section 6404 abatement

What is an “excessive” assessment for which IRS can abate tax liability?
Chief Counsel Notice 2010-012
In a Chief Counsel Notice (CCN), IRS has stated IRS's litigation position in Tax Court cases involving abatement claims under Code Sec. 6404 . In particular, the CCN clarifies that an abatement is authorized for an assessment that is “excessive in amount”—that is, an assessment that is in excess of the correct liability as determined by proper application of the tax law, not an assessment that is legally correct but thought to be unfair.
Background. Under Code Sec. 6404 , IRS may voluntarily abate the unpaid portion of an assessment of any tax or related liability if the assessment is “excessive in amount,” ( Code Sec. 6404(a)(1) ) or “assessed after the expiration of the period of limitation properly applicable thereto,” ( Code Sec. 6404(a)(2) ) or “erroneously or illegally assessed.” ( Code Sec. 6404(a)(3) ) The taxpayer may not file a claim for abatement of income, gift, or estate taxes, but may request abatement of employment and excise taxes. IRS must also abate penalties attributable to the taxpayer's reliance on erroneous written advice and jeopardy assessments where jeopardy doesn't exist.
IRS's position. The CCN concluded that an assessment that is “excessive in amount” under Code Sec. 6404(a)(1) is one that is in excess of the correct liability as determined by proper application of the tax law. It advised IRS attorneys to oppose any expansive construction of Code Sec. 6404(a)(1) that equates excessive assessments with assessments that are legally correct but thought to be unfair.
The CCN took issue with courts that it believes have misconstrued Code Sec. 6404(a)(1) and erroneously concluded that the provision authorizes abatement for reasons other than an incorrect computation of the amount of tax liability. For example, in H&H Trim & Upholstery Co., Inc., TC Memo 2003-9 , the Tax Court interpreted the language of Code Sec. 6404(a)(1) expansively to embrace an abatement broadly designed to promote fairness in tax administration. The Court held that the phrase “excessive in amount” authorized abatement of interest correctly computed as a matter of law, but which struck the court as unfair because IRS had reported an incomplete payoff amount to the taxpayer.
While noting that the limited legislative history of Code Sec. 6404(a) provides little guidance on the construction of the phrase “excessive in amount” in Code Sec. 6404(a)(1) , the CCN reasoned that under the plain meaning of the phrase, as found in dictionaries, an amount can only be described as excessive by reference to that amount which is proper or usual. Once the proper amount is determined, only the amount that is greater than what is proper constitutes an excessive amount.
The proper amount of an assessment is the amount of a taxpayer's liability calculated under the Code. IRS's authority under Code Sec. 6404(a)(1) to abate assessments that are excessive in amount extends only to amounts that exceed the amount determined by correct application of the tax law. This principle is adopted by Reg. § 301.6404-1(a) which provides that IRS may abate an assessment that is “in excess of the correct tax liability.” An example of an excessive assessment that may be abated would be an interest assessment made without proper account of statutorily prescribed interest suspension provisions. Such an assessment may be abated or reduced under Code Sec. 6404(a)(1) 's authority to ensure the assessment reflects the correct amount of tax liability due under law.
The CCN found that to construe the abatement authority under Code Sec. 6404(a)(1) as limited to addressing a unique class of legally deficient abatements fits naturally with the rest of Code Sec. 6404(a) , which specifies other particular assessments that can be abated—assessments after the expiration of the limitations period and erroneous or illegal assessments. To construe the Code Sec. 6404(a)(1) abatement authority as addressing the more generalized problem of collection unfairness doesn't so fit. If “excessive” simply means “unfair,” there would be little need for listing the other types of assessments in Code Sec. 6404 that IRS is authorized to abate.
Even if the meaning of this phrase weren't clear, however, the CCN found that the regs under Code Sec. 6404(a)(1) were clear on the proper construction of this key phrase. The CCN noted that under the Chevron rule, ambiguity in a statute must be resolved in favor of IRS's reasonable interpretation of the statute as expressed in regs. Courts should defer to the reg's interpretation of the statute, rather than supply alternative constructions.
