Abatement of interest and penalties on payroll taxes.

• Author: Lucero, Tessa C.

Look carefully at the date payroll taxes were required to be deposited when requesting abatement of penalties for failure to timely deposit such taxes and the related interest. The first Taxpayer Bill of Rights, which was part of the Technical and Miscellaneous Revenue Act of 1988, granted taxpayers various rights in dealing with the IRS, provided procedures for taxpayers regarding the Service and extended the Tax Court's jurisdiction. A follow-up Taxpayer Bill of Rights 2 (TBOR2) was enacted on July 30, 1996. Among the new laws are provisions dealing with abatement of interest and penalties. The new laws cover expansion of IRS authority to abate interest, Tax Court review of the Service's refusal to abate interest, extension of the interest-free period for payment of tax and abatement of the penalty for failure to deposit payroll taxes.

Prior to TBOR2, the IRS'S power to abate overpaid interest on delinquent taxes was very limited, and the Code did not extend that authority to include employment taxes. This earlier provision is supported in Speers, Fed. Cl. Ct., 6/23/97. The taxpayers were partners in a machine shop in California. The business did not pay FICA, FUTA and state employment taxes for its operations during 1981-1983. The state conducted a payroll audit and concluded that the business had hired employees rather than independent contractors. After obtaining a copy of the audit report and interviewing the taxpayer, the Service also concluded that the business had erroneously treated its employees as independent contractors. The IRS and the taxpayers reached a settlement of about $7,000 in delinquent employment taxes and penalties and about $29,000 in interest. In 1995, the taxpayers filed claims for refunds with the Service, requesting that the IRS abate the interest attributable to the Service's errors and delays. The IRS disallowed these claims in February 1996, stating that it lacked the power to abate interest on employment taxes. The taxpayers filed suit and the court granted the Service's motion to dismiss, ruling that the IRS did not have such abatement authority. As in effect at that time, Sec. 6404(e) allowed the Service to abate interest due to errors and delays by the agency in performing a ministerial act, one carried out in a prescribed manner that does not involve the exercise of judgment or discretion. This provision was limited to the overpayment of interest on tax deficiencies relating to income taxes, estate and...