Interest Netting

If you owe interest to the IRS on an underpayment for the same period the IRS owes you interest on an overpayment, you will be charged interest on the amount of the underpayment (up to the amount of the overpayment) at the overpayment interest rate. As a result, the net rate is zero for that period.

Abatement of Interest Due to Error or Delay by the IRS

The IRS may abate (reduce) the amount of interest you owe if the interest is due to an unreasonable error or delay by an IRS officer or employee performing a ministerial or managerial act (discussed later). Only the amount of interest on income, estate, gift, generation-skipping, and certain excise taxes can be reduced.

Note.   Interest due to an error or delay in performing a managerial act can be reduced only if it accrued with respect to a deficiency or payment for a tax year beginning after July 30, 1996.

The amount of interest will not be reduced if you or anyone related to you contributed significantly to the error or delay. Also, the interest will be reduced only if the error or delay happened after the IRS contacted you in writing about the deficiency or payment on which the interest is based. An audit notification letter is such a contact.

The IRS cannot reduce the amount of interest due to a general administrative decision, such as a decision on how to organize the processing of tax returns.

Ministerial act.   This is a procedural or mechanical act, not involving the exercise of judgment or discretion, during the processing of a case after all prerequisites (for example, 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.

Example 1.   You move from one state to another before the IRS selects your tax return for examination. A letter stating that your return has been selected is sent to your old address and then forwarded to your new address. When you get the letter, you respond with a request that the examination be transferred to the district office closest to your new address. The examination group manager approves your request. After your request has been approved, the transfer is a ministerial act. The IRS can reduce the interest because of any unreasonable delay in transferring the case.

Example 2.   An examination of your return reveals tax due for which a notice of deficiency (90-day letter) will be issued. After you and the IRS discuss the issues, the notice is prepared and reviewed. After the review process, issuing the notice of deficiency is a ministerial act. If there is an unreasonable delay in sending the notice of deficiency to you, the IRS can reduce the interest resulting from the delay.

Managerial act.   This is an administrative act during the processing of a case that involves the loss of records or the exercise of judgment or discretion concerning the management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act.

Example.   A revenue agent is examining your tax return. During the middle of the examination, the agent is sent to an extended training course. The agent's supervisor decides not to reassign your case, so the work is unreasonably delayed until the agent returns. Interest from the unreasonable delay can be abated since both the decision to send the agent to the training class and not to reassign the case are managerial acts.

How to request abatement of interest.   You request an abatement (reduction) of interest on Form 843. You should file the claim with the IRS service center where you filed the tax return that was affected by the error or delay. If you do not remember the service center where you filed that tax return, send your claim to the service center where you filed your last tax return.

If you have already paid the interest and you would like a credit or refund of interest paid, you must file Form 843 within 3 years from the date you filed your original return or 2 years from the date you paid the interest, whichever is later. If you have not paid any of the interest, these time limitations for filing Form 843 do not apply.

Generally, you should file a separate Form 843 for each tax period and each type of tax. However, complete only one Form 843 if the interest is from an IRS error or delay that affected your tax for more than one tax period or for more than one type of tax (for example, where two or more tax years were being examined). You do not have to figure the dollar amounts of interest that you want lowered.

If your request for abatement of interest is denied, you can appeal the decision to the IRS Appeals Office.

Failure to abate interest may be reviewable by Tax Court.   The Tax Court can review the IRS' refusal to abate (reduce) interest when all of the following requirements are met.

1. You have filed a request for abatement of interest (Form 843) with the IRS.
2. The IRS has not denied your request for abatement before July 31, 1996.
3. The IRS has mailed you a notice of final determination or a notice of disallowance.
4. You have filed a petition for review of failure to abate interest under Code section 6404 with the Tax Court within 180 days of the mailing of the notice of final determination or the notice of disallowance.

You must also meet the following requirements.

1. For individual and estate taxpayers - your net worth must not exceed $2 million as of the filing date of your petition for review. For this purpose, individuals filing a joint return shall be treated as separate individuals.
2. For charities and certain cooperatives - you must not have more than 500 employees as of the filing date of your petition for review.
3. For all other taxpayers - your net worth must not exceed $7 million, and you must not have more than 500 employees as of the filing date of your petition for review.

