20.2.7  Abatement and Suspension of Debit Interest

Manual Transmittal

May 09, 2014

Purpose

(1) This transmits revised IRM 20.2.7, Interest, Abatement and Suspension of Debit Interest.

Material Changes

(1) The IRM title has been revised to "Abatement and Suspension of Debit Interest" by removing the words "IRC 6404 and 7508" and adding the word "Debit."

(2) Minor editorial changes have been made throughout this IRM. Web site addresses, legal references, IRM references, and tables were reviewed and updated as necessary.

Reference Description
IRM 20.2.7.1 Incorporated interest abatement and suspension information from IRM 20.2.6.7 and renamed the section "Abatement and Suspension of Debit Interest Overview."
IRM 20.2.7.2 Moved content from IRM 20.2.7.3 and edited title.
IRM 20.2.7.3, IRM 20.2.7.3.1, and IRM 20.2.7.3.2 Added routine interest procedures for math error and non-compute returns.
IRM 20.2.7.4 Added additional information regarding the processing of interest abatement requests and edited title for this section.
IRM 20.2.7.4.1 Renumbered IRM 20.2.7.4.2.
IRM 20.2.7.4.2 Renumbered IRM 20.2.7.4.1 and changed title to "IRC 6404(e)(1) Delegation of Authority."
IRM 20.2.7.4.3 Added new text and changed title to "Disallowance Correspondence." Referenced new letters. Moved former text at IRM 20.2.7.4.3 to IRM 20.2.7.11.2 and titled this section "Closing IRC 6404(e)(1) Interest Abatement Request."
IRM 20.2.7.5 Renumbered IRM 20.7.2.
IRM 20.2.7.6 Renumbered IRM 20.2.7.5.
IRM 20.2.7.6.1 Renumbered IRM 20.2.7.5.1.
IRM 20.2.7.7 Renumbered IRM 20.2.7.7 and clarified that IRC 6404(g) does not apply to the recapture of carryback losses.
IRM 20.2.7.7.1 Renumbered IRM 20.2.7.6.1.1.
IRM 20.2.7.7.1.1 Renumbered IRM 20.2.7.6.1.1.
IRM 20.2.7.7.1.2 Renumbered IRM 20.2.7.6.1.2.
IRM 20.2.7.7.1.3 Renumbered IRM 20.2.7.6.1.3.
IRM 20.2.7.7.2 Renumbered IRM 20.2.7.6.2.
IRM 20.2.7.7.3 Renumbered IRM 20.2.7.6.3.
IRM 20.2.7.7.4 Renumbered IRM 20.2.7.6.4.
IRM 20.2.7.7.5 Renumbered IRM 20.2.7.6.5.
IRM 20.2.7.7.5.1 Renumbered IRM 20.2.7.6.5.1.
IRM 20.2.7.7.5.2 Renumbered IRM 20.2.7.6.5.2.
IRM 20.2.7.7.5.3 Renumbered IRM 20.2.7.6.5.3.
IRM 20.2.7.7.6 Renumbered IRM 20.2.7.6.6.
IRM 20.2.7.8 Renumbered IRM 20.2.7.7.
IRM 20.2.7.8.1 Renumbered IRM 20.2.7.7.1 and expanded the "if and then" combat zone table with additional scenarios.
IRM 20.2.7.8.2 Renumbered IRM 20.2.7.7.2.
IRM 20.2.7.8.3 Renumbered IRM 20.2.7.7.3.
IRM 20.2.7.8.4 Renumbered IRM 20.2.7.7.4.
IRM 20.2.7.9 Renumbered IRM 20.2.7.8.
IRM 20.2.7.10 Renumbered IRM 20.2.7.9.
IRM 20.2.7.10.1 Renumbered IRM 20.2.7.9.1.
IRM 20.2.7.10.2 Renumbered IRM 20.2.7.9.2.
IRM 20.2.7.11 Incorporated text from IRM 20.2.7.1 and added the reasons why criminal restitution and Affordable Care Act claims are not entitled to interest abatement.
IRM 20.2.7.11.1 Renumbered IRM 20.2.7.10 and modified title.
IRM 20.2.7.11.2 Renumbered IRM 20.2.7.4.3 and modified title.
IRM 20.2.7.12 Renumbered IRM 20.2.7.11.
IRM 20.2.7.13 Renumbered IRM 20.2.7.12 and corrected reference to the office where taxpayers should send interest abatement appeal requests.
IRM 20.2.7.14 Renumbered IRM 20.2.7.13.

Effect on Other Documents

This material supersedes IRM 20.2.7, dated 03/09/2010.

Audience

This IRM is intended for use by all employees that work with interest.

Effective Date

(05-09-2014)


Brad Bouton
Director, Exam Policy
Small Business/Self-Employed

20.2.7.1  (05-09-2014)
Abatement and Suspension of Debit Interest Overview

  1. In accordance with IRC 6601(a) and IRC 6601(b), the payment of interest is required unless specific provisions apply that allow the IRS to limit interest. Some established interest abatement or suspension provisions require that all interest on any balance due be suspended during a certain period of time, while others may apply to only part of the balance due. This is an overview of the most common types of interest abatement and suspension provisions, the applicable code sections, and IRM guidance.

  2. Interest abatement and suspension provisions that may affect either all or part of the balance due are described as follows:

    1. Non-compute Returns per IRC 6014: Allows an abatement of interest from the normal due date until 30 days after the first notice and demand of the amount determined by the Secretary as payable. This suspension applies only to the amount stated on the notice and demand. See IRC 6151(b) and IRM 20.2.7.3.2.

    2. Employment Tax Returns per IRC 6205: Allows an underpayment interest-free period from the original due date until the received date of the adjusted return or agreement. See IRM 20.2.12.2, Underpayment Adjustments.

    3. Not Legally Due per IRC 6404(a): Allows the abatement of interest that is excessive, assessed after the statute of limitations, or is illegally or erroneously assessed. See IRM 20.2.7.2.

    4. Errors on IRS Prepared Returns per IRC 6404(d): Allows an abatement of interest attributable to certain math errors caused by the IRS from the normal due date until 30 days after the first notice and demand has been issued. See IRM 20.2.7.3.1.

    5. Ministerial and Managerial Acts per IRC 6404(e)(1): Allows an abatement of interest for unreasonable errors and delays caused by IRS in performing a ministerial or managerial act. See IRM 20.2.7.4.

    6. Erroneous Refunds per IRC 6404(e)(2): Allows an abatement of interest on the repayment of an erroneous refund if a taxpayer (or a related party) did not in any way contribute to the erroneous refund, and the erroneous refund is not more than $50,000. See IRM 20.2.7.6.

    7. Failure to Timely Contact Taxpayer per IRC 6404(g): For timely filed Individual income tax returns only, the provision allows a suspension of interest if IRS did not provide the taxpayer a notice or report of proposed changes within 36 (or 18) months from the later of the return due date or return filed date. See IRM 20.2.7.7.

    8. Waiver on Agreed Assessment per IRC 6601(c): Allows a suspension of interest from 30 days after IRS either receives an agreement or the agreement is executed by an IRS official up until the first date of notice and demand, usually the 23C date of the assessment. See IRM 20.2.5.6, Suspension of Interest on Deficiencies.

    9. Payments Made Within Specified Period After Notice and Demand per IRC 6601(e)(3): Payments made within 21 calendar days (10 business days if the amount for which such notice and demand is made equals or exceeds $100,000) ≡ ≡ ≡ ≡ ≡ ≡ ≡ of a notice and demand for payment are entitled to an underpayment interest-free period up to the amount of the payment. See IRM 20.2.5.4, Notice and Demand and Debit Interest.

    10. Bankruptcies: In the event interest was not systemically suspended for bankruptcy cases, taxpayers may request interest abatement on Form 843, Claim For Refund and Request for Abatement.- See IRM 20.2.11.6, Bankruptcy Code Cases.

  3. Interest suspension provisions affecting the entire balance due are described as follows:

    1. Combat Zone per IRC 7508: Disregards the period from the combat zone entry date to the combat zone exit date plus 180 days plus up to 105 (106 leap year) additional days, depending on the circumstances. See IRM 20.2.7.8.

    2. Military Deferment per Title 50, Appendix section 570 USC: Defers payment of a liability for up to 180 days after release from military service for a qualified taxpayer. See IRM 20.2.7.9.

    3. Disaster Area per IRC 7508A: Postpones the filing of the return, payment of tax liability, or both that is due during a period of a federally declared disaster, terroristic or military action. See IRM 20.2.7.10.

  4. For accounts that qualify for the above provisions, follow the IRM instructions applicable to those provisions to ensure correct application of interest laws. Remember, reasonable cause is never the basis for abating interest.

20.2.7.2  (05-09-2014)
Excessive or Not Legally Due—IRC 6404(a)

  1. IRC 6404(a) is the authority to abate the unpaid portion of any tax or liability, such as interest, that is one of the following:

    • Excessive in amount

    • Assessed after the statutory period of limitations has expired

    • Erroneously or illegally assessed

    However, IRC 6404(b) prohibits taxpayers from requesting an abatement of the assessment of income, estate, or gift taxes.