RIA observation: The approach in Chevron (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc. (SCt 1984), 467 U.S. 837 ) sets out a two step analysis for a court to apply in reviewing an agency's construction of a statute that it administers: (1) if the intent of Congress is clear, IRS and the courts must give effect to the unambiguously expressed intent of Congress; (2) if the statute is silent or ambiguous as to a specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. An agency's regs are given controlling weight unless they are “arbitrary, capricious and manifestly contrary to the statute.”

EXP ¶64,044 Abatements.
IRS can abate the unpaid portion of any tax assessment or related liability that is excessive, made after the statute of limitations has run, or made erroneously or illegally. Code Sec. 6404(a) ; Reg §301.6404-1(a) , . A claim can be filed for abatement of taxes other than income, estate or gift taxes. Code Sec. 6404(b) . Further details are in Reg §301.6404-1(c) .
IRS may issue uniform rules to abate unpaid amounts because of unwarranted administration and collection costs. Code Sec. 6404(c) ; Reg §301.6404-1(d) .
Abatement of underpayments (and interest and penalties) attributable to pre-2008 AMT adjustments for ISOs.
An individual who exercises an incentive stock option (ISO) must include the value of the stock so acquired, minus what he paid for it, in alternative minimum taxable income (AMTI) for the exercise year (even though the “bargain element” isn't subject to regular tax, see ¶4224 ) unless he sells the stock in the same tax year, see ¶564.02 .
OBSERVATION: The alternative minimum tax (AMT) refundable credit rules in Code Sec. 53(e) were enacted partly in response to the hardships that resulted from the AMT adjustment for ISOs. For example, say that an employee exercised ISOs for 10,000 shares of stock at an exercise price of $2 a share, at a time when the stock was worth $100 a share. The exercise wouldn't result in regular tax income, but it would result in AMTI equal to the “bargain element,” here $980,000. If the stock price later plummeted to $10, a sale of the stock wouldn't generate enough cash to pay the AMT liability. Under Code Sec. 53(e) , individuals who become subject to the AMT, or whose AMT liability increases, as a result of exercising ISOs may be entitled to a refundable credit attributable to that AMT liability to the extent it's paid. For further discussion, see ¶534.01 .
Code Sec. 53(f) provides specific relief for AMT attributable to the ISO adjustment. Any underpayment of tax that is outstanding on Oct. 3, 2008, and that is attributable to the application of Code Sec. 56(b)(3) (i.e., the AMT adjustment for ISOs) for any tax year ending before Jan. 1, 2008, and any interest or penalty with respect to that underpayment that is outstanding on Oct. 3, 2008, is abated. Code Sec. 53(f)(1) .
OBSERVATION: In other words, Code Sec. 53(f)(1) abates the following amounts, if they are outstanding on Oct. 3, 2008:
(1) underpayments of tax for tax years before 2008 that are attributable to the AMT ISO adjustment;
(2) any interest on underpayments described in (1) above (see below);
(3) any penalty applicable to an underpayment described in (1) above, e.g., the 0.5% failure-to-pay penalty (see ¶66,564 ); and
(4) any interest imposed on any penalty described in (3) above (see ¶66,014.02 ).
OBSERVATION: The above rule helps an individual who exercised ISOs in a tax year ending before Jan. 1, 2008 who couldn't pay the resulting AMT liability (and applicable interest and/or penalties) either when it was due or at any time up to and including Oct. 3, 2008. He is relieved of his liability for that AMT, and for the applicable interest and penalties.
Example 1. Employee E exercised ISOs to buy 1,000 shares of stock in 2007. The ISO income that E had to include in AMTI for 2007 resulted in an AMT liability of $10,000. E didn't have enough cash to pay the $10,000 AMT liability on Apr. 15, 2008, when his 2007 return was due. He remained short of cash, so that the $10,000 AMT liability was outstanding on Oct. 3, 2008. Code Sec. 53(f)(1) relieves E of his liability for the $10,000 AMT, as well as for any interest or penalties that would have been imposed because of his failure to pay the AMT on time. Without this rule, E would have been liable for the following amounts:
(a) $10,000 AMT liability for 2007;
(b) Interest on the unpaid $10,000 AMT liability. The interest would have started accruing on Apr. 15, 2008, the payment due date;
(c) A failure-to-pay penalty equal to 0.5% of the outstanding $10,000 AMT, multiplied by the number of months (or fraction of a month) that the liability isn't paid; and
(d) Interest on the 0.5% failure-to-pay penalty described in (c). Interest would have run from the date of the notice and demand for the penalty if it wasn't paid within 21 days.