Abatement of Interest for Individuals in Disaster Areas or Affected by Terrorist Attacks

If you live in an area declared a disaster area by the President after 1996 or you have been affected by a terrorist attack, the IRS may abate (reduce) interest on income tax for the length of any extension period granted for filing income tax returns and paying income tax.

If you were granted an extension, but were charged interest on income tax owed during the declared disaster period, the IRS may retroactively abate your interest. To the extent possible the IRS can do the following.

• Make appropriate adjustments to your account.
• Notify you when the adjustments are made.
• Refund any interest paid by you where appropriate.

For more information on disaster area losses, see Disaster Area Losses in Publication 547, Casualties, Disasters, and Thefts. For more information on tax relief resulting from terrorist attacks, see Publication 3920.

Offer in Compromise

In certain circumstances, the IRS will allow you to pay less than the full amount you owe. If you think you may qualify, you should submit your offer by filing Form 656, Offer in Compromise. The IRS may accept your offer for any of the following reasons.

• There is doubt about the amount you owe (or whether you owe it).
• There is doubt as to whether you can pay the amount you owe based on your financial situation.
• An economic hardship would result if you had to pay the full amount owed.
• Regardless of your financial circumstances, payment of the full amount owed would harm voluntary compliance by you or other taxpayers.

If your offer is rejected, you have 30 days to ask the Appeals Office of the IRS to reconsider your offer.

The IRS offers fast track mediation services to help taxpayers resolve many issues including a dispute regarding an offer in compromise. For more information, see Publication 3605.

Generally, if you submit an offer in compromise, the IRS will delay certain collection activities. The IRS usually will not levy (take) your property to settle your tax bill during the following periods.

• While your offer in compromise is being evaluated by the IRS.
• For 30 days immediately after the offer is rejected.
• During any period that your timely-filed appeal is being considered by Appeals.

Also, if the IRS rejects your original offer and you submit a revised offer within 30 days of the rejection, the IRS generally will not levy your property while it considers your revised offer.

For more information about submitting an offer in compromise, see Form 656.

Appeal Rights

Because people sometimes disagree on tax matters, the Service has an appeals system. Most differences can be settled within this system without expensive and time-consuming court trials.

However, your reasons for disagreeing must come within the scope of the tax laws. For example, you cannot appeal your case based only on moral, religious, political, constitutional, conscientious, or similar grounds.

In most instances, you may be eligible to take your case to court if you do not reach an agreement at your appeals conference, or if you do not want to appeal your case to the IRS Office of Appeals. See Appeals to the Courts, later, for more information.

Appeal Within the IRS

You can appeal an IRS tax decision to a local Appeals Office, which is separate and independent of your local IRS office, service or compliance center. The Appeals Office is the only level of appeal within the IRS. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

If you want an appeals conference, follow the instructions in the letter you received. Your request will be sent to the Appeals Office to arrange a conference at a convenient time and place. You or your representative should be prepared to discuss all disputed issues at the conference. Most differences are settled at this level.

In most instances, if agreement is not reached at your appeals conference, you can, at any time, take your case to court. See Appeals to the Courts, later.

Protests and Small Case Requests

When you request an Appeals conference, you may also need to file either a formal written protest or a small case request with the office named in the letter you received. Also see the special appeal request procedures in Publication 1660.

Written protest.   You need to file a written protest:

• In all employee plan and exempt organization cases without regard to the dollar amount at issue,
• In all partnership and S corporation cases without regard to the dollar amount at issue, and
• In all other cases, unless you qualify for the small case request procedure, or other special appeal procedures such as requesting Appeals consideration of liens, levies, seizures, or installment agreements. See Publication 1660.

If you must submit a written protest, see the instructions in Publication 5 about the information you need to provide. The IRS urges you to provide as much information as you can, as it will help speed up your appeal. That will save you both time and money.

Be sure to send the protest within the time limit specified in the letter you received.