  2. IRS employees are obligated to correct interest errors discovered on taxpayer accounts without the taxpayer having to file a request. For interest errors, the module does not need to be in zero balance in order to correct the identified interest error.

    Example:

    During review of a restricted interest computation, it was discovered that incorrect payment amounts were used in the interest computation that resulted in an increase in the amount of debit interest owed. The employee can make the correction without the taxpayer having to file a request for abatement.

  3. Listed below are the steps to follow to correct an IRC 6404(a) interest error:

    1. Notify manager of error, and document error on history sheet or by available electronic means.

    2. Prepare applicable adjustment document(s) to correct error.

    3. Secure required approval(s) and signature(s) on adjustment document(s).

    4. Attach documentation of error and interest computation (if applicable) to adjustment document(s).

    5. Access account (command code (CC) TXMODA) to make sure the adjustment(s) posted to the module and corrected the interest on the module.

    For more information on interest errors, see IRM 20.2.11.11, Correction of Interest Computational Errors.

20.2.7.3  (05-09-2014)
Certain Mathematical Errors by IRS Versus Non-Compute Return

  1. There are two separate Internal Revenue Code provisions for interest relief requests that have the same interest relief period. Provisions apply only to corrections made to the original tax. Interest relief does not apply to subsequent tax adjustments resulting from an amended return or an examination.

20.2.7.3.1  (05-09-2014)
Math Error by IRS-IRC 6404(d)

  1. IRC 6404(d) grants authority to the IRS to abate assessed interest due to a "mathematical error" on a return prepared by an IRS employee while performing preparation of income tax returns in his or her official capacity or as a voluntary income tax assistance (VITA) volunteer. The taxpayer will receive a notice of math error with the corrected tax increase amount. Payment of the additional tax is not due until 30 days after the date of the math error notice. If the corrected tax is not paid within 30 days from the date of the "math error" notice, then interest starts to accrue from the 30th day after the notice and demand date or the return due date, whichever is later.

  2. A "math error" can be in addition, subtraction, multiplication, or division of items on the prepared return, or there is an item entry inconsistent with another entry on the return. For the definition of mathematical error, see IRC 6213(g)(2).

20.2.7.3.2  (05-09-2014)
Non-Compute Return-IRC 6151(b)

  1. Under IRC 6014, a taxpayer may file a timely return not showing the tax on the return and "elect" to have IRS compute the tax for the filed return. Since the IRS is computing the tax, the taxpayer cannot satisfy his liability at the time of filing. IRC 6151(b) provides that the amount determined by the Secretary as payable is due within 30 days after the mailing of the notice and demand showing the IRS computed the tax. If the taxpayer does not fully pay the IRS computed tax within 30 days of the date of the notice and demand, interest starts to accrue from 30 days after the notice and demand date or return due date, whichever is later.

  2. In the "non-compute code" field on a transcript of account (CC TXMODA), a "4" indicator is a return prepared by an IRS employee in the course of his or her duty, and a "1" indicator is the IRS computed tax.

20.2.7.4  (05-09-2014)
Unreasonable Error or Delay in Performing a Ministerial or Managerial Act-IRC 6404(e)(1)

  1. IRC 6404(e)(1) gives the IRS discretion to abate interest on an underpayment where an IRS employee caused an unreasonable delay or error and the taxpayer (or representative) did not in any way contribute to the delay or error. IRC 6404(e)(1) does not apply to employment taxes.

  2. A "ministerial act" is a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs while a taxpayer's case is pending after all prerequisites to the act, such as conferences and reviews by supervisors, have taken place.

    Example:

    An audit selection letter is sent to the taxpayer's old address and then forwarded to the new address. In response to the letter, the taxpayer notifies the IRS of the new address and requests a transfer of the audit to an office closer to the new address. The manager approves the transfer request. The IRS, in its discretion, may abate interest attributable to any unreasonable delay in transferring the case.

  3. A "managerial act" is an administrative act that occurs while processing a taxpayer's case. It may be the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel.

    Example:

    The manager approves the transfer of the case, but the clerk misplaces the case file. The "misplacing of the case file" is a managerial act. The IRS, in its discretion, may abate interest attributable to any unreasonable delay caused by the misplacement of the case file.

    Caution:

    A decision concerning the proper application of federal tax law is not a managerial act, nor is it a ministerial act. See Treas. Reg. 301.6404-2.

  4. Under IRC 6404(e)(1), the IRS may abate the amount of interest that accrues during the period in which the unreasonable error or delay occurred. The provision applies only when an unreasonable error or delay occurred after the date the IRS contacts the taxpayer in writing with respect to an audit deficiency or payment. Do not abate interest accruing from the return due date up to the date when the IRS first contacts the taxpayer.

    Example:

    Taxpayer files a 2006 balance due income tax return. An audit resulted in additional liability (tax and penalty), and there was an unreasonable error (or delay) during the audit. Consider only the interest accruing on the audit liability (additional tax and penalty) for abatement due to the unreasonable error (or delay) and not interest on the underpaid original liability.

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  6. TEFRA/Partnerships-IRC 6404(e)(1) applies to partnership/TEFRA examinations:

    1. If the interest abatement request alleges that an unreasonable error or delay occurred during the examination of a partnership return and the ministerial or managerial act criteria applies, then the determination may be applicable to "every partner."

    2. If the interest abatement request alleges that an unreasonable error or delay occurred after the close of a partnership examination, apply the ministerial or managerial act criteria to each partner's interest abatement request and determine allowance on a "case by case basis."

  7. All IRS employees are responsible for identifying significant errors or delays associated with the ministerial and managerial acts that occur during work in progress. Employees are obligated to report unreasonable errors or delays to their manager.

20.2.7.4.1  (05-09-2014)
IRC 6404(e)(1) Criteria

  1. The following criteria must be met for an interest abatement request to qualify for unreasonable error or delay under IRC 6404(e)(1):

    1. The statutory period of limitations to file a claim per IRC 6511 is open.

    2. The request is for tax years beginning after December 31, 1978.

    3. The request relates to interest on taxes described in IRC 6212(a); e.g., income, estate, gift, certain excise taxes (employment taxes are specifically excluded).

    4. An unreasonable error or delay occurred in relation to the performance of a ministerial or managerial act.

    5. The error or delay occurred after the taxpayer was contacted in writing with respect to the examination, underpayment, or payment.

    6. The taxpayer or representative did not contribute to the error or delay.

    An interest abatement request under IRC 6404(e)(1) not meeting all of the above criteria is automatically disallowed by law.

20.2.7.4.2  (05-09-2014)
IRC 6404(e)(1) Delegation of Authority

  1. Authority delegated to certain individuals to authorize abatement of interest from an unreasonable error or delay caused by the IRS in the performance of a ministerial or managerial act is found in IRM 1.2.51.2, Delegation Order 20-1, (Rev. 2, formerly DO-228, Rev. 3). The delegation order provides certain managers the authority to disallow interest abatement requests. Interest abatement coordinators may issue the notice of final determination on interest abatement requests that are automatically disallowed by law.

  2. Prior to July 30, 1996, IRC 6404(e)(1) addressed only interest abatement requests due to ministerial acts. A taxpayer’s case misplaced during an examination did not qualify for interest relief under IRC 6404(e)(1) because it was a managerial act.

  3. For returns due after July 30, 1996, IRC 6404(e)(1) was amended to include both ministerial and managerial acts and redefined "the IRS error or delay" to be unreasonable.

20.2.7.4.3  (05-09-2014)
Disallowance Correspondence

  1. Use the appropriate letter to communicate the result of the interest abatement determination with the taxpayer. If you are going to disallow the request, make sure to use a disallowance letter with appeal rights. If the taxpayer does not agree or appeals the initial disallowance determination, then issue a notice of final determination by certified mail. Interest abatement coordinators (IACs) should use Letter 3180, Notice of Final Determination Letter for Full Disallowance of Interest Abatement Claim, (campus use Letter 3180-C, Notice of Final Determination Letter for Full Disallowance of Interest Abatement Claim), or Letter 3181, Notice of Final Determination Letter for Partial Disallowance of Interest Abatement Claim, (campus uses Letter 3181-C, Notice of Final Determination Letter for Partial Disallowance of Interest Abatement Claim).