OBSERVATION: The abatement described above applies to amounts attributable to a pre-2008 AMT ISO adjustment that are outstanding on Oct. 3, 2008. If an individual paid the tax attributable to a pre-2008 Extenders Act ISO adjustment when it was due, or paid it (and any applicable interest and/or penalty) before Oct. 3, 2008, the individual won't have any outstanding liability for tax and/or interest attributable to the ISO adjustment on Oct. 3, 2008. Thus, the individual won't be entitled to any abatement under the rules described above. This means that he can't get a refund for the amounts already paid. But he gets to increase his MTC and AMT refundable credit for 2008 and 2009, see ¶534.01 .
Prior law.
Before Oct. 3, 2008 ( Sec. 103(c)(2)DivC, PL 110-343, 10/3/2008 ), the rules above, relating to abatement of underpayments (and interest and penalties) attributable to pre-2008 AMT adjustments for ISOs, didn't apply.
Abatement of interest due to certain IRS mathematical errors.
IRS can also abate interest assessed on an income tax deficiency attributable in whole or in part to a mathematical error if the return was prepared by an IRS officer or employee rendering return preparation assistance. The abatement can cover interest for a period ending on or before the 30th day after the date of notice and demand for payment of the deficiency. Code Sec. 6404(d) .
Abatement of interest due to unreasonable IRS errors or delays.
IRS is authorized, in its discretion, to abate the assessment of all or any part of interest due when:
• the interest was assessed because of a deficiency attributable in whole or part to any unreasonable error or delay by an IRS officer or employee acting in his official capacity when performing a ministerial or managerial act ( Code Sec. 6404(e)(1)(A) ); or
• interest is due on any payment of any tax described in Code Sec. 6212(a) , to the extent that any unreasonable error or delay in payment of that tax is attributable to an IRS employee or officer being erroneous or dilatory in performing a ministerial or managerial act. ( Code Sec. 6404(e)(1)(B) ).
Abatement will be allowed only if the taxpayer isn't significantly responsible for the delay. An error or delay will be taken into account only after IRS has written the taxpayer with regard to the deficiency or payment. Code Sec. 6404(e)(1) . The written contact requirement partially precludes the abatement of interest for the period of time between the date the taxpayer files a return and the date IRS commences to audit his return. (An exception to that rule is the requirement, discussed below, that IRS suspend interest and penalties when it waits too long to notify a taxpayer of a liability. Code Sec. 6404(g) .) Similarly, if the taxpayer files a return without paying the tax due, the provision cannot be used to abate interest for the period before IRS contacts the taxpayer to demand payment. Conf Rept No. 99-841 , Vol. II (PL 99-514) p. II-811. The abatement of interest provision isn't intended to be used routinely to avoid payment of interest. H Rept No. 99-426 (PL 99-514) pp. 844–45; S Rept No. 99-313 (PL 99-514) pp. 208–09.

Ministerial act.
The term “ministerial act” means a procedural or mechanical act that doesn't 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 occurred. A decision as to the proper application of federal tax law (or other federal or state law) is not a ministerial act. ( Reg §301.6404-2(b)(2) ).
Example 2. Jill Jones moves from one state to another before IRS selects her income tax return for examination. A letter explaining that the return has been selected for examination is sent to her old address and then forwarded to the new address. Jones timely responds, asking that the audit be transferred to the IRS district office that is nearest the new address. The group manager approves the request. After the request for transfer has been approved, the transfer of the case is a ministerial act. IRS may, in its discretion, abate interest attributable to a delay in transferring the case. Reg §301.6404-2(c) , Ex (1) For additional examples, see Reg §301.6404-2(c) .


Managerial act.