Small case request.   If the total amount for any tax period is not more than $25,000, you may make a small case request instead of filing a formal written protest. In computing the total amount, include a proposed increase or decrease in tax (including penalties), or claimed refund. For an offer in compromise, in calculating the total amount, include total unpaid tax, penalty, and interest due. For a small case request, follow the instructions in our letter to you by sending a letter:

• Requesting Appeals consideration,
• Indicating the changes you do not agree with, and
• Indicating the reasons why you do not agree.

Representation

You can represent yourself at your appeals conference, or you can be represented by any federally authorized practitioner, including an attorney, a certified public accountant, an enrolled actuary, or an enrolled agent.

If your representative attends a conference without you, he or she can receive or inspect confidential information only if you have filed a power of attorney or a tax information authorization. You can use a Form 2848 or any other properly written power of attorney or authorization.

You can also bring witnesses to support your position.

Confidentiality privilege.   Generally, the same confidentiality protection that you have with an attorney also applies to certain communications that you have with federally authorized practitioners. See Confidentiality privilege under If Your Return Is Examined, earlier.

Appeals to the Courts

If you and the IRS still disagree after the appeals conference, you can take your case to the United States Tax Court, the United States Court of Federal Claims, or the United States District Court. These courts are independent of the IRS.

If you elect to bypass the IRS' appeals system, you also can take your case to one of the courts listed above. However, a case petitioned to the United States Tax Court will normally be considered for settlement by an Appeals Office before the Tax Court hears the case.

If you unreasonably fail to pursue the IRS' appeals system, or if your case is intended primarily to cause a delay, or your position is frivolous or groundless, the Tax Court may impose a penalty of up to $25,000. See Appeal Within the IRS, earlier.

Prohibition on requests to taxpayers to give up rights to bring civil action.   The Government cannot ask you to waive your right to sue the United States or a Government officer or employee for any action taken in connection with the tax laws. However, your right to sue can be waived if:

• You knowingly and voluntarily waive that right,
• The request to waive that right is made in writing to your attorney or other federally authorized practitioner, or
• The request is made in person and your attorney or other representative is present.

Burden of proof.   For court proceedings resulting from examinations started after July 22, 1998, the IRS has the burden of proof for any factual issue if you have introduced credible evidence relating to the issue. However, you also must have:

• Complied with all substantiation requirements of the Internal Revenue Code,
• Maintained all records required by the Internal Revenue Code,
• Cooperated with all reasonable requests by the IRS for information regarding the preparation and related tax treatment of any item reported on your tax return, and
• Had a net worth of $7 million or less at the time your tax liability is contested in any court proceeding if your tax return is for a corporation, partnership, or trust.

You must still keep and maintain records needed by the IRS to verify that all taxes have been properly determined and computed even if the IRS has the burden of proof on disputed factual issues.

The burden of proof does not change on an issue when another provision of the tax laws requires a specific burden of proof with respect to that issue.

Use of statistical information.   The IRS has the burden of proof in court proceedings based on any reconstruction of income, for an individual taxpayer, solely through the use of statistical information on unrelated taxpayers.

Penalties.   The IRS has the burden of initially producing evidence in court proceedings with respect to the liability of any individual taxpayer for any penalty, addition to tax, or additional amount imposed by the tax laws.

Recovering litigation or administrative costs.   These are the expenses that you pay to defend your position to the IRS or the courts. You may be able to recover reasonable litigation or administrative costs if you are the prevailing party and if:

• You exhaust all administrative remedies within the IRS,
• Your net worth is below a certain limit (see Net worth requirements, later),
• You do not unreasonably delay the proceeding, and
• You apply for these costs within 90 days of the date on which the final decision of the IRS as to the determination of the tax, interest, or penalty was mailed to you.

Note.   If the IRS denies your award of administrative costs, and you want to appeal, you must petition the Tax Court within 90 days of the date on which the IRS mails the denial notice.

Prevailing party.   Generally, you are the prevailing party if:

1. You substantially prevail with respect to the amount in controversy or on the most significant tax issue or set of issues in question, and
2. You meet the net worth requirements, discussed later.

