A taxpayer filed a late tax return, and paid with it interest and penalties based on the tax due. The taxpayer then filed a time-barred refund claim, providing that the tax amount due was overstated on the original return.
It was too late for the taxpayers to receive a refund of the overpaid taxes. However, the statute of limitations for refund of the interest and penalties paid had not yet expired. Could the IRS abate the penalties and interest due to the lower amount of tax that should have applied?
Code Sec. 6404(a) provides: “IRS is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which—(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed (emphasis added).” Thus, from this provision, it would appear that the IRS has no authority to abate paid interest and penalties.
Nonetheless, in a Chief Counsel Advice, the IRS indicated that Code Sec. 6404 abatement “is permissive and that the IRS is not prohibited from abating the paid portion of assessments.”