The Tax Court has upheld the IRS’s refusal to abate interest after the IRS made an erroneous refund (Allcorn, III v. Commissioner, Dec. 59,156, 139 TC No. 4). The court concluded that, while the IRS had the authority to abate (forgive) the interest, it did not, in fact, abuse its discretion when it decided not to abate the interest.
The Tax Court found that both the taxpayer and the IRS had made errors that led to the erroneous refund. As a result, the IRS was not required to abate the interest because of the taxpayer’s errors, even though they were relatively simple (he had entered a payment on an incorrect line on his return). The court found that the agency retained broad discretion to abate (or not to abate) the interest.
For the tax year at issue, the taxpayer had $27,000 withheld from wages and pension distributions. He also paid $4,000 in estimated taxes. On his Form 1040, he included the $4,000 in amounts withheld of $31,000 and did not report it on the separate line for estimated tax payments. He included a note with Form W-2 that stated “Additional $4,000 was sent with Form 1040-ES.”
The taxpayer claimed a refund of $850. The IRS noted the withholdings of $31,000, determined that the taxpayer also paid estimated taxes of $4,000, and calculated that the taxpayer had paid $35,000 in tax payments. In effect, this counted the $4,000 in estimated tax payments twice. The IRS paid the taxpayer a refund of approximately $5,000. The taxpayer was not entitled to $4,000 of this amount.
Subsequently, the IRS correctly redetermined the taxpayer’s withholding and asked the taxpayer to repay the $4,000, plus interest and penalties. The taxpayer paid the $4,000. At the taxpayer’s request, the IRS abated the penalties. The IRS refused to abate interest of $214 because the taxpayer, by filing an incorrect return, had contributed to the erroneous refund.
The Tax Court found that: (1) the refund was an erroneous refund under Code Secs. 6602 and 6402(e)(2); (2) interest abatement was not mandatory because the taxpayer’s mistake contributed to the making of the erroneous refund; (3) the IRS had discretionary authority to abate the interest; and (4) the IRS did not abuse its discretion in denying the taxpayer’s request to abate interest on the erroneous refund.
Here, the court found, the taxpayer’s misreporting of his estimated taxes, even though not intentional, contributed to the erroneous refund. The court rejected the taxpayer’s argument that he had not contributed to the error and that the IRS should have noticed the mistake because of the note that he included with his return. The court concluded that the note was ambiguous, although the note could have alerted the IRS of the need to verify the tax payments.