Abatement of interest: new Tax Court rules.

The Taxpayer Bill of Rights 2 (TBOR2) signed into law by President Clinton in July 1996 extended the authority to abate interest to cases of IRS managerial acts that result in an unreasonable error or delay. The committee report to TBOR2 stated that such managerial acts could include loss of records by the Service, IRS personnel transfers, extended illnesses, extended personnel training or extended leave (Sec. 6404(e)).

Previously, the Service, in its discretion, had the authority to abate the assessment of interest on a tax deficiency or payment only if the assessment was attributable to an error or delay by an IRS employee in performing a ministerial act, defined as "a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer's case after all prerequisites to the act, such as conferences and review by supervisors, have taken place" (Temp. Regs. Sec. 301.6404-2T(b)(1)).

In addition, prior to TBOR2, there was no judicial review of the Service's denial of a taxpayer's request for abatement under Sec. 6404(e). The courts, when denying a taxpayers request, frequently cited the IRS's discretionary authority in the statute and the fact that no standards of judicial review existed (see, e.g., Argabright, 35 F3d 472 (9th Cir. 1994)). The omission of judicial review was corrected in TBOR2.

Under new Sec. 6404(g), as of Aug. 1, 1996, the Tax Court has the jurisdiction to determine whether the Service's failure to abate interest was an abuse of discretion; the court recently issued interim rules on the procedure for taxpayers to follow in actions for review of the Service's failure to abate interest (Title XXVII, Rules of Practice and Procedure of the United States Tax Court).

Under new Tax Court Ride 280, the Tax Court will have jurisdiction for such an action when (1) the IRS has mailed a notice of final determination (the "notice") not to abate interest and (2) a petition for review of the failure to abate interest is filed with the court within 180 days after the mailing of the notice.

Under Tax Court Rule 281(b), a petition entitled "Petition for Review of Failure to Abate Interest Under Code Section 6404" must contain the following: 1. Name, mailing address and identifying number of the petitioner. 2. The issuing IRS office and date of the notice. 3. The periods to which the failure to abate relates. 4. A clear and concise statement of the facts on which the petitioner intends to rely to establish that the Service's failure to abate was an abuse of discretion. 5. A statement that the petitioner meets the net worth requirements of Sec. 7430(c)(4)(A)(ii). Generally, in order to bring such an action, an individual cannot have a net worth in excess of $2 million and a business cannot have a net worth in excess of $7 million (Regs. Sec. 301.7430-5(f)). 6. Signature, address and Tax Court bar number of counsel. 7. A copy of the notice of final determination denying (in whole or in part) the requested abatement.

The new Tax Court rules also address such issues as designation of place of trial, filing of an answer by the IRS, filing of a reply by the petitioner, form of pleadings, and place and manner of filing the petition by reference to existing Tax Court rules. Comment: The provisions extending the Service's authority to abate interest accrued due to unreasonable delays or errors resulting from managerial acts will provide more opportunities for taxpayers and their advisers to request interest abatement when the IRS has delayed the processing of a case (e.g., when an examiner is removed for an extended period of time to attend training). In addition, the fact that the Tax Court now has jurisdiction to review cases in which the Service has denied a request to abate interest will hopefully lead to a more thoughtful and objective review of such requests by the IRS.