The term “managerial act” means an administrative act that occurs during the processing of a taxpayer's case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. Reg §301.6404-2(b)(1) . Examples are delays caused by IRS personnel transfers, extended illnesses, extended personnel training, or extended leave. H Rept No. 104-506 (PL 104-168) p. 27.
A decision concerning the proper application of federal tax law (or other federal or state law) isn't a managerial act. Further, interest attributable to a general administrative decision, such as the IRS's decision on how to organize the processing of tax returns or the IRS's decision on the implementation schedule for an improved computer system, can't be abated under the rules of Code Sec. 6404(e) discussed above. Reg §301.6404-2(b)(1) . For examples illustrating the definition of a managerial act, see Reg §301.6404-2(c) .
Abatement of interest on refunds made by IRS error.
Generally, IRS cannot charge interest on refunds made because of IRS error until the date it demands repayment. For instance, a taxpayer who gets a $1,000 refund, rather than the $100 refund he rightfully claimed, because of an IRS error won't be charged interest on the excess $900 until the date repayment is claimed. But there are two exceptions to the no-interest-on-refund-rule under Code Sec. 6404(e)(2) . A taxpayer will be charged interest on an erroneous refund if:
• the taxpayer (or a related party) has in any way caused the overstated refund to occur, or
• the erroneous refund exceeds $50,000.
OBSERVATION: For IRS acts regarding federally declared disasters or terroristic or military actions after Jan. 22, 2002, interest is abated under the Code Sec. 7508A rules, see ¶75,08A4 . The rules below applied before that date because the pre-Jan. 23, 2002 version of IRC §7508A did not provide for an abatement of interest for the period of the extension, see ¶75,08A4 .
Prior law. Pre-Jan. 23, 2002 abatement of interest in case of federally declared disasters or terroristic or military actions. For actions taken by the IRS before Jan. 23, 2002, and for acts regarding disasters and terroristic or military actions occurring before Sept. 11, 2001, where the IRS extended, for any period, the time for filing income tax returns ( ¶60,814 ) and for paying income tax with respect to those returns ( ¶61,614 et seq.) for any taxpayer located in a federally declared disaster area, it also had to abate, for the same period, any interest that would otherwise be due on the extended income tax. Code Sec. 6404(h)(1) before repeal by Sec. 112(d)(1)(A), PL 107-134, 01/23/2002 .
For purposes of this rule, the term “federally declared disaster area” meant, with respect to any taxpayer, any area that the President had determined warranted assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Code Sec. 6404(h) before repeal by Sec. 112(d)(1)(A), PL 107-134, 01/23/2002 .
The above rules applied to all taxpayers, including individuals, corporations, trusts, and estates. Notice 99-2, 1999-2 IRB 8 .
Example 3. In Mar. 2001, the President declared Area A to be a disaster area, and IRS accordingly extended the due date for filing 2000 income tax returns and paying income tax. IRS had to abate the assessment of interest for all taxpayers (individuals, corporations, estates, and trusts) who were located in the disaster area and were granted the extension.


How to make a claim.
Taxpayers requesting credit, refund, or abatement of interest should file Form 843 with the Service Center where they filed their tax return. If the request is denied, the taxpayer can appeal the decision to the IRS Appeals Office. Instructions to Form 843 , (11/2005) , p. 1 ; IRS Pub. 556 , (8/2005) , p. 7 .
Judicial review of failure to abate interest.
The Tax Court has jurisdiction to determine whether IRS's failure to abate interest under Code Sec. 6404 is an abuse of discretion, and, if so, it may abate the interest. This jurisdiction is limited to cases in which the taxpayer meets the net worth and size requirements in effect for awards of costs and attorney's fees ( ¶74,304.01 ). The taxpayer's petition must be mailed within 180 days after the date IRS mails the taxpayer its final determination not to abate interest. The Tax Court's order may be appealed to the Court of Appeals. Code Sec. 6404(i) .
Abatement of penalties attributable to IRS's erroneous written advice.
IRS must abate any portion of any penalty or addition to tax that is attributable to the erroneous advice a taxpayer received in writing from an IRS officer or employee acting in his or her official capacity. Code Sec. 6404(f) .