You will not be treated as the prevailing party if the United States establishes that its position was substantially justified. The position of the United States is presumed not to be substantially justified if the IRS:

• Did not follow its applicable published guidance (such as regulations, revenue rulings, notices, announcements, and private letter rulings and determination letters issued to the taxpayer) in the proceeding (This presumption can be overcome by evidence.), or
• Has lost in courts of appeal for other circuits on substantially similar issues.

The court will generally decide who is the prevailing party.

Reasonable litigation costs.   These costs include the following:

1. The reasonable costs of studies, analyses, engineering reports, tests, or projects found by the court to be necessary for the preparation of your case,
2. The reasonable costs of expert witnesses,
3. Attorney fees that generally may not exceed $150 per hour for calendar year 2002. The hourly rate is indexed for inflation. See Attorney fees later.

Reasonable administrative costs.   These costs include the following:

1. Any administrative fees or similar charges imposed by the IRS,
2. The reasonable costs of studies, analyses, engineering reports, tests, or projects,
3. The reasonable costs of expert witnesses, and
4. Attorney fees that generally may not exceed $150 per hour for calendar year 2002.

Timing of costs.   Administrative costs can be awarded for costs incurred after the earliest of:

• The date the first letter of proposed deficiency is sent that allows you an opportunity to request administrative review in the IRS Office of Appeals,
• The date you receive notice of the IRS Office of Appeals' decision, or
• The date of the notice of deficiency.

Net worth requirements.   An individual taxpayer may be able to recover litigation or administrative costs when certain requirements are met:

• For individual and estate taxpayers - your net worth must not exceed $2 million as of the filing date of your petition for review. For this purpose, individuals filing a joint return shall be treated as separate individuals.
• For charities and certain cooperatives - you must not have more than 500 employees as of the filing date of your petition for review.
• For all other taxpayers - your net worth must not exceed $7 million, and you must not have more than 500 employees as of the filing date of your petition for review.

Qualified offer rule.   You can also receive reasonable costs and fees and be treated as a prevailing party in a civil action or proceeding when:

1. You make a qualified offer to the IRS to settle your case,
2. The IRS does not accept that offer, and
3. The tax liability (not including interest) later determined by the court is equal to or less than the amount of your qualified offer.

You must also meet the net worth requirements, discussed earlier, to get the benefit of the qualified offer rule.

Qualified offer.   This is a written offer made by you during the qualified offer period. It must specify:

• The amount of your liability (not including interest), and
• That it is a qualified offer when made.

It must also remain open until the earliest of:

• The date the offer is rejected,
• The date the trial begins, or
• 90 days from the date of the offer.

Qualified offer period.   This is the period beginning with the date the first letter of proposed deficiency that allows you to request review by the IRS Office of Appeals is mailed by the IRS to you and ending on the date 30 days before the date your case is first set for trial.

Attorney fees.   For the calendar year 2002 the basic rate for attorney fees is $150 per hour and can be higher in certain circumstances. Those circumstances include the difficulty of the issues in the case and the local availability of tax expertise. The basic rate will be subject to a cost-of-living adjustment each year.

Attorney fees include the fees paid by a taxpayer for the services of anyone who is authorized to practice before the Tax Court or before the IRS. In addition, attorney fees can be awarded in civil actions for unauthorized inspection or disclosure of a taxpayer's return or return information.

Fees can be awarded in excess of the actual amount charged if:

• The taxpayer is represented for no fee, or for a nominal fee, as a pro bono service, and
• The award is paid to the taxpayer's representative or to the representative's employer.

Jurisdiction for determination of employment status.   The Tax Court can review IRS employment status determinations (for example, whether individuals hired by a taxpayer are in fact employees of that taxpayer or independent contractors). Tax Court review can take place only if, in connection with an audit of any person, there is an actual controversy involving a determination by the IRS as part of an examination that:

1. One or more individuals performing services for that person are employees of that person, or
2. That person is not entitled to relief under section 530(a) of the Revenue Act of 1978 (discussed later).

