Interest Abatement Denial Subject to Judicial Review

The 5th Circuit Court of Appeals has held that in amending IRC § 6404(e), which grants IRS the authority to abate an assessment of interest attributable in whole or in part to any error or delay by the IRS in performing a ministerial or managerial act, Congress clearly expressed its intent that the decision to abate interest was subject to judicial review. Beall v. U.S., No. 01-41471, (6/27/03).

[Following the IRS denial of their claim for refund and for abatement of interest under IRC § 6404(e), the taxpayers commenced suit in district court under IRC § 7422, which permits a claim for refund for “any sum . . . wrongfully collected.” The district court dismissed, citing a lack of subject matter jurisdiction. The instant appeal ensued.]

Finding that the phrases (i) “any sum” includes unabated interest on income taxes owed and (ii) “wrongfully collected” includes interest that the IRS has refused to abate under IRC § 6404(e), the court first determined that the claim was not barred by sovereign immunity and that the District Court had in fact possessed subject matter jurisdiction.

Although an IRS decision not to abate interest was not previously subject to judicial review, the addition by Congress of the word “unreasonable” to modify the words “error or delay” indicated that “Congress clearly expressed its intent that the decision to abate interest no longer rest entirely within the Secretary’s discretion.” The vesting of jurisdiction in the Tax Court to review interest abatement challenges authorized judicial review.

The final issue facing the court was whether the Tax Court had exclusive jurisdiction under IRC § 6404(h) to review an IRS decision not to abate interest. §6404(h) provides: “The Tax Court shall have jurisdiction over any action brought by a taxpayer . . . to determine whether the Secretary’s failure to abate interest . . . was an abuse of discretion.” In its brief, the government cited to the House Report accompanying the 1996 Taxpayer Bill of Rights, which stated that “[f]ederal courts generally do not have the jurisdiction to review the IRS’s failure to abate interest.”

Noting that the House Committee Report “clearly states” that “[n]o inference is intended as to whether under present law any court has jurisdiction to review IRS’s failure to abate interest,” the court rejected the government’s argument, which assumed that in vesting to the Tax Court jurisdiction to review, the statute “impliedly repealed” the district court’s existing jurisdiction.

The decision is significant for a two reasons:  First, the taxpayer who has paid the entire tax liability plus interest will not be forced to litigate the interest abatement issue in Tax Court and the refund claim in federal District Court. Also, litigating an IRS abatement issue in federal district court is far more appealing from a strategic standpoint than litigating the issue in Tax Court, which is viewed as far less taxpayer-friendly than federal district courts.

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