20.2.7.5  (05-09-2014)
Interest Abatement Coordinator (IAC)

  1. An interest abatement coordinator (IAC) is someone whose duty (as assigned by area or function) is to review the facts and circumstances of an interest abatement request and render a decision based on those facts. An IAC's duties vary throughout the IRS and may include some of the following activities:

    1. Maintain inventory controls (manual or electronic).

    2. Review interest abatement requests and make preliminary determinations.

    3. Request necessary documentation, which may include securing the case file.

    4. Work interest abatement requests relating to IRC 6404(e)(1).

    5. Identify the dates (from and to) where interest should be abated or suspended.

    6. Secure approval of a proposed decision following the operating division's established guidelines.

    7. Communicate the decision to the taxpayer using appropriate correspondence.

    8. Confirm the correctness and completion of the adjustments.

    9. Provide status updates upon request.

  2. lACs issue determinations for requests made pursuant to IRC 6404(e)(1), which determinations are then approved by a delegated authority identified in Delegation Order 20-1. IACs issue notice of final determinations on interest abatement requests that are automatically disallowed by law. For example, a request for abatement of interest on an employment tax liability, or an interest abatement for tax year 1978 or prior are automatically disallowed by law.

  3. Taxpayers who disagree with the interest charges must contact the person whose name and contact information is printed on the last notice or correspondence received from the IRS, not the IAC. A listing of IACs can be found on the Office of Servicewide Interest web page. These IACs only work IRC 6404(e)(1) interest abatement requests received by the campuses.

    Reminder:

    IAC contact information is for internal use only.

20.2.7.6  (05-09-2014)
Erroneous Refunds-IRC 6404(e)(2)

  1. Generally, interest is assessed on an erroneous refund recoverable by suit from the refund date to the repayment date. See IRC 6532(b), IRC 6602, and IRC 7405. IRC 6404(e)(2) requires the abatement of interest charged from the refund date to the date of demand for repayment if that refund is $50,000 or less and the taxpayer (or a related party) did not in any way cause the erroneous refund.

  2. For erroneous refunds greater than $50,000, the abatement of interest under IRC 6404(e)(2) is not required but may be allowed on a case by case basis.

  3. The IRS has discretionary authority to abate interest on erroneous refunds that exceed $50,000. The erroneous refund function (or function working the erroneous refund case) should consult, through managerial channels, with counsel. Employees making the determination on the erroneous refund should consider the following facts and circumstances:

    1. Did the taxpayer (or representative) cause or contribute to the error or delay?

    2. Did the taxpayer (or representative) fail to return the erroneous refund for a significant period of time after discovery of the error or after the taxpayer (or representative) reasonably should have discovered the error?

    3. Did the taxpayer (or representative) return the erroneous refund before the IRS notified the taxpayer of the error?

    4. Is the taxpayer (or representative) sophisticated in tax or business matters?

  4. IRC 6404(e)(2) does not authorize the abatement of interest accruing from the date of demand to the repayment date, but interest may be suspended under a different interest provision. See IRC 6601(e)(3) and IRM 20.2.5.4, Notice and Demand and Debit Interest. A repayment received within 21 calendar (or 10 business days if the amount for which such notice and demand is made equals or exceeds $100,000) days from the erroneous refund demand date must post with a Transaction Code (TC) 720 in order for Master File to correctly suspend interest from the date of demand to the repayment date.

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  6. For more information on erroneous refund processes and procedures, refer to the following manuals:

    • IRM 3.17.80, Working and Monitoring Category D, Erroneous Refund Cases in Accounting Operations

    • IRM 21.4.5, Erroneous Refunds

20.2.7.6.1  (05-09-2014)
IRC 6404(e)(2) Delegation of Authority

  1. Delegation Order 30-6 (formerly known as Delegation Order 231 (Rev. 4)) was consolidated with Delegation Order 20-1 (Rev. 1) as Delegation Order 20-1 (Rev. 2), IRM 1.2.51.2, signed on October 25, 2012.

  2. Authority delegated to certain IRS employees to abate interest on erroneous refunds of $50,000 or less is in paragraphs 14 through 16 of Delegation Order 20-1 (Rev. 2).

20.2.7.7  (05-09-2014)
IRC 6404(g) Interest Suspension

  1. IRC 6404(g) suspends interest if, as a result of an examination, the IRS fails to timely provide the taxpayer adequate notice of liability and the basis for the liability. The IRS has 36 months (or 18 months in certain cases) from the return due date or return filed date (with regard to extensions), whichever is later, to notify the taxpayer of the additional liability without suspending interest. The IRC 6404(g) interest suspension applies only to timely filed individual income tax returns for taxable years ending after July 22, 1998.

  2. The IRC 6404(g) interest suspension applies to an increase in liability for any taxes reportable on a Form 1040, U.S. Individual Income Tax Return, and therefore would apply to an individual's liability as a result of an adjustment to a flow-through entity or Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) adjustment. If it is determined that a carryback allowance (tentative carryback refunds (TENT) or restricted interest carryback claims (RINT)) was excessive, no suspension under IRC 6404(g) is allowed when the excessive amount is reassessed (including, if applicable, its associated interest and penalty charges).

    1. TENT: Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund

    2. RINT: Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended Corporation Income Tax Return

  3. Section 8242 of the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA), extended the notification period for IRC 6404(g) to 36 months for notices issued after November 25, 2007. See IRM 20.2.7.7.3 for examples of how to determine a 36-month (or 18-month) notification period.

  4. Rev. Rul. 2005-4, 2005-4 IRB 366, extended IRC 6404(g) interest suspension rules to amended returns (or signed correspondence) received on or before December 21, 2005. The start of the 18-month period applicable for amended returns is the return due date or return filed date of the original tax return. If a taxable amended return is received after 18 months from the original return due date (or filed date), interest on the amended return liability is suspended 18 months after the original return due date up through 21 days after receipt of the amended return.

  5. Section 303(b) of the Gulf Opportunity Zone Act of 2005 (GOZA), changed the notification period start date for amended returns received after December 21, 2005. For amended returns received after December 21, 2005, the 18-month notification period began on the date the IRS received the amended return. Therefore, amended returns received after this date no longer qualify for IRC 6404(g) interest suspension because "receipt" of the amended return is the start of the 18-month notification period, and the amended return itself is the "6404(g) notice."

    Example:

    A taxpayer timely filed Form 1040 for 200312. The IRS received an amended return on April 17, 2006. The 18-month period started on April 17, 2006, which is the same date "notice" (Form 1040X) was provided. The IRC 6404(g) interest suspension does not apply.

20.2.7.7.1  (05-09-2014)
Undisclosed Reportable and Listed Transactions

  1. Section 903 of the American Jobs Creation Act of 2004 (AJCA) eliminated IRC 6404(g) interest suspension for interest accruing after October 3, 2004, on listed transactions and undisclosed reportable transactions. The following year, section 303(a) of the Gulf Opportunity Zone Act (GOZA) included an off-Code provision that retroactively repealed interest suspension for the same group of taxpayers, including interest accruing on or before October 3, 2004. Retroactive repeal of IRC 6404(g) interest suspension under GOZA will not apply if the taxpayer qualified for one of the following exceptions:

    1. If, as of January 23, 2006, the taxpayer participated in the IRS Settlement Initiative, Announcement 2005-80 (Global Settlement Initiative), or signed a settlement agreement (Form 906, Closing Agreement on Final Determination Covering Specific Matters) for the specific transaction.

    2. The Secretary of the Treasury or the Secretary's delegate may grant interest suspension if the taxpayer acted reasonably and in good faith.

    3. If, as of December 14, 2005, the assessment statute expiration date (ASED) for the tax year had expired, or the taxpayer had already signed a closing agreement (Form 906) regarding the transaction.

  2. The following two "if and then" tables will help determine whether IRC 6404(g) is applicable. Table 1 explains the IRC 6404(g) interest suspension rules for taxpayers who participated in listed transactions (as defined in IRC 6707A(c)). Table 2 explains the IRC 6404(g) interest suspension rules for taxpayers who participated in undisclosed reportable transactions (as defined in IRC 6664(d)(3)(A)) and transactions referred to as "neither" transactions, which are defined as "not a listed or undisclosed transaction."

    Table 1-Listed Transactions

    If and Then
    A taxpayer participated in a listed transaction qualified for one of the exceptions noted in IRM 20.2.7.7.1 Allow an interest suspension up to 10/03/2004. See IRM 20.2.7.7.1.2 or IRM 20.2.7.7.1.3 for those authorized to grant the "good faith exception."
    A taxpayer participated in a listed transaction did not qualify for any exception noted in IRM 20.2.7.7.1 IRC 6404(g) does not apply.

    Table 2-Reportable or Neither Transactions

    If and Then
    A taxpayer participated in a reportable transaction the tax year is 2002 or prior Allow IRC 6404(g) interest suspension.
    A taxpayer participated in an undisclosed reportable transaction the tax year is 2003 and subsequent Do not allow IRC 6404(g) interest suspension unless the taxpayer qualified for one of the exceptions noted in IRM 20.2.7.7.1.
    A taxpayer participated in a neither transaction for any tax year Allow IRC 6404(g) interest suspension.

20.2.7.7.1.1  (05-09-2014)
Good Faith Exception

  1. The retroactive repeal of the interest suspension affected "listed transaction taxpayers" that did not participate in the Global Settlement Initiative and did not sign a Form 906 by January 23, 2006. "Listed transaction taxpayers" who, through no fault of their own, were unable to sign Form 906 by the cut-off date of January 23, 2006, may be eligible for the good faith exception. The American Job Creation Act (AJCA) of 2004 limited IRC 6404(g) interest suspension up through October 3, 2004.

