Abatement of Interest

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8789]

RIN 1545-AV32

Abatement of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the

abatement of interest attributable to unreasonable errors or delays by

an officer or employee of the IRS in performing a ministerial or

managerial act. The final regulations reflect changes to the law made

by the Tax Reform Act of 1986 and the Taxpayer Bill of Rights 2. The

final regulations affect both taxpayers requesting abatement of certain

interest and IRS personnel responsible for administering the abatement

provisions.

DATES: Effective Date: These regulations are effective December 18,

1998.

Applicability Date: For dates of applicability, see Sec. 301.6404-

2(d).

FOR FURTHER INFORMATION CONTACT: Michael L. Gompertz, (202) 622-4910

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Procedure and

Administration Regulations (26 CFR Part 301) relating to the abatement

of interest attributable to unreasonable errors or delays by an officer

or employee of the IRS under section 6404(e)(1) of the Internal Revenue

Code. Section 6404(e)(1) was enacted by section 1563(a) of the Tax

Reform Act of 1986 (1986 Act) (Public Law 99-514 (100 Stat. 2762)

(1986)) and amended by section 301 of the Taxpayer Bill of Rights 2

(TBOR2) (Public Law 104-168 (110 Stat. 1452) (1996)).

Section 6404(e)(1) applies only to interest on taxes of a type for

which a notice of deficiency is required by section 6212, that is,

income tax, estate tax, gift tax, generation-skipping transfer tax, and

certain excise taxes. Requests for abatement of interest should be made

on Form 843, ``Claim for Refund and Request for Abatement.'' For more

information, see Publication 556, ``Examination of Returns, Appeal

Rights, and Claims for Refund.''

As enacted by the 1986 Act, section 6404(e)(1) provided that the

IRS may abate interest attributable to any error or delay by an officer

or employee of the IRS (acting in an official capacity) in performing a

ministerial act. The legislative history accompanying the Act provided:

The committee intends that the term `ministerial act' be limited

to nondiscretionary acts where all of the preliminary prerequisites,

such as conferencing and review by supervisors, have taken place.

Thus, a ministerial act is a procedural action, not a decision in a

substantive area of tax law.

H.R. Rep. No. 426, 99th Cong., 1st Sess. 845 (1985); S. Rep. No.

313, 99th Cong., 2d Sess. 209 (1986).

Further, Congress did not intend that the abatement of interest

provision ``be used routinely to avoid payment of interest.'' H.R. Rep.

No. 426, 99th Cong., 1st Sess. 844 (1985); S. Rep. No. 313, 99th Cong.,

2d Sess. 208 (1986). Rather, Congress intended abatement of interest to

be used in instances ``where failure to abate interest would be widely

perceived as grossly unfair.'' Id.

In TBOR2, Congress amended section 6404(e)(1) to permit the IRS to

abate interest attributable to any unreasonable error or delay by an

officer or employee of the IRS (acting in an official capacity) in

performing a managerial act as well as a ministerial act.

Pursuant to the legislative history accompanying TBOR2, a

managerial act includes a loss of records or a personnel management

decision such as the decision to approve a personnel transfer, extended

leave, or extended training. See H.R. Rep. No. 506, 104th Cong., 2d

Sess. 27 (1996). The legislative history of TBOR2 distinguished a

managerial act from a general administrative decision and provided that

interest would not be abated for delays resulting from general

administrative decisions. For example,

[[Page 70013]]

the taxpayer could not claim that the IRS's decision on how to organize

the processing of tax returns or its delay in implementing an improved

computer system resulted in an unreasonable delay in the Service's

action on the taxpayer's tax return, and so the interest on any

subsequent deficiency should be waived. The amendments to section

6404(e)(1) are effective for interest accruing with respect to

deficiencies or payments for taxable years beginning after July 30,

1996.

On August 13, 1987, the IRS published temporary regulations (TD

8150) in the Federal Register (52 FR 30162) relating to the definition

of ministerial act for purposes of abatement of interest. A notice of

proposed rulemaking (LR-34-87) cross-referencing the temporary

regulations was also published in the Federal Register for the same day

(52 FR 30177). No public hearing regarding these regulations was

requested or held.

On January 8, 1998, the IRS published in the Federal Register a

notice of proposed rulemaking (REG-209276-87) under section 6404(e)(1)

withdrawing the prior notice of proposed rulemaking and reproposing a

modified version of the prior notice to incorporate the changes made by

TBOR2 (63 FR 1086).

One written comment was received on the proposed regulations. No

public hearing regarding these regulations was requested or held. After

consideration of the written comment, the proposed regulations

published on January 8, 1998, are adopted with minor changes by this

Treasury decision.

