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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.
Generally, interest will accrue on the unpaid tax from the date the tax return was due until payment is made in full. The interest rate consists of the federal short-term rate plus 3 percent where the IRS sets the rate on a quarterly basis. By way of example, the interest rate relating to underpayment for the second quarter of 2023 is currently 7 percent whereas the interest rate from the second quarter of the prior year was 4 percent, representing a 3 percent increase.
The IRS will compound interest on a daily basis. In this situation, the interest is assessed on the previous day’s balance plus the interest. Compounding interest overtime might create what the taxpayer perceives as a runaway tax balance that can very quickly become overwhelming.
It is important to note that obtaining an extension to file a tax return does not extend the deadline for paying the tax. Rather, the tax must be paid in full by the filing deadline in order to avoid accrual of interest and possible penalties.
Based on the foregoing, taxpayers are incentivized to file their tax returns timely and pay any associated tax due. If you are unable to pay your balance in a full,a competent tax attorney can help you set up an affordable payment plan, pursue an offer in compromise, or seek interest abatement depending on the facts of your case. At a minimum, it may be possible to borrow the funds necessary to pay taxes at a lower rate than the combined IRS interest and penalty rate.
Eligibility for Interest Abatement
The circumstances that support an IRS interest abatement are quite narrow and the requirements are considered rigid. Unlike a request for penalty abatement, reasonable cause does not constitute a sufficient ground for interest abatement. Rather, the IRS will only reduce or remove interest when there was an unreasonable error or delay on the part of an IRS employee.
According to IRC 6404(e), an interest abatement request must meet specific criteria in order to qualify for unreasonable error or delay:
- Taxpayer’s claim must be filed 3 years from the date the tax return was originally filed or 2 years from the date of payment of the tax, whichever is later;
- The request must not relate to interest abatement on employment taxes;
- The error or delay must have occurred after the IRS contacted the taxpayer about examination, underpayment, or payment;
- Neither the taxpayer nor the taxpayer’s representative(s) contributed to the delay or error at issue;
- The request must relate to an unreasonable error or delay that occurred in relation to the IRS’ performance of ministerial or managerial acts.
The IRS defines a ministerial act as one not involving the exercise of judgment or discretion such as a procedural or mechanical act. An example of a ministerial act that would amount to unreasonable error or delay might involve a situation where the taxpayer requests that his audit get transferred to a different office given than he has changed residences and the IRS fails to timely effectuate the transfer.
The IRS defines a managerial act as one that occurs during the processing of a taxpayer’s case that involves the loss of records or the exercise of judgment relating to the management of IRS personnel. An example of a managerial act that would amount to unreasonable error or delay might involve a situation where a revenue officer’s supervisor does not timely reassign a taxpayer’s case after having assigned the Revenue Officer to other tasks.
The decision whether to abate interest is discretionary with the Commissioner and determined on a case-by-case basis. In most situations, even where the taxpayer may be able to show that there was some unreasonable error or delay on the part of an IRS employee or department, typically the taxpayer contributed to the delay or error, nullifying an interest abatement request.
In those rare cases where the IRS agrees to abate interest, the amount of the interest abated will be equivalent to the amount of interest that accrued during the period of unreasonable error or delay.
Do You Need a Tax Attorney?
A tax attorney can review the facts of your case and determine whether you have a viable interest abatement claim which would require filing IRS Form 843 Claim for Refund and Request for Abatement along with the supporting documentation. A tax attorney can also help you appeal the denial of any such abatement request.
Given that the circumstances supporting successful interest abatement requests are quite rare, a tax attorney will be most useful to taxpayers in seeking a reduction in overall tax and penalties owed, which will in turn reduce the interest. Some of the means of doing so include helping the taxpayer correct erroneous assessments, seeking penalty abatement, setting up an affordable payment plan, or pursuing a settlement with the IRS a taxpayer.
- The experienced tax attorneys at Segal, Cohen & Landis have helped clients with overwhelming tax liabilities based, in part, on compounded interest, by providing the following services:
- 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.
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to advise you as to how we can resolve your case and how much it would cost.