Further:

• A Tax Court petition to review these determinations can be filed only by the person for whom the services are performed,
• If the taxpayer receives an IRS determination notice by certified or registered mail, the request for Tax Court review must be filed within 90 days of the date of mailing of that notice,
• If during the Tax Court proceeding, the taxpayer begins to treat as an employee an individual whose employment status is at issue, the Tax Court will not consider that change in its decision,
• Assessment and collection of tax is suspended while the Tax Court review is taking place,
• There can be a de novo review by the Tax Court (a review which does not consider IRS administrative findings), and
• At the taxpayer's request and with the Tax Court's agreement, small tax case procedures (discussed later) are available to simplify the case resolution process when the amount at issue is $50,000 or less for each calendar quarter involved.

Section 530(a) of the Revenue Act of 1978.   Briefly, this section relieves an employer of certain employment tax responsibilities for individuals treated as independent contractors and not as employees. It also provides relief to taxpayers under audit or involved in administrative or judicial proceedings.

Tax Court review of request for relief from joint and several liability on a joint return.   As discussed later, under Relief from joint and several liability on a joint return, you can request relief from liability for tax you owe, plus related penalties and interest, that you believe should be paid by your spouse (or former spouse). You also can petition (ask) the Tax Court to review your request for innocent spouse relief or your election to allocate liability if:

• The IRS sends you a determination notice denying, in whole or in part, your request for or election of relief, or
• You have not received a determination notice from the IRS within 6 months from the date you file Form 8857.

You must petition the Tax Court to review your request during the 90-day period that begins on the date the IRS mails you a determination notice. See Publication 971 for more information.

Tax Court

You can take your case to the United States Tax Court if you disagree with the IRS over:

• Income tax,
• Estate tax,
• Gift tax, or
• Certain excise taxes of private foundations, public charities, qualified pension and other retirement plans, or real estate investment trusts.

For information on Tax Court review of an IRS refusal to abate interest, see Failure to abate interest may be reviewable by Tax Court, earlier.

To take your case to the Tax Court, the IRS must first send you a notice of deficiency. Then, you can only appeal your case if you file a petition within 90 days from the date this notice is mailed to you (150 days if it is addressed to you outside the United States).

The notice will show the 90th (and 150th) day by which you must file your petition with the Tax Court.

Note.   If you consent, the IRS can withdraw any notice of deficiency. Once withdrawn, the limits on credits, refunds, and assessments concerning the notice are void, and you and the IRS have the rights and obligations that you had before the notice was issued. The suspension of any time limitation while the notice of deficiency was issued will not change when the notice is withdrawn.

After the notice is withdrawn, you cannot file a petition with the Tax Court based on the notice. Also, the IRS can later issue a notice of deficiency in a greater or lesser amount than the amount in the withdrawn deficiency.

Generally, the Tax Court hears cases before any tax has been assessed and paid; however, you can pay the tax after the notice of deficiency has been issued and still petition the Tax Court for review. If you do not file your petition on time, the proposed tax will be assessed, a bill will be sent, and you will not be able to take your case to the Tax Court. Under the law, you must pay the tax within 10 days. After 10 days the tax is subject to immediate collection. This collection can proceed even if you think that the amount is excessive. Publication 594 explains IRS collection procedures.

If you filed your petition on time, the Court will schedule your case for trial at a location convenient to you. You can represent yourself before the Tax Court or you can be represented by anyone admitted to practice before that Court.

Small tax case procedure.   If the amount in your case is $50,000 or less for any one tax year or period, the Tax Court has a simple alternative to solve your case. At your request and if the Tax Court approves, your case can be handled under the small tax case procedure. In this procedure, you can present your case to the Tax Court for a decision that is final and that you cannot appeal. You can get more information regarding the small tax case procedure and other Tax Court matters from the United States Tax Court, 400 Second Street, N.W., Washington, DC 20217.

Motion to request redetermination of interest.   In certain cases, you can file a motion asking the Tax Court to redetermine the amount of interest on either an underpayment or an overpayment. You can do this only in a situation that meets all of the following requirements.

1. The IRS has assessed a deficiency that was determined by the Tax Court.
2. The assessment included interest.
3. You have paid the entire amount of the deficiency plus the interest claimed by the IRS.
4. The Tax Court has found that you made an overpayment.

You must file the motion within one year after the decision of the Tax Court becomes final.

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