  2. A taxpayer's conduct during the examination, including withdrawal from settlement negotiations and involvement in the transaction, will be considered when determining eligibility for the good faith exception. Forward any post-assessment interest abatement request(s) citing the good faith exception to Exam Technical Services. See Treas. Reg. 301.6404-4 for examples of taxpayers acting reasonably and in good faith.

20.2.7.7.1.2  (05-09-2014)
Post-Assessment Good Faith Claims

  1. IRM 1.2.51.3, Delegation Order 20-2, lists IRS employees with the authority to grant the good faith exception on post-assessment (interest assessed) cases. IACs in Exam Technical Services, Small Business/Self Employed (SB/SE), may grant the good faith exception for assessed interest of less than $100,000 per tax year. For assessed interest of $100,000 or more, Exam Technical Services Manager (SB/SE) and the Director of Field Operations in Large Business and International (LB&I), have the authority to grant the good faith exception.

20.2.7.7.1.3  (05-09-2014)
Pre-Assessment Good Faith Exception

  1. During an open examination (or on pre-assessed interest), the Exam Area Director (SB/SE) and Director of Field Operations (LB&I) have the authority to grant interest suspension under IRC 6404(g) on certain listed transactions where the taxpayer has acted reasonably and in good faith. Documentation (e.g., memo, e-mail or 6404(g) lead sheet) of the Director's concurrence to the good faith provision must be included in workpapers. Director’s approval is required only if the good faith exception is allowed.

20.2.7.7.2  (03-09-2010)
Exclusion From IRC 6404(g) Interest Suspension

  1. Interest suspension under IRC 6404(g) does not apply to the following situations:

    1. Any penalty imposed by IRC 6651.

    2. Any interest, penalty, addition to tax, or additional amount in a case involving fraud.

    3. Any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return.

    4. Any interest, penalty, addition to tax, or additional amount with respect to any gross misstatement (applicable to taxable years beginning after December 31, 2003).

    5. Any interest, penalty, addition to tax, or additional amount with respect to an undisclosed reportable transaction (for which the requirement of IRC 6664(d)(3)(A) is not met) and any listed transaction, as defined in IRC 6707A(c). When researching IRC 6404(g), the citation refers to IRC 6664(d)(2)(A) which Congress has renumbered to IRC 6664(d)(3)(A).

    6. Any criminal penalty.

  2. A gross misstatement is defined as follows:

    1. A substantial omission of income as described in IRC 6501(e)(1) or IRC 6229(c)(2).

    2. A gross valuation misstatement within the meaning of IRC 6662(h).

    3. Misstatement to which the penalty under IRC 6702(a) applies.

20.2.7.7.3  (05-09-2014)
Notification Period (36 or 18 Months)

  1. The IRS has 36 months (or 18 months in certain cases) to notify the taxpayer of an additional liability and the basis for the liability interest continues to accrue. The 36 months (or 18 months) starts on the later of these dates:

    • The due date of the return if filed on or before the return due date (without regard to extensions), or

    • The filing date of the return if filed timely under a valid extension.

  2. When determining which notification period to use (36 months or 18 months), add 18 months to the return due date or return filed date of the tax module you are working with, and then follow the instructions in either (a) or (b):

    1. If the end of the 18 months falls on or before November 25, 2007, the IRS has 18 months to notify the taxpayer of the additional liability without suspending interest.

    2. If the end of the 18 months falls after November 25, 2007, the IRS has 36 months to notify the taxpayer of the additional liability without suspending interest.

  3. The following "if and then" table explains how to identify the beginning day of the 36 months (or 18 months) period.

    If Then
    The tax return is received on or before the return due date (04/15 for calendar year filer) Use the return due date (04/15).
    The tax return is postmarked on the next business day because 04/15 (or 10/15) is a weekend or legal holiday Use the postmarked date (example 04/16, 04/17, or 10/16).
    There is an extension to file (10/15) and the tax return is received before the extended due date Use the return received date (example 06/22, 08/07) on the transcript (command codes TXMODA or IMFOLT).
    The postmark date (04/21) is after the return due date and there is no extension to file The return is delinquent and does not qualify for the IRC 6404(g) interest suspension.
  4. Once you have determined which notification period (36 or 18 months) applies to the tax module, the next action is to identify the end date of the notification period. At the suggestion of Chief Counsel, the "months" in the 36 (or 18) month notification period is calculated as "36 (or 18) months minus 1 day."

    1. If the 18 months minus 1 day falls on a Saturday, Sunday, or legal holiday, the next business day becomes the "end date" of the 18-month period, or

    2. If the 36 months minus 1 day falls on a Saturday, Sunday, or legal holiday, the next business day becomes the "end date" of the 36-month period.

    Example:

    A 200012 original tax return is filed on or before the return due date. The 18-month period "starts" on the return due date, April 15, 2001, and "ends" on Tuesday, October 15, 2002. For this scenario, the close of the 18-month period is October 14, 2002, a legal holiday; therefore, the next business day is the 18-month period end date. The 18 months ended before November 25, 2007, and if the IRS did not provide notice by October 15, 2002, interest is suspended the day after the end of the 18 months.

    Example:

    A 200212 original tax return (with an approved 4 month extension) is received by the IRS on June 19, 2003. The 18-month period "starts" on June 19, 2003, and "ends" on Monday, December 20, 2004. For this scenario, the close of the 18-month period is Saturday, December 18, 2004; therefore the next business day is the 18-month period end date. The 18 months ended before November 25, 2007, and if the IRS did not provide notice by December 20, 2004, interest is suspended after the end of the 18 months.

    Example:

    A 200512 original tax return is filed by the return due date. The 18 months is from April 17, 2006, through October 16, 2007. For this scenario, the 18 months ended before November 25, 2007, and if the IRS did not provide notice by October 16, 2007, interest is suspended the day after the end of the 18 months.

    Example:

    A 200512 original tax return (with an approved 6 month extension) is filed by October 16, 2006, and 18 months from this date is April 15, 2008. Since April 15, 2008, is after November 25, 2007, the IRS has 36 months from the return filed date to notify the taxpayer of the additional liability.

    Example:

    A 200612 return is filed by April 17, 2007. The 18-month period is still open as of November 25, 2007; therefore, the IRS will have 36 months from April 17, 2007, to notify the taxpayer of an additional liability without suspending interest.

    Reminder:

    Interest accrues during the 36-month (or 18-month) notification period for IRC 6404(g) purposes.

20.2.7.7.4  (05-09-2014)
Interest Suspension Period

  1. The "interest suspension period" is the length of time the IRS must suspend interest for untimely notifying the taxpayer of an additional liability. Interest, penalties, additions to tax, and additional amounts, as shown on the examination changes report (or amended returns provided to the IRS before December 21, 2005) are suspended starting the day after the 36-month (or 18-month) period end date.

  2. The IRC 6404(g) interest suspension period ends 21 calendar days after the "6404(g) notice" date or the received date of the amended return/correspondence (provided to the IRS before December 21, 2005). Interest resumes the 22nd day after the 6404(g) notice date. Here are examples of interest suspension periods:

    Example:

    A 199812 tax return is filed on April 15, 1999. An examination changes report, Form 4549, Income Tax Examination Changes, with Form 886-A, Explanation of Items, was issued to the taxpayer on September 6, 2001. Interest suspension starts on October 17, 2000, and ends September 27, 2001. Interest resumes September 28, 2001.

    Example:

    A 200012 tax return is filed on April 15, 2001. Form 1040X, Amended U.S. Individual Income Tax Return, is received on March 1, 2004. Interest suspension starts on October 16, 2002, and ends March 22, 2004. Interest resumes March 23, 2004.

    Example:

    A 200212 tax return was received June 19, 2003, with a valid extension of time to file by August 15, 2003. On December 2, 2005, the IRS sends the taxpayer an examination changes report, Form 4549, with Form 886-A. Interest suspension starts on December 21, 2004, and ends December 23, 2005. Interest resumes December 24, 2005.

20.2.7.7.5  (05-09-2014)
IRC 6404(g) Notice

  1. A notice for IRC 6404(g) purposes must be in writing and contain adequate information, as it relates to the proposed examination liability, in the event the taxpayer wants to challenge the adjustment. The notice requirement applies separately to each item or adjustment. An adequate IRC 6404(g) notice provided within the prescribed time period (18 or 36 months) prevents the suspension of interest only on those items or adjustments described in that notice.

  2. In general, the following list describes the documents that are considered adequate notice for purposes of IRC 6404(g):

    1. Math error notice.

    2. Underreporter program notice.

    3. Notice of final partnership administrative adjustment (FPAA) containing specific information about the basis for the adjustments to partnership items.