The taxpayer must have given the employee adequate and accurate information, his reliance on the advice must have been reasonable, and he must have specifically requested the advice in writing. Reg §301.6404-3(b)(1) , .
Example 4. Bob Brown files his federal income tax return and then receives written advice from IRS regarding an item included in that return. Since the advice was received after the return was filed, Brown didn't reasonably rely on the advice in filing the return. However, if he then files an amended return to conform his return to the advice, he has reasonably relied on the advice.
When the written advice does not relate to an item included on a return (for example, advice on payment of estimated taxes), and is received after the act or omission that is the basis of the penalty, the taxpayer hasn't relied on the advice. In the case of advice relating to a continuing action or series of actions, a taxpayer may rely on that advice until notified that it is no longer valid, either by direct correspondence from IRS, or when a contrary position is later set forth in legislation, a tax treaty, a U.S. Supreme Court decision, regulations, or a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin. Reg §301.6404-3(b)(2)(v) .
A written response to a taxpayer by IRS will be considered “advice” only if the response applies the tax laws to a specific set of facts submitted by the taxpayer and it provides a conclusion regarding the tax treatment to be accorded the taxpayer. Reg §301.6404-3(c)(1) .
Taxpayers requesting an abatement should file Form 843 with the Service Center where they filed the applicable return, along with copies of the written request for advice, the erroneous written advice from IRS, and, if applicable, the report of tax adjustments identifying the penalty or addition to tax and the item relating to the erroneous advice. Reg §301.6404-3(d) .
CAUTION: The abatement provision for erroneous IRS advice doesn't absolve taxpayers who rely on inaccurate answers given them by IRS employees on the telephone. And surprisingly, it doesn't even excuse interest on tax underpayments attributable to erroneous written IRS advice (except to the extent that interest would have applied to any abated penalties and additions to tax).
Interest and penalties suspended when IRS fails to timely notify taxpayer of liability.
Where an individual taxpayer files an income tax return for a tax year on or before the due date for the return (including extensions), the imposition of any interest, penalty, addition to tax, or additional amount with respect to any failure relating to that return (except as provided below) must be suspended by the IRS if the IRS fails to provide a notice to the taxpayer specifically stating the taxpayer's liability and the basis for the liability before the close of the 18-month period beginning on the later of (A) the date the return is filed, or (B) the due date of the return without regard to extensions. (But see below, where taxpayer later files amended return, or other document showing additional tax due). Code Sec. 6404(g)(1)(A) .
OBSERVATION: There's no suspension with respect to interest, penalties, etc., with respect to an original return that isn't timely filed, e.g., filed after Apr. 15 without having obtained an extension of time to file. For how interest suspension applies where a taxpayer files an amended return reporting additional tax, after the original return, see below.
If after the return for the tax year is filed, a taxpayer files an amended return or other signed written document showing that the taxpayer owes an additional amount of tax for the tax year, the relevant 18-month period under the interest and penalty suspension rule (rule (A) above) is measured from the latest date on which those documents were provided. Code Sec. 6404(g)(1) ; Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 68, see ¶64,041.001 .
OBSERVATION: Thus, where a taxpayer files an amended return (or other written document) showing additional tax liability (after timely filing his original return), the 18-month period for IRS to issue the required notice of liability (and avoid interest or penalty suspension) is restarted.
The suspension applies to any interest, penalty, etc., that's computed by reference to the period of time the failure continues to exist and that's properly allocable to the suspension period. This rule is applied separately for each item or adjustment. Code Sec. 6404(g)(1)(A) .
Example 5. IRS sends a math error notice to a taxpayer two months after the return is filed. Two years later, IRS sends a notice of deficiency related to a different item. The suspension applies to the item reflected on the second notice even though the first notice was sent within the 18-month period. Conf Rept No. 105-599 (PL 105-206) p. 260, ¶64,041.004 .
The suspension period begins on the day after the close of the 18-month period referred to above, and ends on the date that's 21 days after IRS provides the notice described above. Code Sec. 6404(g)(3) . Thus, the provision suspends the accrual of penalties and interest after 18 months (if IRS hasn't sent the required notice within the time specified above), and interest and penalties don't resume until 21 days after IRS sends that notice to the taxpayer. Conf Rept No. 105-599 (PL 105-206) p. 260, ¶64,041.004 .
