acceptance of the amended return does not create a deficiency.1 Even
though section 6404(e) would not apply in these two scenarios, a final determination
letter is still appropriate for the reasons detailed below.

Section 6404(h) provides that the Tax Court shall have jurisdiction over any action
brought by a taxpayer to determine whether the Secretary’s failure to abate interest was
an abuse of discretion, and may order an abatement if such action is brought within 180
days after the date of the mailing of the Secretary’s final determination not to abate such
interest. See Hinck v. United States, 550 U.S. 501, 503 (2007). A claim for abatement
and a final determination by the Service are prerequisites to Tax Court review under
section 6404(h). See Bourekis v. Commissioner, 110 T.C. 20, 26 (1998). Additionally,
the Tax Court provides the exclusive forum for judicial review of the Service’s refusal to
abate interest. Hinck at 503.

In enacting section 6404(h), Congress gave the Tax Court jurisdiction to review whether
the Service’s failure to abate interest was an abuse of discretion. The Tax Court has
held that it has broad jurisdiction to review the Service’s determinations not to abate
interest. See Woodral v. Commissioner, 112 T.C. 19, 22-3 (1999). The Service should
not take any action that could be construed as limiting this jurisdiction. Because the Tax
Court has exclusive jurisdiction to review the Service’s refusal to abate interest, by
1
If after examining the amended return an additional liability is assessed, section 6404(e) may be
applicable to any interest that accrues on the additional liability, but only if it is determined that there was
a ministerial or managerial error or delay after the taxpayer was contacted in writing.
POSTS-139082-11 4

failing to provide a final determination as required under section 6404(h), the Service
would be denying the taxpayer access to challenge its determination in any legal forum.
Moreover, the Tax Court could find a no consideration letter by the Service a “final
determination” anyway for purposes of conferring section 6404(h) jurisdiction. Even if
the Tax Court refused to review a no consideration letter issued by the Service, finality
might never be achieved in these cases because the taxpayer would have the right to
continue submitting his interest abatement claim until he received a final determination
letter and the corresponding Tax Court rights. Although the Service’s authority to abate
interest is only triggered once the statutory requirements for abatement are met, any
consideration by the Service of whether the statutory requirements are met in a
particular claim is subject to review by the Tax Court. Thus, where the Service receives
a processable2 claim for interest abatement, such claim must be considered and if the
requested abatement is disallowed a final determination letter should follow.

Section 7121(a) of the Internal Revenue Code authorizes the Treasury Secretary or his
delegate to enter into binding agreements with a taxpayer relating to the liability of such
person in respect of any internal revenue tax for any taxable period. These agreements
are referred to as “closing agreements.” Section 7121(b) provides that a closing
agreement is “final and conclusive . . . [and] except upon a showing of fraud or
malfeasance, or misrepresentation of a material fact . . . the case shall not be reopened
as to the matters agreed upon or the agreement modified . . . .”

A closing agreement sometimes is erroneously equated to a contract. Because it is
limited by statute, a closing agreement is less flexible than a contract. Under general
contract law principles, parties to a contract are not locked into a contract’s terms
forever. Parties to a contract are ordinarily as free to change the contract terms after
making them as they were to make the contract in the first instance. Restatement
(First) of Contracts § 408 (1932). Conversely, the closing agreement statutory
requirement of finality distinguishes a closing agreement from a regular contract.
Although the interpretation of closing agreements is governed by federal common law
contract principles, United States v. National Steel Corp., 75 F.3d 1146, 1150 (7th Cir.
1996), where the closing agreement “statute conflicts with general and otherwise
governing contract law principles, the statute governs.” Marathon Oil Co. v. United
States, 42 Fed. Cl. 267, 274 (1998), aff’d 215 F.3d 1343 (Fed. Cir. 1999). Thus, while
contract law generally governs closing agreements, the statutory requirement of finality
trumps any general contract law principle that would allow a closing agreement to be
modified or changed. In practice this means that once a closing agreement is made “it
is final, conclusive and binding upon both the taxpayer and IRS, for the purpose of the
agreement is to terminate and dispose of tax controversies once and for all,” barring
one of the statutory exceptions of fraud, malfeasance, or a misrepresentation of material

2
A claim would be non-processable where a taxpayer failed to submit the information required to make a
determination. For example, a statement “I should not have to pay interest” standing alone, without
reference to a specific liability or tax year, would not be a processable claim for interest abatement. In the
case of a non-processable claim a no consideration letter is appropriate. The taxpayer then has the
ability to provide any information necessary for the consideration of the claim.
POSTS-139082-11 5

fact. S&O Liquidating Partnership v. Commissioner, 291 F.3d 454, 458 (7th Cir 2002).
“The notion being that where the taxpayer agrees that the determination is just and the
department thinks it is just they can come to an agreement and clean it up forever.”
Hearings on H.R. 8245 before the Senate Committee on Finance, 67th Congress, 1st
Sess. 129 (1921)(statement of T.S. Adams, Tax Advisor, Treas. Dept.)

The authority to enter into these final and conclusive agreements has not been
delegated lightly. Delegation Order 8-3, formerly known as DO-97, Rev. 34, found at
IRM 1.2.47.4, is the general delegation order regarding closing agreements. DO 8-3
delegates the authority to enter into and approve a written agreement with any person
relating to the internal revenue tax liability of such person for a taxable period ended
prior to the date of the agreement. IRM 1.2.47.4(5). A closing agreement involving
interest abatement would be covered under this delegation order as it involves an
internal revenue tax liability for a taxable period that would have ended prior to the date
of the closing agreement. DO 8-3 provides that with respect to SB/SE this authority is
delegated no lower than to SB/SE Director of Compliance. IRM 1.2.47 (6). Effective
October 1, 2000, the title of Director of Compliance was replaced by several
directorships, including the SB/SE Director of Examination. Thus, the SB/SE Director of
Examination would have authority to enter into this type of closing agreement. Since
SB/SE Technical Services reports to the SB/SE Director of Examination, there is no one
within SB/SE Technical Services with the requisite authority to sign such a closing
agreement. Thus, neither an individual Interest Abatement Coordinator, nor a manager
in the Technical Services group to whom the Interest Abatement Coordinator would
report, would have the requisite authority to enter into such an agreement for a case
within the jurisdiction of SB/SE.

                                 CONCLUSIONS

1) A no consideration letter is appropriate only in very limited circumstances where
a taxpayer fails to submit the information required for consideration of the interest
abatement claim. Otherwise, any consideration by the Service of whether the
statutory requirements for interest abatement are met in a particular claim is
subject to review by the Tax Court. Therefore, if a claim is disallowed the
taxpayer should receive a final determination letter.

2) An Interest Abatement Coordinator does not have the requisite authority to enter
into a closing agreement regarding an interest abatement issue. The lowest
representative of the Service within SB/SE who would have the authority to do so
would be the SB/SE Director of Examination. Certainly, an IAC could solicit such
a closing agreement, but an interest abatement claim issue within the jurisdiction
of SB/SE would have to be executed on behalf of the Commissioner by the
SB/SE Director of Examination.