    4. Form 4549 report with Form 886-A, See IRM 4.10.8, Report Writing.

    5. 60-day letter or FPAA with Form 4605-A, Examination Changes-Partnerships, Fiduciaries, S Corporations and Interest Charge Domestic International. Sales Corporation (Unagreed and Excepted Agreed) and Form 886-S, Partners' Share of Income, Deduction, and Credits. See IRM 4.31.2, TEFRA Examinations-Field Office Procedures.

    6. CP 2000 notice.

    7. Amended return or signed taxpayer correspondence (provided to the IRS before December 21, 2005).

  3. For Examination, an explanation of each item of adjustment using one of the following methods provides adequate notice:

    • Standard paragraphs in IRM 4.10.10, Standard Paragraphs and Explanation of Adjustments, or customized paragraphs created by examiners to explain the adjustment;

    • Form 886-A, which references each adjustment and gives the reason(s) for each adjustment; or

    • Copies of examination work papers that reference each adjustment and explains each item of adjustment and the basis for the adjustment.

20.2.7.7.5.1  (05-09-2014)
Multiple IRC 6404(g) Notices

  1. An examiner may issue more than one report for a tax return during the course of an examination. If a subsequent report does not contain new items or adjustments, there is only one IRC 6404(g) notice date.

    Example:

    A 199812 tax return is filed on April 15, 1999. The examiner issued Form 4549 on December 1, 2000, with a liability of $4,000 due to a disallowed deduction for charitable contributions. The taxpayer provides proof for part of the deductions. The examiner revised and issued a report with a liability of $2,500 on February 6, 2001. For this example, since the revised report does not contain new items/adjustments, the IRC 6404(g) notice date is December 1, 2000, and interest resumes December 23, 2000.

  2. If a subsequent report contains new items or adjustments, there are separate IRC 6404(g) notice dates, so interest must be manually computed.

    Example:

    A 199812 tax return is filed on April 15, 1999. Automated Underreporter (AUR) generated a CP 2000 notice on December 1, 2000, attributable to omission of interest income which resulted in a tax liability of $4,000. The audit was later transferred to the field and Form 4549 was issued on May 31, 2001, with a tax liability of $6,000 based on the omission of interest income and disallowed charitable contributions. For this example, the IRC 6404(g) notice dates are December 1, 2000, for the liability of $4,000 and May 31, 2001, for the additional liability of $2,000. Interest resumes on the $4,000 liability from December 23, 2000, and on the $2,000 liability from June 22, 2001.

  3. An amended return provided to the IRS before December 21, 2005, and an examination report issued for the same tax year but with different issues, qualify as separate notices for IRC 6404(g) purposes. Both notices (Form 1040X and the examination report) were issued after the "18-month period," so the liability and basis on both notices are subject to the IRC 6404(g) interest suspension. Interest on the liability and basis shown on each notice resumes on different dates.

    Example:

    A 199912 tax return is filed on April 15, 2000. The IRS received a Form 1040X on May 3, 2002, with a liability of $998, due to unreported income. An examination report was issued on January 10, 2003, with a liability of $6,908 and an accuracy related penalty of $1,382, due to disallowed Schedule A and Schedule C deductions. For the Form 1040X liability of $998, interest resumes on May 25, 2002, and for the examination report liability of $8,290, interest resumes on February 1, 2003.

20.2.7.7.5.2  (03-09-2010)
Recording IRC 6404(g) Notice Date

  1. Examiners must notate "IRC 6404(g) does not apply" or "IRC 6404(g) does apply" and the date notice was provided on Form 3198, Special Handling Notice for Examination Case Processing, (or equivalent) and on the income tax examination changes reports are as follows:

    1. Form 4549 in the "other information" section of the report. See IRM 4.10.8, Report Writing.

    2. Form 4605-A in the "remarks" section of the report. See IRM 4.31.6, Non-TEFRA Examinations-CTF Procedures.

  2. The following "if and then" table provides instructions on which date the examiner will record as the IRC 6404(g) notice date.

    If the notice was Then the IRC 6404(g) notice date is
    Hand-carried to the taxpayer/representative The date the notice was given to the taxpayer/representative.
    Sent by regular mail to the last known address The date of mailing the notice.
    Sent certified by United States Postal Service (USPS) The date of the USPS stamp.
    An amended return The date the amended return was received in the IRS office/campus.*

    Caution:

    *All amended returns provided to the IRS after December 21, 2005, no longer qualify for IRC 6404(g) interest suspension.

20.2.7.7.5.3  (05-09-2014)
Input of IRC 6404(g) Notice Date on Master File

  1. The IRC 6404(g) notice date is recorded onto IDRS by the input of Transaction Code (TC) 971 and Action Code (AC) 064 onto Master File (MF). Input TC 971 AC 064 only if notification was not made within the 36 (or 18) month period. Do not input TC 971 AC 064 if notice was provided within the 36 (or 18) months as this will adversely affect systemic interest computations on subsequent adjustments.

  2. The IRC 6404(g) notice date is entered in the "TRANS-DT" field of command code FRM77, and the liability amount eligible for IRC 6404(g) interest suspension (e.g., tax, penalties, addition to tax) must be entered in the "FREEZE-RELEASE-AMT" field. If a TC 971 AC 064 was inadvertently input, use TC 972 with AC 064 to reverse it. IDRS and Master File cannot correctly determine an interest suspension period when there is more than one tax increase (TC 29X or TC 30X) on a module, even if the TC 290 or TC 300 is for a zero (.00) amount followed by secondary transactions with money amounts.

  3. The TC 971 AC 064 confirms the untimely issuance of the notice, and starts the systemic interest suspension routine and then stops the routine 21 days from the notice date.

  4. Rev. Rul. 2005-4 was released in January 2005 and extended the IRC 6404(g) interest suspension to taxable amended returns. Therefore, the decision was made to adjust the interest on already processed taxable amended returns instead of requiring taxpayers to file a claim. For taxable amended returns already processed (posted) when Rev. Rul. 2005-4 was released, the following procedure was used to calculate interest on modules that did not already have a prior TC 290 (document locator number Blocking Series 500-519, 550-589, 600-619, 650-679), or a TC 30X:

    • The received date of the amended return was entered in the "AMD-CLMS-DT" field of CC ADJ54.

    • The received date of the amended return was also entered as the IRC 6404(g) notice date with TC 971 AC 064.

    • The Master File program then calculated interest factoring in the applicable suspension period based upon the amended claims date and TC 971 AC 064 showing the same date.

20.2.7.7.6  (05-09-2014)
IRC 6404(g) Interest Computation

  1. Interest is systemically computed when there is only one IRC 6404(g) notice date and the module is not restricted. The example below will illustrate the systemic IRC 6404(g) interest suspension routine.

    Example:

    A 199812 tax return is filed on April 15, 1999. The IRS sent an examination changes report on December 1, 2000, showing a liability of $4,000 due to disallowed charitable contributions.

    1. Interest computed on the liability of $4,000 from 04/15/1999 to 10/16/2000 is $536.21. The close of the 18-month period (10/14/2000) was a Saturday, so the next business day is the 18-month end date.

    2. Interest is suspended on $4,536.21 (tax and interest up to 10/16/2000) from 10/17/2000 (day after the 18-month end date) to 12/22/2000 (21 calendar days after the IRC 6404(g) notice date).

    3. Interest resumes on $4,536.21 from 12/23/2000 to the applicable interest stop date (waiver plus 30 days, 23C date, or payment date, whichever is earlier). Refer to IRM 20.2.5, Interest on Underpayment, for debit interest stop dates.

  2. Master File and IDRS cannot correctly compute underpayment interest with an IRC 6404(g) interest suspension when there is more than one TC 29X or TC 30X adjustment on the module, even if it is for a zero amount. A TC 290 or TC 300 for a zero amount, with an accompanying penalty adjustment or change in refundable credits, is considered an adjustment. Interest must be manually computed and restricted in these instances. If not, the adjustment will unpost with Unpostable Code 155, Reason Code 1 (reactivated 07/01/2009).

    Example:

    A 199812 tax return is filed on April 15, 1999. AUR generated a CP 2000 on December 1, 2000, due to the omission of interest income resulting in a tax liability of $4,000. The case is transferred to the field office. Once in the field, an examination report, which included the omission of interest income plus disallowed contributions, was issued on May 31, 2001, with a tax liability of $6,000. The taxpayer paid in full on July 27, 2001.

    Note: To illustrate the interest routine that occurs when there are multiple IRC 6404(g) notices, we must separate the liabilities according to their notice dates.

    Interest computed on the liability from the first IRC 6404(g) notice (CP 2000) is computed as follows:

    • 04/15/1999 to 10/16/2000 on $4,000 = $536.21

    • 10/17/2000 to 12/22/2000 on $4,536.21 = .00 (suspend interest)

    • 12/23/2000 to 07/27/2001 on $4,536.21 = $230.30 (resume interest)

    Interest computed on the liability from the second IRC 6404(g) notice (examination report) is computed as follows:

    • 04/15/1999 to 10/16/2000 on $2,000 = $268.10

    • 10/17/2000 to 06/21/2001 on $2,268.10 = .00 (suspend interest)

    • 06/22/2001 to 07/27/2001 on $2,268.10 = $16.28

    The total tax liability is $6,000 with interest (TC 340 or non-restricting TC 340) of $1,050.89.

