IRS may abate excessive penalties despite a time-barred tax refund

Plain-English summary

An amended return showed that a taxpayer's true tax liability was lower than the amount originally reported. Although section 6511 barred refunding the tax because the amended return was late, the penalties and interest had also been calculated on the excessive original liability. Chief Counsel advised that section 6404(a)(1) permitted the IRS to abate both unpaid and paid portions of excessive assessments. The timing of the tax refund claim did not eliminate that abatement authority. The amended return could be treated as a claim to refund excessive penalties and interest paid during the two years before it was filed.

Ruling snapshot

• Question: May the IRS abate and refund excessive penalties and interest when the underlying tax refund is time-barred?
• Outcome: Advice given, abatement is permitted and recent overpayments may be refunded.
• Key authorities: IRC §§ 6402, 6404(a)(1), and 6511

Full text (IRS public release)

ID: CCA_2015042310213454 [Third Party Communication:

UILC: 6404.01-01, 6402.00-00 Date of Communication: Month DD, YYYY]

Number: 201520010
Release Date: 5/15/2015
From:
Sent: Thursday, April 23, 2015 10:21:34 AM
To:
Cc:
Bcc:
Subject: advice for your TAO

Hi -------------------------. This relates to the TAO issued in ------------------. Thanks for your
patience while I looked into this further and coordinated with the subject matter experts
in Counsel.

You have indicated that the IRS agrees that the amended return filed by the taxpayer
reflects the correct tax liability. The amended return reflects a refund of tax. The
penalties and interest were calculated based on the tax reported on the original return.
Thus, the penalties and interest that have been assessed are excessive, as the
taxpayer’s true tax liability is much lower, which would have resulted in lower penalties
and interest. IRC section 6404(a)(1) authorizes the IRS to abate the unpaid portion of
an assessment that is excessive in amount. While the statute specifies “unpaid”
assessments, Counsel’s view is that IRC section 6404(a)(1) is permissive and that the
IRS is not prohibited from abating the paid portion of assessments.

The timing of a claim for credit or refund has no effect on the IRS’s authority to abate an
assessment. Thus, although the refund of tax reported on the amended return is time-
barred under IRC section 6511 (the amended return was not filed within 3 years from
the filing of the original return and the taxpayer full-paid the liability when he filed the
original return), the IRS may still abate the penalties and interest that exceed the true
amount of penalties and interest the taxpayer owes. As a result of the payments of
penalties and interest that the taxpayer has been making each month, the taxpayer has
overpaid the penalties and interest. The amended return should be treated as a claim
for refund for the penalties and interest paid in the two years prior to the date the
amended return was filed, to the extent those amounts exceed what the taxpayer
actually owed.

Please share this e-mail with the IRS to bring closure to this case. The Counsel subject
matter experts in CC:---- have seen this e-mail and concur that the taxpayer is entitled
to a refund of penalties and interest as described above.

Thanks. Let me know if you have any further questions.