OBSERVATION: Since the suspension applies only to interest, etc., that's allocable to the suspension period, interest and penalties do accrue until the close of the applicable 18-month period.
Example 6. John files his Year 1 income tax return on Feb. 1 of Year 2. Interest and penalties will accrue on that return starting April 15, Year 2, but if the IRS hasn't provided notice by the close of the 18-month period starting on that date, further accrual of interest and penalties on the Year 1 return will be suspended starting the day after the close of that 18-month period.
Example 7. If in the above illustration John had an extension of time to file his return and actually filed the return on Aug. 1 of Year 2, the accrual of any penalties and interest would start on April 15, Year 2 and wouldn't be suspended until the start of the day after the close of the 18-month period beginning Aug. 1, Year 2 (if the IRS failed to provide the notice before then). Thus, 21 1/2 months of penalties and interest would accrue before the suspension started.
OBSERVATION: The IRS can keep the accrual of interest and penalties running by providing the required notice within the 18-month period. If the IRS fails to provide the notice in time, further accrual stops. But if the IRS provides the required notice after the 18-month period, the accrual of interest and penalties begins again 21 days after the IRS provides the notice.
The suspension of interest and penalties under Code Sec. 6404(g)(1) above doesn't apply to—
(1) any penalty imposed by Code Sec. 6651 (for failure to file tax return or to pay tax, see ¶66,514 et seq.). Code Sec. 6404(g)(2)(A) ; Conf Rept No. 105-599 ( PL 105-206, 7/22/1998 ) p.260, ¶64,041.004 .
OBSERVATION: The penalties under Code Sec. 6651 involve failure to timely file a tax return as well as failure to pay tax. Since the suspension applies in the first instance only in the case of a timely filed return, the failure to file penalty wouldn't be affected by the suspension rule.
(2) any interest, penalty, addition to tax, or additional amount, in a case involving fraud. Code Sec. 6404(g)(2)(B) .
(3) any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return, for example, where a taxpayer has self-assessed the tax. Code Sec. 6404(g)(2)(C) ; Conf Rept No. 105-599 (PL 105-206) p.260, ¶64,041.004 .
OBSERVATION: Thus, for example, where a taxpayer files a return showing an unpaid tax liability and enters into an installment agreement with the IRS for payment of that liability, interest with respect to any remaining part of that liability won't be suspended after 18 months if the IRS fails to provide notice.
(4) any interest with respect to any gross misstatement. Code Sec. 6404(g)(2)(D) . For this purpose, gross misstatements include:
(a) any substantial omission of items to which the six-year statute of limitations under Code Sec. 6051(e) applies (i.e., where there have been “25% omissions” on income, estate, gift or excise tax returns, see ¶60,514 );
(b) gross valuation misstatements, as defined by Code Sec. 6662(h) (see ¶66,624.05 ); and
(c) similar provisions.
Conf Rept No. 108-755 ( PL 108-357, 10/22/2004 ), p. 771.
(5) any interest with respect to the following transactions, Code Sec. 6404(g)(2)(E) :
(a) any reportable transaction with respect to which the requirement of Code Sec. 6664(d)(3)(A) is not met, Code Sec. 6404(g)(2)(E) —i.e., any reportable transaction that the taxpayer did not disclose as required by Code Sec. 6011 . If the penalty imposed under Code Sec. 6707A is rescinded ( ¶67,07A4 ), then the taxpayer is treated as meeting the reportable transaction disclosure requirements of the regs under Code Sec. 6011 for purposes of Code Sec. 6404(g)(2)(E) . Rev. Proc. 2007-21, Sec. 2.08, 2007-9 IRB .
(b) any listed transaction, as defined in Code Sec. 6707A(c) (i.e., certain transactions that have a potential for tax avoidance or evasion, see ¶67,07A4 ). Code Sec. 6404(g)(2)(E) .
(6) any criminal penalty, Code Sec. 6404(g)(2)(F) .