  3. A 6404(g) Recovery Project (identified with TC 971 AC 199) was conducted to allow the IRC 6404(g) interest suspension on amended return (Rev. Rul. 2005-4) adjustments (not AUR or Exam) that posted to Master File on or before January 7, 2005. Due to the impacted volume of cases, an interest program was developed to systemically compute the correct amount of interest due. Systemic computation of interest for the 6404(g) Recovery Project followed the above computations, with one exception:

    The interest suspension period ended 21 calendar days after the 23C date of an amended return adjustment (23C date of TC 290). For example: Taxpayer Z, with a TC 290 posting date of 12/30/2004 (23C date), would have an interest suspension end date of 01/20/2005. The difference between the posted interest and the systemically computed interest was abated (or assessed via CC ADJ54 by employees in the Andover and Memphis campuses). Although these interest adjustments posted with Document Code 54, they are treated as a systemic action. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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  5. Interest suspension on listed transactions and undisclosed reportable transactions ended on 10/03/2004 under section 903 of the American Jobs Creation Act of 2004, so the accrual of interest on these cases resumed on 10/04/2004. Examiners must correctly flag the portion of the liability attributed to undisclosed reportable/listed transactions on Form 3198 before sending the cases to Centralized Case Processing to close.

20.2.7.8  (05-09-2014)
Combat Zone-IRC 7508

  1. IRC 7508 prescribes a period of time to disregard when determining the liability of individuals who serve in a combat zone (CZ). Disregard interest accrual during the time period a taxpayer is located in one of the following:

    1. An area designated as a combat zone.

    2. A contingency operation designated by the Department of Defense (DOD).

    3. A qualified hazardous duty area as defined by Congress.

    4. Direct support of military operations in a combat zone certified by the DOD.

  2. A Master File (MF)-C freeze on a module indicates a combat zone participant. The MF-C freeze remains on the account even after the taxpayer is no longer active in a CZ. When working an account that contains a MF-C freeze, additional research is required to determine the taxpayer's CZ status.

  3. If the combat indicator is "1," then the taxpayer is still serving in a combat zone. Any compliance activity such as assessing or collecting tax is prohibited. However, if the taxpayer has other issues or requests information, you may work these other issues and contact the taxpayer, if needed. If the combat indicator is "2," then the taxpayer is no longer a combat zone participant. Refer to your functional area specific IRM when researching or working combat zone cases.

  4. The transaction date of TC 500 with Closing Code 52, 54, or 56 identifies the date the taxpayer entered a CZ, and the transaction date of TC 500 with Closing Code 53, 55, or 57 identifies the date the taxpayer exited a CZ. A current list of combat zone areas can be found on the IRS web page www.irs.gov.

20.2.7.8.1  (05-09-2014)
Time Disregarded by Reason of Combat Zone Service

  1. The "period of time" to disregard because of service in a combat zone (CZ) starts when an individual enters a CZ and ends 180 days after exit from the CZ. Time in a combat zone includes all continuous time spent in a hospital outside the U.S., and up to 5 continuous years spent in a hospital inside the U.S., due to injuries sustained while in a combat zone. If a taxpayer enters or exits a CZ during a 'period of time' to perform certain acts, the CZ suspension period is extended that many more days in order to perform these acts. Certain acts may include, but are not limited to, the filing of a tax return, filing of a claim for refund, or petitioning the Tax Court.

  2. The following "if and then" table provides guidance when determining the number of days to disregard (or exclude) when computing debit interest on a CZ individual income tax module.

    If Then
    Scenario 1-Taxpayer enters CZ after the return due date of tax year with liability Disregard the period from the CZ entry date up to the CZ exit date PLUS 180 days.
    Example: 2009 Form 1040 with liability
    TC 500 04/29/2010 cc 56
    TC 500 08/07/2010 cc 57
    Disregard the period from 04/29/2010 up to 02/03/2011 (180 days after the CZ exit date).
    Example: 2010 Form 1040 with liability
    TC 500 04/29/2010 cc 56
    TC 500 08/07/2010 cc 57
    No CZ relief. The last day of CZ period was 08/07/2010, before the due date of the 2010 tax return.
    Scenario 2-Taxpayer enters CZ any time during the filing period (January 1-April 15 calendar year filer) of tax year with liability Disregard the period from the return due date up through 180 days plus the number of days remaining in the filing period after the CZ entry date.
    Example: 2008 Form 1040 with liability
    TC 500 04/01/2010 cc 56
    TC 500 06/30/2010 cc 57

    Disregard the period from 04/01/2010 up through 12/27/2010. Add 180 days to the CZ exit date.
    Example: 2009 Form 1040 with liability
    TC 500 04/01/2010 cc 56
    TC 500 06/30/2010 cc 57

    Disregard the period from 04/15/2010 (return due date) up through 01/11/2011. When taxpayer entered CZ, there were 15 days left in the 2009 filing period (calendar year filer). Add 180 days plus 15 days to the CZ exit date.
    Example: 2010 Form 1040 with liability
    TC 500 04/01/2010 cc 56
    TC 500 06/30/2010 cc 57
    No CZ relief. The last day of CZ period was 06/30/2010 before the due date of the 2010 tax return.
    Scenario 3-Taxpayer exits CZ any time during the filing period (calendar year filer January 1 through April 15) of the tax year with liability Disregard the period from the return due date up through 180 plus the number of filing period days the taxpayer was in the CZ up to the CZ exit date.
    Example: 2008 Form 1040 with liability
    TC 500 11/10/2009 cc 56
    TC 500 02/28/2010 cc 57
    Disregard the period from 11/10/2009 up to 08/27/2010. Add 180 days to the CZ exit date.
    Example: 2009 Form 1040 with liability
    TC 500 11/10/2009 cc 56
    TC 500 02/28/2010 cc 57
    Disregard the period from 04/15/2010 up to 12/10/2010. Add 180 plus 59 days to the return due date. Taxpayer exits CZ during the 2009 tax year filing period.

    Caution:

    If taxpayer exits CZ any time during the filing season period (calendar year filer January 1 through April 15) of tax year with liability and re-enters CZ any time during the suspension period, each filing season day is credited only once. Thus, the calculation should be from the due date of the return (April 15) plus 180 days plus the number of days of the filing season that the taxpayer was in the CZ.

    Scenario 4-Taxpayer enters and exits CZ during filing period of year with liability Disregard the period from the return due date up through 180 days plus the number of filing period days the taxpayer was in the CZ.
    Example: 2008 Form 1040 with liability
    TC 500 02/01/2010 cc 56
    TC 500 02/28/2010 cc 57
    Disregard the period from 02/01/2010 up to 08/27/2010 (180 days after CZ exit date).
    Example: 2009 Form 1040 with liability
    TC 500 02/01/2010 cc 56
    TC 500 02/28/2010 cc 57
    Disregard the period from 04/15/2010 up to 11/09/2010. Add 180 days plus 28 days (filing period days taxpayer was in CZ) to the return due date.
    Scenario 5-Taxpayer re-enters CZ within 6 months of last CZ exit date Disregard the period from the first CZ entry date or return due date, whichever is later, up through the second CZ exit date plus 180 days plus the number of filing period days taxpayer was in CZ, if any.

    Caution:

    Manual interest computation and restriction required for Scenario 5.

    Example: 2008 Form 1040 with liability
    TC 500 12/01/2009 cc 56
    TC 500 06/08/2010 cc 57
    TC 500 11/29/2010 cc 56
    TC 500 09/06/2011 cc 57
    Add 180 days to the last CZ exit date.
    Disregard the period from 12/01/2009 up to 03/04/2012.
    Example: 2009 Form 1040 with liability
    TC 500 12/01/2009 cc 56
    TC 500 06/08/2010 cc 57
    TC 500 11/29/2010 cc 56
    TC 500 09/06/2011 cc 57
    Add 180 plus 105 (filing period) days to the last CZ exit date.
    Disregard the period from 04/15/2010 up to 06/17/2012.
    Example: 2010 Form 1040 with liability
    TC 500 12/01/2009 cc 56
    TC 500 06/08/2010 cc 57
    TC 500 11/29/2010 cc 56
    TC 500 09/06/2011 cc 57
    Add 180 plus 105 (filing period) days to the last CZ exit date.
    Disregard period from 04/15/2011 up to 06/17/2012.
    Example: 2011 Form 1040 with liability
    TC 500 12/01/2009 cc 56
    TC 500 06/08/2010 cc 57
    TC 500 11/29/2010 cc 56
    TC 500 09/06/2011 cc 57
    Adding 180 days to the last CZ exit date is 03/04/2012, which is before the 2011 tax return due date. No CZ relief.

