IRS Interest Accrual and Abatement

Interest start dates differ by penalty type; do not assume every penalty begins accruing interest on the original return due date. Check the specific assessed penalty and current IRS guidance.

 

Many taxpayers believe that if they pay an outstanding tax bill, the IRS will forgive the interest, or, if they set up a payment plan with the IRS, interest will no longer accrue on the unpaid balance. Unfortunately for the taxpayer, neither of these are true. However, there are limited circumstances that will support the removal of interest from your tax bill.

This article explores the amount of interest that the IRS charges on unpaid federal tax, the conditions that support the abatement of interest, and the alternatives to interest abatement.

What is the IRS Interest Rate and How Is It Calculated?

The IRS will charge interest on any unpaid tax liability where the total liability includes the underlying tax plus penalties, additions to tax, and interest. This means that taxpayers will be paying interest on interest and interest on penalties in addition to interest on the unpaid tax.

Interest on unpaid tax generally runs from the original payment due date until payment. An extension to file a tax return ordinarily does not extend that payment date. For most underpayments, the rate is the federal short-term rate plus 3 percentage points, set quarterly; special rates apply in some corporate cases. Check the rate for each relevant quarter rather than treating an old example as a current rate.

IRS interest generally compounds daily, so interest can accrue on previously accrued interest as well as the unpaid amount. The applicable starting date can differ for tax and particular penalties, and the balance changes as payments and adjustments are applied.

An extension to file a tax return generally does not extend the original payment due date. Ordinarily, paying the tax by that date avoids interest on the tax and applicable late-payment penalties; separately applicable postponement or relief rules may change the result.

File required tax returns on time and pay what you can by the deadline. If full payment is not possible, an attorney can assess a payment plan, an offer in compromise or a supported interest-abatement request. Before borrowing to pay tax, compare the full financing costs and risks with the IRS balance and available alternatives.

Eligibility for Interest Abatement

IRC section 6404(e)(1) permits limited relief for interest attributable to a qualifying unreasonable IRS error or delay in performing a ministerial or managerial act. This is not a general reasonable-cause or first-time waiver of interest. Separately, reducing an underlying tax or qualifying for penalty abatement can reduce related interest.

According to IRC 6404(e), an interest abatement request must meet specific criteria in order to qualify for unreasonable error or delay:

• Observe the applicable claim deadline. Generally a credit or refund claim must be filed within 3 years after the original tax return was filed or 2 years after payment, whichever is later. Distinguish a refund of paid interest from abatement of unpaid interest and check the rules for the particular request;
• The request must concern an eligible tax, such as income, estate, gift or certain excise taxes; section 6404(e)(1) does not cover employment taxes. The rules also depend on the tax period, including different effective dates for managerial-act relief;
• The qualifying error or delay must occur after the IRS contacted the taxpayer in writing about the examination, underpayment or payment;
• No significant aspect of the error or delay may be attributable to the taxpayer or the taxpayer’s representative;
• The request must relate to an unreasonable error or delay that occurred in relation to the IRS’ performance of ministerial or managerial acts.

A ministerial act is procedural or mechanical and does not involve judgment or discretion once its prerequisites are complete. For example, after an audit transfer has been approved, an unreasonable delay in actually transferring the case may qualify. Disagreement over how tax law applies is not itself a ministerial act.

A managerial act can involve lost records or case-related personnel management. For example, assigning an agent to extended training without reassigning the agent’s cases may cause a qualifying delay. General administrative policy decisions and decisions about the correct application of tax law are not qualifying managerial acts.

Eligibility depends on the documented facts, the type of act and whether a significant aspect of the error or delay was the taxpayer’s or representative’s fault. Abatement is discretionary and is limited to interest attributable to the qualifying error or delay.

An approved request does not necessarily remove all interest for the affected dates. For example, a qualifying audit delay can affect interest on the additional audit liability without eliminating interest on the originally reported unpaid balance.

Do You Need a Tax Attorney?

A tax attorney can evaluate the facts and prepare Form 843, Claim for Refund and Request for Abatement, or an appropriate signed request with supporting records describing the IRS error or delay. If relief is denied, available administrative or judicial review procedures and deadlines must be evaluated separately.

Review the assessed tax, penalties, interest, payment history, and available procedures before choosing a response. Professional assistance depends on the facts and agreed scope of representation. Related resources: penalty abatement.

• Possible services for a taxpayer facing an interest-bearing tax balance include the following, subject to the facts and agreed scope of representation:
• Interest Abatement Request via Form 843;
• Assistance with filing compliance and correction of Substitute for Return (SFR) balances;
• Installment arrangement;
• Offer in compromise; and
• IRS Appeals.

To discuss your tax matter, review our team and contact the firm using its published contact information, including (310) 285-3999. Confirm consultation terms, attorney availability, fees and the proposed scope of representation. No particular outcome is guaranteed.