CAUTION: Code Sec. 6404(g)(2)(E) at (5)(a) above actually refers to Code Sec. 6664(d)(2)(A) rather than Code Sec. 6664(d)(3)(A) because Code Sec. 6404(g)(2)(E) was not amended to reflect a renumbering by the Health Care and Education Reconciliation Act ( Sec. 1409(c), PL 111-152, 3/30/2010 ). A technical correction may be necessary.
Whether a transaction is a listed transaction or an undisclosed reportable one is determined as of the date IRS provides notice to the taxpayer regarding the transaction that specifically states taxpayer's liability and the basis for it. Reg §301.6404-4T(b)(5)(i) .
Temp Reg 301.6404-4T(b)(5) (above and below), expire on or before June 18, 2010. Reg §301.6404-4T(b)(5)(ii)(B) .
For notices provided after the date which is six months after May 25, 2007, Sec. 8242(b), PL 110-28, 5/25/2007 , —i.e., Nov. 25, 2007—by the Secretary of the Treasury or his delegate, Sec. 8242(b), PL 110-28, 5/25/2007 ,—i.e., by IRS—IRS will have 36 months to notify an individual taxpayer of the basis for liability before it must suspend interest under the above rules. Code Sec. 6404(g) as amended by Sec. 8242(a), PL 110-28, 5/25/2007 . Thus, the accrual of interest and penalties will be suspended starting 36 months after the filing of the tax return if IRS has not sent the taxpayer a notice specifically stating the taxpayer's liability and the basis for the liability. Joint Comm Staff, Tech Expln of the Small Business and Work Opportunity Tax Act of 2007 (JCX-29-07), 5/24/2007, p. 29, see ¶64,041.0008 .
OBSERVATION: Thus, IRS will be given twice the time as under pre-2007 Small Business Act law to notify taxpayers about violations.

Prior law.
For documents provided before Dec. 21, 2005, Sec. 303(b)(2), PL 109-135, 12/21/2005 , Code Sec. 6404(g)(1) didn't provide the special starting date for the 18-month period notification period where a taxpayer files an amended return or other document showing additional tax liability. Code Sec. 6404(g)(1) before amend by Sec. 303(b)(1), PL 109-135, 12/21/2005 .
For interest accruing before Oct. 4, 2004, Sec. 903(d)(2), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 , the rule at (4) above providing that interest with respect to Code Sec. 6664(d)(3)(A) reportable transactions and Code Sec. 6707A(c) listed transactions is excepted from the suspension of interest rules), doesn't apply—i.e., the taxpayer remains eligible for suspension of interest under Code Sec. 6404(g)(1) with respect to these undisclosed reportable transactions or listed transactions, for interest accruing before Oct. 4, 2004—in these special cases :
(A) If as of Jan. 23, 2006,
• the taxpayer is participating in the settlement initiative pursuant to Ann. 2005-80, 2005-46 IRB 967 with respect to that transaction, or
• the taxpayer has entered into a settlement agreement pursuant to the initiative. Sec. 903(d)(2)(B)(ii), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 ; Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 67, see ¶64,041.001 .
The special rule at (A) above applies on a transaction-by-transaction basis. Thus, participation in the settlement initiative with respect to an individual transaction qualifies the taxpayer for the Code Sec. 6404(g)(1) suspension of interest only with respect to interest and penalties on underpayments resulting from that transaction. If the taxpayer has entered into other listed or undisclosed reportable transactions, the special rule does not apply to interest and penalties resulting from those transactions. Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 68, see ¶64,041.001 .
However, this special rule won't apply (i.e., the taxpayer's eligibility for suspension of interest under Code Sec. 6404(g)(1) is revoked) if, after Jan. 23, 2006, the taxpayer withdraws from or terminates participation in the Ann. 2005-80 settlement initiative, or IRS or its delegate determines that a settlement agreement won't be reached under the initiative within a reasonable period of time. Sec. 903(d)(2)(B)(ii), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 ; Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 67, see ¶64,041.001 .
A settlement initiative for purposes of Sec. 903(d)(2)(B)(ii) means both those offered through published guidance and those select initiatives that were undertaken by directly contacting targeted groups of known taxpayers who participated in a tax shelter promotion, but where the initiative wasn't formally published.Chief Counsel Advice No. 200611001 .