20.2.7.8.2  (03-09-2010)
Combat Zone Interest Suspension

  1. The Master File and IDRS programs can correctly compute and suspend interest (and penalties) on combat zone (CZ) accounts if there is one CZ period, or in the case of multiple CZ periods, if the second CZ entry date is more than 6 months later than the previous CZ exit date. For example:

    Multiple CZ periods with more than 6 months between tours:
    TC 500 04/29/2006 cc 52, TC 500 12/10/2006 cc 53
    TC 500 10/08/2007 cc 56, TC 500 06/08/2008 cc 57

  2. Where there are multiple in and out CZ periods and the previous CZ exit date is within 6 months of the next CZ entry date, Master File and IDRS cannot correctly compute interest. Therefore, manually compute and restrict interest on the module. For information on the use of TC 34X, refer to IRM 20.2.8.3, Manual Computations. In this instance, where the in/out CZ tours are within 6 months, the CZ period is considered as one continuous period starting from the first CZ entry date up through the last CZ exit date.

    Multiple CZ periods within 6 months of each tour:
    TC 500 04/29/2006 cc 52, TC 500 12/10/2006 cc 53
    TC 500 05/31/2007 cc 56, TC 500 06/08/2008 cc 57
    Suspend interest in this example from 04/29/2006 up through 06/08/2008 plus 180 days

20.2.7.8.3  (05-09-2014)
Combat Zone Overpayment

  1. Pursuant to IRC 7508(b)(2), all 45-day interest-free processing under IRC 6611(e), including the 45-day interest-free periods for the following:

    1. Original return overpayments—IRC 6611(e)(1)

    2. Amended return overpayments—IRC 6611(e)(2)

    3. IRS-initiated adjustments—IRC 6611(e)(3)

    will not apply to overpayments that originate from combat zone (CZ) tax modules, provided the original tax return is timely filed (determined by taking into account IRC 7508 provisions).

    Example:

    CZ taxpayer with refunds from tax years 2010 and 2011. Taxpayer in a CZ from 12/01/2011 up through 02/28/2012. Since the 2010 tax return was due prior to the combat zone entry date, credit interest on the refund is subject to both the late filing return rule and the 45-day interest free processing rule. The 2011 tax return was timely filed per IRC 7508, and is not subject to the 45-day interest free period.

  2. Do not enter an amended claims date (AMD-CLMS-DT) on a timely filed return with a CZ indicator. An amended claims date would trigger the 45-day back-off rule causing less credit interest to be paid on the refund. For all other overpayment interest rules, see IRM 20.2.4, Overpayment Interest.

  3. Do not enter a Priority Code 3 for an IRS-initiated adjustment on command codes AMCLS or ADJ54 when the CZ indicator is present.

20.2.7.8.4  (05-09-2014)
Prisoners of War (POW) and Persons Missing in Action (MIA)

  1. IRC 7508(c) entitles the spouse of a service person to the same postponement acts: an extension of time for filing and paying taxes. This rule does not apply to the spouse of a service person from the Vietnam conflict for any taxable year beginning more than two years after the date designated as the termination date of combat.

  2. IRC 7508(d) provides that the period of service in a CZ includes the period during which a person is missing in action. For more information on CZ, see IRM 5.1.7.9, Accounts of Taxpayers Who Serve in a Combat Zone; IRM 5.19.1.4.11, Killed in Terrorist Action (KITA), Killed in Action (KIA), and Astronauts Killed in the Line of Duty; and Pub 3, Armed Forces' Tax Guide.

20.2.7.9  (05-09-2014)
Military Deferment

  1. Under the Servicemembers Civil Relief Act (Title 50 Appendix, Section 570, United States Code), a taxpayer in the Armed Forces (not in a combat zone) having a liability that was due before entering military service and whose ability to pay has been materially affected by joining the military service, may request to defer payment of the liability; otherwise known as military deferment. If granted, there will be no interest accrued during the deferral period, which starts from the day the taxpayer reports for active duty up through 180 days after release from military service (initial period).

  2. Collection (Compliance Services Collection Operations) will determine a taxpayer's eligibility for military deferment and input the identifying codes on the affected tax module; TC 500 with closing code 50 or 51 (closing code 51 is valid after 2003).

    Note:

    Military deferment does not apply to an employee's share of social security and medicare taxes.

  3. Members of the armed forces who do not qualify for military deferment may be eligible for a decrease in interest rate. The decrease in interest rate applies to an outstanding tax liability "incurred prior" to entering the military service (Title 50 Appendix, Section 527, United States Code). The rate of interest charged on tax liabilities incurred before entering the military service would be the applicable rate up to a maximum interest rate of 6% and only during the period of initial military service. Manually compute and assess interest during periods where the applicable interest rate exceeds the maximum 6%.

  4. Military deferment cases are maintained by Centralized Case Processing Operations, Field Operations Resource Team (FORT) in Philadelphia. At the end of the deferral period, FORT will compute and assess interest accordingly. For more information on military deferment cases, refer to IRM 5.1.7.12, Military Deferments; IRM 5.19.1.4.11, Killed in Terrorist Action (KITA), Killed in Action (KIA), and Astronauts Killed in the Line of Duty, and Pub 3, Armed Forces' Tax Guide.

20.2.7.10  (05-09-2014)
Federally Declared Disaster-IRC 7508A

  1. For disasters declared after 12/31/1997 and before 09/11/2001, where the IRS granted an extension of time to file (IRC 6081) and an extension of time to pay (IRC 6161) for a taxpayer located in a federally declared disaster area, IRC 6404(h) authorizes the abatement of interest and penalties during the declared disaster period plus the time covered under the extension to file and the extension to pay.

  2. For disasters declared on or after 09/11/2001, IRC 7508A authorizes the IRS to disregard (exclude) a period of up to one year when determining the interest liability for a taxpayer affected by a federally declared disaster. After each federally declared disaster, the IRS issues guidance detailing the type of relief given, the period of time relief is granted, and details of taxpayers eligible for the disaster relief. Most taxpayers "affected" by a federally declared disaster are systemically identified with a TC 971 and AC 086, 087, or 688. A taxpayer who was not systemically identified will have to self-identify by writing the name of the disaster across the top of his or her tax return that was affected by the disaster.

  3. When adjusting interest on a module where the disaster information was manually input, go to the IRS Assistance Disaster Program website to verify the effective dates of the applicable disaster.

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20.2.7.10.1  (05-09-2014)
IRC 7508A Interest Computation

  1. For a taxpayer meeting IRC 7508A criteria, suspend interest during the declared disaster period wherein the IRS has granted a postponement of time to pay. The disaster period interest suspension is only granted for tax returns having an original return due date or extended due date that falls within the disaster period. Provided below are examples to help determine if taxpayer qualifies for an IRC 7508A interest suspension.

    Example:

    Tax year 2006 Form 1040 with an extension of time to file to 10-15-2007, when severe storms and flooding occurred on 08-18-2007 in the county where taxpayer resides. The President declared the area a disaster and the IRS granted relief from filing and paying to start from 08-18-2007 to 11-15-2007. Suspend interest on this module from 08-18-2007 through 11-15-2007.

    Example:

    Same taxpayer as mentioned above, except there is another tax year with a liability, Form 1040 for 2005. The tax year 2005 liability does not qualify for disaster relief because its return due date is prior to the declared disaster period.

  2. A taxpayer affected by a disaster who receives a bill for interest or penalties accruing during the disaster (or postponement) period should contact the IRS to request an abatement of interest or an abatement of penalties. Tax years with pre-existing liabilities that are due before or after a disaster period do not qualify for disaster interest relief under IRC 7508A.

  3. For more information on declared disaster cases, refer to IRM 25.16.1, Program Guidelines.

20.2.7.10.2  (03-09-2010)
Amended Returns for Hurricane Related Casualty Losses With Subsequent Grant Reimbursement

  1. Section 3082(a) of Public Law 110-289 (HR 3221) enacted on July 30, 2008, provides a waiver of penalties and interest for taxpayers affected by Hurricanes Katrina, Rita, or Wilma, who previously claimed a casualty loss deduction with respect to a principal residence on their original return and then received a hurricane relief grant as reimbursement for the same deduction. Taxpayers electing to file an amended return reducing the casualty loss previously deducted will have one year from the later of the due date for filing the return for the year in which the grant was received or July 30, 2009, (which is one year after the date section 3082(a) was enacted), to file an amended return. There will be no penalties or accrual of interest on the tax increase shown on the amended return as long as the entire underpayment is paid in full within one year after filing the amended return. For purposes of determining the waiver of penalties and interest, an amended return filed before July 30, 2009, will be treated as filed on July 30, 2009.

  2. A section 3082(a) tax increase will post with a TC 290 with a Reason Code (RC) 176, or TC 298 with a RC 177 and secondary transaction codes TC 270 for zero and TC 340 for zero. For accounts with a balance due prior to posting the taxable amended return with section 3082(a) tax increase, manually compute and post applicable penalties and interest relative to the pre-existing liability.