Public Comments

A comment letter was received proposing that a special effective

date rule be added to the regulations applicable to the abatement of

interest on estate tax. The comment letter noted that because estate

tax is not imposed with respect to a taxable year, it is difficult to

apply the effective date rule in the proposed regulations to estate

tax.

The comment letter also recommended that Example 11 be clarified to

provide more detailed guidance in determining the amount of interest

the IRS should abate. Further, the comment letter recommended that

Example 12 be eliminated because errors in performing all interest

computations should be considered ministerial. Finally, because it may

be difficult for taxpayers to determine whether there has been delay by

the IRS in performing a ministerial or managerial act, the comment

letter recommended that the regulations authorize the Taxpayer Advocate

to investigate on behalf of taxpayers the manner in which the IRS

processed their cases. The commentator believes that this would assist

taxpayers in filing requests for interest abatement.

Explanation of Provisions

In accordance with the first recommendation made in the comment

letter, the final regulations include special effective date rules

applicable to the abatement of interest on estate tax, gift tax, and

generation-skipping transfer tax. The final regulations apply if the

death occurred after July 30, 1996, or if the gift was made or the

generation-skipping transfer occurred after December 31, 1996.

The other recommendations made in the comment letter are not

adopted. The Treasury Department and the IRS believe that Example 11

does not need any clarification and that Example 12 is essentially

correct as written (however, this Treasury decision makes minor

modifications to Example 12). Finally, the Treasury Department and the

IRS believe that it is not necessary for the regulations to authorize

the Taxpayer Advocate to assist taxpayers in regard to interest

abatement claims. Taxpayers who seek abatement of interest should file

Form 843. If the taxpayer believes the IRS has improperly denied the

request for abatement, the taxpayer may seek the assistance of the

Taxpayer Advocate without specific authorization in the regulations.

Also, the taxpayer may file a petition in the Tax Court under section

6404(g) to obtain judicial review of the denial of the request for

abatement.

The final regulations add a new example (Example 13) to the

regulations. This example clarifies that if the examination of a

taxpayer's return is delayed, and both the actions of the taxpayer and

those of the IRS contribute to the overall delay, the IRS cannot abate

interest attributable to delay caused by the taxpayer. However, the IRS

may abate interest attributable to unreasonable delay in the

performance of a ministerial or managerial act if no significant aspect

of this delay is attributable to the taxpayer.

Finally, the final regulations make obsolete Rev. Proc. 87-42

(1987-2 C.B. 589). Rev. Proc. 87-42 provides instructions for

requesting interest abatement under section 6404(e) and examples

illustrating the definition of ministerial act. The guidance provided

by Rev. Proc. 87-42 is no longer needed. The instructions for

requesting interest abatement are included in the instructions to Form

843.

Effect on Other Documents

Rev. Proc. 87-42 (1987-2 C.B. 589) is hereby terminated as of

December 18, 1998.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these regulations, and because the

regulations do not impose a collection of information on small

entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Internal Revenue Code, the

IRS submitted the notice of proposed rulemaking preceding these

regulations to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is David B. Auclair of

the Office of Assistant Chief Counsel (Income Tax & Accounting).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by

adding an entry in numerical order for Section 301.6404-2 to read as

follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6404-2 also issued under 26 U.S.C. 6404; * * *

Par. 2. Section 301.6404-2 is added to read as follows:

Sec. 301.6404-2 Abatement of interest.

(a) In general. (1) Section 6404(e)(1) provides that the

Commissioner may (in the Commissioner's discretion) abate the

assessment of all or any part of interest on any--

(i) Deficiency (as defined in section 6211(a), relating to income,

estate, gift, generation-skipping, and certain excise taxes)

attributable in whole or in part to

[[Page 70014]]

any unreasonable error or delay by an officer or employee of the

Internal Revenue Service (IRS) (acting in an official capacity) in

performing a ministerial or managerial act; or

(ii) Payment of any tax described in section 6212(a) (relating to

income, estate, gift, generation-skipping, and certain excise taxes) to

the extent that any unreasonable error or delay in payment is

attributable to an officer or employee of the IRS (acting in an

official capacity) being erroneous or dilatory in performing a

ministerial or managerial act.

(2) An error or delay in performing a ministerial or managerial act

will be taken into account only if no significant aspect of the error

or delay is attributable to the taxpayer involved or to a person

related to the taxpayer within the meaning of section 267(b) or section

707(b)(1). Moreover, an error or delay in performing a ministerial or

managerial act will be taken into account only if it occurs after the

IRS has contacted the taxpayer in writing with respect to the

deficiency or payment. For purposes of this paragraph (a)(2), no

significant aspect of the error or delay is attributable to the

taxpayer merely because the taxpayer consents to extend the period of

limitations.

