Abatement of Interest

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-209276-87]

RIN 1545-AV32

Abatement of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed 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 proposed regulations reflect changes to the law

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

The proposed regulations affect both taxpayers requesting abatement of

certain interest and IRS personnel responsible for administering the

abatement provisions.

DATES: Written comments and requests for a hearing must be received by

April 8, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209276-87), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209276-87), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington

DC. Alternatively, taxpayers may submit comments electronically via the

INTERNET by selecting the ``Tax Regs'' option on the IRS Home Page, or

by submitting comments directly to the IRS Internet site at http://

www.irs.ustreas.gov/prod/tax__regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David

Auclair, (202) 622-4910 (not a toll-free number). Concerning

submissions, Michael Slaughter, (202) 622-7190 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

gs'' option on the IRS Home Page, or

by submitting comments directly to the IRS Internet site at http://

www.irs.ustreas.gov/prod/tax__regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David

Auclair, (202) 622-4910 (not a toll-free number). Concerning

submissions, Michael Slaughter, (202) 622-7190 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed 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 (Pub. L. 99-514, 100 Stat. 2762 (1986)) (1986 Act)

and amended by section 301 of the Taxpayer Bill of Rights 2 (Pub. L.

104-168, 110 Stat. 1452 (1996)) (TBOR2).

As enacted by the 1986 Act, section 6404(e)(l) 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.

acity) 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.

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. In this document, the IRS is reproposing a modified

version of the earlier notice of proposed rulemaking to incorporate

changes made by TBOR2. Therefore, the earlier notice of proposed

rulemaking is withdrawn.

The temporary regulations define ministerial act to mean 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

isterial act to mean 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. The temporary regulations also provide five

examples to illustrate the definition of ministerial act.

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. Thus, as a

result of TBOR2, the IRS has the authority to abate interest in more

situations than under prior law.

Pursuant to the legislative history accompanying TBOR2, a

managerial act is 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). TBOR2 distinguished a managerial act from a general

administrative decision, such as a decision on how to organize the

processing of tax returns or a decision regarding the implementation of

an improved computer system. Id. A general administrative decision is a

decision that impacts tax administration. 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.

TBOR2 also added section 6404(g). Section 6404(g) grants the Tax

Court jurisdiction to determine whether the IRS's failure to abate

interest for an eligible taxpayer is an abuse of discretion. Tax Court

review is available for requests for abatement of interest that are

made after July 30, 1996, or that have not been denied prior to July

31, 1996. See Banat v. Commissioner, 109 T.C

0,

1996.

TBOR2 also added section 6404(g). Section 6404(g) grants the Tax

Court jurisdiction to determine whether the IRS's failure to abate

interest for an eligible taxpayer is an abuse of discretion. Tax Court

review is available for requests for abatement of interest that are

made after July 30, 1996, or that have not been denied prior to July

31, 1996. See Banat v. Commissioner, 109 T.C. 92 (1997); White v.

Commissioner, 109 T.C. 96 (1997).

Explanation of Provisions

TBOR2 expanded the scope of abatement relief under section

6404(e)(1). Consistent with congressional intent, the proposed

regulations permit abatement of interest in more situations than under

prior law. Nothing in the proposed regulations is intended to limit the

extent to which the IRS could abate interest before the effective date

of TBOR2.

The proposed regulations define managerial act and incorporate

other changes made by TBOR2. TBOR2 did not alter the definition of

ministerial act under prior law. Accordingly, the proposed regulations

retain the definition of ministerial act in the temporary regulations.

Managerial act is defined as 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, interest attributable to 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, cannot be abated under section 6404(e)(1).

In addition, the proposed regulations provide examples to

illustrate the definitions of ministerial act and managerial act.

Examples 1, 2, 3, 7, and 8 of the proposed regulations are

substantially similar to Examples 1 through 5 of the temporary

regulations

nize

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

computer system, cannot be abated under section 6404(e)(1).

In addition, the proposed regulations provide examples to

illustrate the definitions of ministerial act and managerial act.

Examples 1, 2, 3, 7, and 8 of the proposed regulations are

substantially similar to Examples 1 through 5 of the temporary

regulations. However, in Example 3 of the proposed regulations (Example

4 of the temporary regulations), a decision to approve extended

training is a managerial act, and in Example 8 of the proposed

regulations (Example 5 of the temporary regulations) the type of work

priority is specified.

The provisions of the regulations relating to a ministerial act

apply to interest accruing with respect to deficiencies or payments of

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

December 31, 1978, for which the applicable statute of limitations has

not expired. The provisions of the regulations relating to a managerial

act are proposed to 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.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a Public Hearing

ot 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, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) or electronic comments that are submitted timely

to the IRS. All comments will be available for public inspection and

copying. A public hearing may be scheduled if requested in writing by

any person that timely submits written comments. If a public hearing is

scheduled, notice of the date, time, and place of the hearing will be

published in the Federal Register.

Drafting Information

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

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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read

in part as follows:

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

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--

, 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, interest attributable to a

general administrative decision, such as the IRS's decision on how to

organize the processing of tax returns or the IRS's decision on the

implementation schedule for an improved computer system, cannot 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.

inisterial 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 (b)(2) of this section. For the 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.

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 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

e 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

sions.

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 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

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 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, Examination requests advice 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 the

amount due to satisfy the taxpayer's income tax liability for a

particular taxable year

gn 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 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. 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 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 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 cannot be abated under

paragraph (a) of this section.

amount due. As a result,

the taxpayer pays less than the amount required to satisfy the tax

liability. Interpreting 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 cannot be abated under

paragraph (a) of this section.

(d) Effective date. 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.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-19 Filed 1-7-98; 8:45 am]

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