  3. These amended return claims are centralized and worked by an Accounts Management team in the Austin Campus. See Section 3082(a) of the Housing and Economic Recovery Act of 2008-Disaster Primary Housing Grant Relief in IRM 21.6.6, Individual Tax Returns, Specific Claims and Other Issues.

20.2.7.11  (05-09-2014)
Request for Interest Abatement

  1. If any of the interest provisions mentioned throughout this IRM section was overlooked during processing of a qualified return, a taxpayer can file a request to abate interest using Form 843, Claim for Refund and Request for Abatement. While Form 843 is the preferred form to request an abatement or suspension of interest, IRS will review and consider all signed correspondence requests having the same required elements (e.g., name, taxpayer identification number, interest period in question, signature under penalties of perjury, and the reason(s) for the abatement, etc.) as that of a Form 843.

  2. Taxpayers should submit a completed Form 843 to the campus where the last tax return was filed. All Forms 843 for interest abatement should be identified on IDRS and Master File with a TC 971 and an AC 660. Accounts Management is responsible for the input of a TC 971 with an AC 660 on to a taxpayer's account and then routing the Form 843 according to established instructions in IRM 21.5.3, General Claims Procedures.

  3. A taxpayer might request the abatement of interest due to a ministerial or managerial act during the collection process or during an examination. Secure a signed Form 843. Form 843 must include the following elements:

    • Description of the unreasonable error or delay caused by an IRS employee.

    • The time frame (from MM-DD-YYYY to MM-DD-YYYY) of unreasonable error or delay for interest abatement.

    • Taxpayer(s) signature.

  4. Work the interest abatement request according to your area's established guidelines. See IRM 5.1.15.16.3, Interest Abatement, or IRM 4.8.8, Miscellaneous Responsibilities. Do not send the request to a campus.

  5. For IRC 6404(e)(1) interest abatement requests where the alleged delay or error was by an Appeals employee, route the case to the compliance IAC per instructions in IRM 8.7.7.14.1 (3), Appeals Technical Employees' (ATEs) Responsibility for Abatement of Interest Cases. If the IAC disallowed the interest abatement request "concerning an Appeals employee’s actions" and the taxpayer appealed the determination, forward the case to the Appeals Area Director having jurisdiction over that Appeals employee. Flag the outside of the case as well as on the transmittal that the taxpayer alleges an unreasonable error or delay by an Appeals employee.

  6. The following situations are not entitled to interest abatement:

    1. Criminal restitution requests citing "interest waived by the court" as the basis for the abatement. Interest waived by the court refers to interest under Title 18, while IRS assessed interest is under Title 26. Therefore, criminal restitution assessments are subject to IRS interest. Any interest abatement claims filed for this reason must be denied.

    2. Taxpayers who deducted Qualifying Therapeutic Discovery Project (QTDP) expenses on their 2009 and 2010 returns, and then received a non-taxable grant in 2010 and or 2011 for part or all of the expenses claimed, are not entitled to an underpayment interest suspension period when they are required to amend their 2009 and 2010 returns to reduce the expenses deducted. Neither section 9023 of the Affordable Care Act (ACA) nor Notice 2010-45, Qualifying Therapeutic Discovery Project Credit , allows for a restriction or abatement of the underpayment interest. To the extent the reduced expense deduction creates an underpayment in 2009 or 2010, or a deficiency if an amended return is not filed, underpayment interest will be charged under IRC 6601. Interest accrues from when the tax was due (generally, the due date for filing the original 2009 or 2010 return, without regard to extensions). Do not unnecessarily restrict debit interest when processing QTDP adjustments. Any request to suspend or abate debit interest should be denied, citing the information above.

20.2.7.11.1  (05-09-2014)
Closing Other Interest Abatement Requests

  1. A request for the abatement of unpaid income, estate, or gift taxes citing IRC 6404(a) is prohibited by IRC 6404(b). The taxpayer must make full payment and file an amended return to claim a refund.

  2. When a request for abatement of unpaid interest is received, review the taxpayer's request for completeness before forwarding the claim to another employee or function for processing. Full payment is not required on an interest abatement request.

  3. The request should close as follows:

    If the request is Then
    Disallowed in full Send a disallowance letter with the reason for the decision made.
    Input TC 290 .00, RC 074, and BLK 98/99.
    Partially disallowed Send a partial disallowance letter with the reason for the decision made.
    Input TC 341 for the interest abatement amount and RC 074.
    Fully allowed Send claim allowance letter and
    Input TC 341 for interest abatement amount and RC 074.
  4. Post interest accruals to the module before the input of an interest abatement. When a written protest is received because of a disallowed interest abatement request, forward the protest along with the disallowed case file to Appeals for reconsideration.

  5. Use Letter 3477Interest Suspension, or Letter 3477C, Interest Suspension, to communicate IRS decisions on any IRC 6404(g) interest suspension provision. IRC 6404(g) is not an interest abatement, but it is an interest suspension provision, and it is not eligible for judicial review or appeal rights.

20.2.7.11.2  (05-09-2014)
Closing IRC 6404(e)(1) Interest Abatement Request

  1. The following "if and then" table provides instructions for the input of an IRC 6404(e)(1) interest abatement request on IDRS:

    If the request is Then
    Disallowed in full Input TC 290 for zero, Reason Code 080, and send disallowance letter.
    Partially disallowed Input TC 290 for zero, TC 341 for amount of interest abatement, Reason Code 081, and send partial disallowance letter.
    Fully allowed Input TC 290 for zero, TC 341 for amount of interest abatement, Reason Code 082, and send allowance letter.

    Caution:

    When adjusting interest due to a ministerial or managerial act, and after the adjustment the module will be in balance due status, it is recommended that two separate interest adjustments be input; one to post the accruals and the other to abate the interest per IRC 6404(e)(1).

  2. If the interest abatement request is allowed (in part or in full), abate the portion of interest accruing from the date the unreasonable error (or unreasonable delay) occurred up to the date the unreasonable error (or delay) was identified. The employee who reviews the interest abatement request and makes the decision to allow the request must furnish the start and end dates of the ministerial or managerial act(s) to the interest computation function. For more information on disallowed interest abatement procedures, see IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.

    Caution:

    IRC 6404(e)(1) only abates interest due on an "additional" liability, not on the original tax liability. This provision does not apply to employment taxes.

20.2.7.12  (05-09-2014)
Interest Calculation

  1. When working interest abatement requests due to an unreasonable error or delay by the IRS (at no fault of taxpayer or representative), consider only interest accruing during the identified period of error or delay. For example, if correct payoff amount should have been $100 but instead $70 was given, consider only interest accruing on the difference. For this example, it would be interest accruing on the difference of $30 that should be considered for abatement.

  2. The total interest remaining on the module (which includes the proposed or pending adjustment) must be correct. When allowing the interest abatement request in part (or in full), manually compute interest.

  3. Refer to IRM 20.2.6, Methods of Computing Interest, for available interest computation tools supported by the IRS.

    1. Compute and input TC 34X as appropriate.

    2. Use the applicable blocking series (see Document 6209, IRS Processing Codes and Information).

    3. Secure the signature of the official authorized to grant abatement on the adjustment document.

    4. Attach documentation of the interest computation to the case or adjustment document.

    5. Make meaningful notes in history sheet, workpapers, or on available electronic means (e.g., CIS, AMS, etc.).

      Caution:

      The use of TC 34X in Step (1) above will restrict interest and prevent Master File from systemically generating interest updates unless a non-restricting TC 340 is used. You must ensure the net amount of interest remaining on the module is accurate.

20.2.7.13  (05-09-2014)
Appeal Rights

  1. Taxpayers meeting the requirements in IRC 7430(c)(4)(A)(ii) have the right to appeal the denial of an interest abatement request (regardless of account status). Taxpayers who wish to appeal the disallowance of their interest abatement request must send their protest (a brief statement detailing the reason(s) IRS should reconsider the interest abatement request) to the office that issued the interest abatement disallowance letter. That office will forward the taxpayer's protest to Appeals. For more information on the appeal process, see IRM 8.7.7, Claims and Overassessment Cases.

  2. IRC 6404(g) is not an interest abatement, but it is an interest suspension provision, and it is not eligible for judicial review or appeal rights.

20.2.7.14  (05-09-2014)
Disputes as to Interest Amount

  1. The Office of Servicewide Interest (OSI), located in the Small Business/Self-Employed Division, has responsibility for all interest; accrued, abated, assessed, offset, refunded or suspended systemically and manually. Report systemic interest discrepancies to the User Support Unit in your respective campus. Disputes within the IRS over manual interest calculations should be settled according to the area or function's established guidelines. For discrepancies concerning the accuracy of the computed interest amount, contact the area that performed the interest computation for resolution. For interest discrepancies due to interpretation or application of interest law(s) which cannot be resolved locally, forward a description of the problem and supporting documentation to the analyst with program responsibilities as listed on the Servicewide Interest website.


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