(b) Definitions--(1) Managerial act means an administrative act

that occurs during the processing of a taxpayer's case involving the

temporary or permanent loss of records or the exercise of judgment or

discretion relating to management of personnel. A decision concerning

the proper application of federal tax law (or other federal or state

law) is not a managerial act. Further, a general administrative

decision, such as the IRS's decision on how to organize the processing

of tax returns or its delay in implementing an improved computer

system, is not a managerial act for which interest can be abated under

paragraph (a) of this section.

(2) Ministerial act means a procedural or mechanical act that does

not involve the exercise of judgment or discretion, and that occurs

during the processing of a taxpayer's case after all prerequisites to

the act, such as conferences and review by supervisors, have taken

place. A decision concerning the proper application of federal tax law

(or other federal or state law) is not a ministerial act.

(c) Examples. The following examples illustrate the provisions of

paragraphs (b) (1) and (2) of this section. Unless otherwise stated,

for purposes of the examples, no significant aspect of any error or

delay is attributable to the taxpayer, and the IRS has contacted the

taxpayer in writing with respect to the deficiency or payment. The

examples are as follows:

Example 1. A taxpayer moves from one state to another before the

IRS selects the taxpayer's income tax return for examination. A

letter explaining that the return has been selected for examination

is sent to the taxpayer's old address and then forwarded to the new

address. The taxpayer timely responds, asking that the audit be

transferred to the IRS's district office that is nearest the new

address. The group manager timely approves the request. After the

request for transfer has been approved, the transfer of the case is

a ministerial act. The Commissioner may (in the Commissioner's

discretion) abate interest attributable to any unreasonable delay in

transferring the case.

Example 2. An examination of a taxpayer's income tax return

reveals a deficiency with respect to which a notice of deficiency

will be issued. The taxpayer and the IRS identify all agreed and

unagreed issues, the notice is prepared and reviewed (including

review by District Counsel, if necessary), and any other relevant

prerequisites are completed. The issuance of the notice of

deficiency is a ministerial act. The Commissioner may (in the

Commissioner's discretion) abate interest attributable to any

unreasonable delay in issuing the notice.

Example 3. A revenue agent is sent to a training course for an

extended period of time, and the agent's supervisor decides not to

reassign the agent's cases. During the training course, no work is

done on the cases assigned to the agent. The decision to send the

revenue agent to the training course and the decision not to

reassign the agent's cases are not ministerial acts; however, both

decisions are managerial acts. The Commissioner may (in the

Commissioner's discretion) abate interest attributable to any

unreasonable delay resulting from these decisions.

Example 4. A taxpayer appears for an office audit and submits

all necessary documentation and information. The auditor tells the

taxpayer that the taxpayer will receive a copy of the audit report.

However, before the report is prepared, the auditor is permanently

reassigned to another group. An extended period of time passes

before the auditor's cases are reassigned. The decision to reassign

the auditor and the decision not to reassign the auditor's cases are

not ministerial acts; however, they are managerial acts. The

Commissioner may (in the Commissioner's discretion) abate interest

attributable to any unreasonable delay resulting from these

decisions.

Example 5. A taxpayer is notified that the IRS intends to audit

the taxpayer's income tax return. The agent assigned to the case is

granted sick leave for an extended period of time, and the

taxpayer's case is not reassigned. The decision to grant sick leave

and the decision not to reassign the taxpayer's case to another

agent are not ministerial acts; however, they are managerial acts.

The Commissioner may (in the Commissioner's discretion) abate

interest attributable to any unreasonable delay caused by these

decisions.

Example 6. A revenue agent has completed an examination of the

income tax return of a taxpayer. There are issues that are not

agreed upon between the taxpayer and the IRS. Before the notice of

deficiency is prepared and reviewed, a clerical employee misplaces

the taxpayer's case file. The act of misplacing the case file is a

managerial act. The Commissioner may (in the Commissioner's

discretion) abate interest attributable to any unreasonable delay

resulting from the file being misplaced.

Example 7. A taxpayer invests in a tax shelter and reports a

loss from the tax shelter on the taxpayer's income tax return. IRS

personnel conduct an extensive examination of the tax shelter, and

the processing of the taxpayer's case is delayed because of that

examination. The decision to delay the processing of the taxpayer's

case until the completion of the examination of the tax shelter is a

decision on how to organize the processing of tax returns. This is a

general administrative decision. Consequently, interest attributable

to a delay caused by this decision cannot be abated under paragraph

(a) of this section.

Example 8. A taxpayer claims a loss on the taxpayer's income tax

return and is notified that the IRS intends to examine the return.

However, a decision is made not to commence the examination of the

taxpayer's return until the processing of another return, for which

the statute of limitations is about to expire, is completed. The

decision on how to prioritize the processing of returns based on the

expiration of the statute of limitations is a general administrative

decision. Consequently, interest attributable to a delay caused by

this decision cannot be abated under paragraph (a) of this section.

Example 9. During the examination of an income tax return, there

is disagreement between the taxpayer and the revenue agent regarding

certain itemized deductions claimed by the taxpayer on the return.

To resolve the issue, advice is requested in a timely manner from

the Office of Chief Counsel on a substantive issue of federal tax

law. The decision to request advice is a decision concerning the

proper application of federal tax law; it is neither a ministerial

nor a managerial act. Consequently, interest attributable to a delay

resulting from the decision to request advice cannot be abated under

paragraph (a) of this section.

Example 10. The facts are the same as in Example 9 except the

attorney who is assigned to respond to the request for advice is

granted leave for an extended period of time. The case is not

reassigned during the attorney's absence. The decision to grant

leave and the decision not to reassign the taxpayer's case to

another attorney are not ministerial acts; however, they are

managerial acts. The Commissioner may (in the Commissioner's

discretion) abate interest attributable to any unreasonable delay

caused by these decisions.

Example 11. A taxpayer contacts an IRS employee and requests

information with respect to the amount due to satisfy the taxpayer's

income tax liability for a particular taxable year. Because the

employee fails to access the most recent data, the employee gives

the taxpayer an incorrect amount due.

[[Page 70015]]

As a result, the taxpayer pays less than the amount required to

satisfy the tax liability. Accessing the most recent data is a

ministerial act. The Commissioner may (in the Commissioner's

discretion) abate interest attributable to any unreasonable error or

delay arising from giving the taxpayer an incorrect amount due to

satisfy the taxpayer's income tax liability.

Example 12. A taxpayer contacts an IRS employee and requests

information with respect to the amount due to satisfy the taxpayer's

income tax liability for a particular taxable year. To determine the

current amount due, the employee must interpret complex provisions

of federal tax law involving net operating loss carrybacks and

foreign tax credits. Because the employee incorrectly interprets

these provisions, the employee gives the taxpayer an incorrect

amount due. As a result, the taxpayer pays less than the amount

required to satisfy the tax liability. Interpreting complex

provisions of federal tax law is neither a ministerial nor a

managerial act. Consequently, interest attributable to an error or

delay arising from giving the taxpayer an incorrect amount due to

satisfy the taxpayer's income tax liability in this situation cannot

be abated under paragraph (a) of this section.

Example 13. A taxpayer moves from one state to another after the

IRS has undertaken an examination of the taxpayer's income tax

return. The taxpayer asks that the audit be transferred to the IRS's

district office that is nearest the new address. The group manager

approves the request, and the case is transferred. Thereafter, the

taxpayer moves to yet another state, and once again asks that the

audit be transferred to the IRS's district office that is nearest

that new address. The group manager approves the request, and the

case is again transferred. The agent then assigned to the case is

granted sick leave for an extended period of time, and the

taxpayer's case is not reassigned. The taxpayer's repeated moves

result in a delay in the completion of the examination. Under

paragraph (a)(2) of this section, interest attributable to this

delay cannot be abated because a significant aspect of this delay is

attributable to the taxpayer. However, as in Example 5, the

Commissioner may (in the Commissioner's discretion) abate interest

attributable to any unreasonable delay caused by the managerial

decisions to grant sick leave and not to reassign the taxpayer's

case to another agent.

(d) Effective dates--(1) In general. Except as provided in

paragraph (d)(2) of this section, the provisions of this section apply

to interest accruing with respect to deficiencies or payments of any

tax described in section 6212(a) for taxable years beginning after July

30, 1996.

(2) Special rules--(i) Estate tax. The provisions of this section

apply to interest accruing with respect to deficiencies or payments

of--

(A) Estate tax imposed under section 2001 on estates of decedents

dying after July 30, 1996;

(B) The additional estate tax imposed under sections 2032A(c) and

2056A(b)(1)(B) in the case of taxable events occurring after July 30,

1996; and

(C) The additional estate tax imposed under section 2056A(b)(1)(A)

in the case of taxable events occurring after December 31, 1996.

(ii) Gift tax. The provisions of this section apply to interest

accruing with respect to deficiencies or payments of gift tax imposed

under chapter 12 on gifts made after December 31, 1996.

(iii) Generation-skipping transfer tax. The provisions of this

section apply to interest accruing with respect to deficiencies or

payments of generation-skipping transfer tax imposed under chapter 13--

(A) On direct skips occurring at death, if the transferor dies

after July 30, 1996; and

(B) On inter vivos direct skips, and all taxable terminations and

taxable distributions occurring after December 31, 1996.

Sec. 301.6404-2T [Removed]

Par. 3. Section 301.6404-2T is removed.

Approved: October 20, 1998.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98-33123 Filed 12-17-98; 8:45 am]

BILLING CODE 4830-01-U