To be treated as having entered into a settlement agreement for purposes of Sec. 903(d)(2)(B)(ii)(II), taxpayers must have a legally binding settlement agreement by Jan. 23, 2006. Both parties must have reached a meeting of the minds. IRS's practice is to make settlement agreements (usually on Form 906) effective only when the taxpayer has first signed and IRS has countersigned the document. In addition, initiatives sometimes specifically require signed closing agreements to effectuate the settlement. Before that point, the agreements typically aren't binding on the parties and either party can withdraw.Chief Counsel Advice No. 200611001 .
For these purposes, a “participant in a settlement initiative” is either of the following:
(1) A participant in a settlement initiative who, as of Jan. 23, 2006, had not reached agreement with IRS. A participant in a settlement initiative includes a taxpayer who, as of Jan. 23, 2006, was participating in a settlement initiative described in Ann. 2005-80. A taxpayer participates in the initiative by complying with Section 5 of Ann. 2005-80. A taxpayer is not a participant in a settlement initiative if, after Jan. 23, 2006, he withdraws from or terminates participation in the initiative, or if IRS determines that a settlement agreement will not be reached under the initiative within a reasonable period of time. Reg §301.6404-4T(b)(5)(iii)(A)(1) .
(2) A participant in a settlement initiative who, as of Jan. 23, 2006, had reached agreement with the IRS. A participant in a settlement initiative is a taxpayer who, as of Jan. 23, 2006, had entered into a settlement agreement under Ann. 2005-80 or any other prior or contemporaneous settlement initiative either offered through published guidance or, if the initiative was not formally published, direct contact with taxpayers known to have participated in a tax shelter promotion. Reg §301.6404-4T(b)(5)(iii)(A)(2) .
(B) Any transaction in which the taxpayer has acted reasonably and in good faith, as determined by IRS, and which the Secretary of the Treasury or the Secretary's delegate excepts from the continuation of interest rule, Sec. 903(d)(2)(B)(iii), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 and Sec. 426(b)(1), PL 109-432, 12/20/2006 , Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 67, see ¶64,041.001 .
The IRS's determination of whether a taxpayer has acted reasonably and in good faith will take into account all the facts and circumstances surrounding the transaction. These include, but are not limited to, whether the taxpayer disclosed the transaction and his course of conduct after being identified as participating in it, including his response to opportunities afforded to him to settle the transaction, and whether he engaged in unreasonable delay at any stage of the matter. Reg §301.6404-4T(b)(5)(iii)(B)(1) .
If a taxpayer and IRS promptly enter into a settlement agreement with respect to a transaction on terms proposed by IRS or, in the event of atypical facts and circumstances, on terms more favorable to the taxpayer, and the taxpayer has complied with the terms of that agreement without unreasonable delay, the taxpayer will be presumed to have acted reasonably and in good faith except in rare and unusual circumstances. Rare and unusual circumstances must involve specific actions involving harm to tax administration. Even if a taxpayer does not qualify for this presumption, he may still be granted interest suspension under the general facts and circumstances test noted above. Reg §301.6404-4T(b)(5)(iii)(B)(2) .
The temp regs contain five examples on determining whether a taxpayer has acted reasonably and in good faith. Reg §301.6404-4T(b)(5)(iii)(B)(3) .
(C) If, as of Dec. 14, 2005: Sec. 903(d)(2)(B)(iv), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 ; Reg §301.6404-4T(b)(5)(iii)(C)
• the assessment of all federal income taxes for the tax year in which the tax liability to which the interest relates arose is prevented by the operation of any law, or
• a closing agreement under Code Sec. 7121 has been entered into with respect to the tax liability arising in connection with the transaction. Sec. 903(d)(2)(B)(iv), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 .
That is, under rule (C) above, taxpayers remain eligible for suspension of interest under Code Sec. 6404(g)(1) if the year in which the underpayment occurred is barred by the statute of limitations (or a closing agreement) as of Dec. 14, 2005. Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 67, see ¶64,041.001 .
Before Dec. 21, 2005, the rule at (4) above, excepting interest with respect to Code Sec. 6664(d)(2)(A) reportable transactions and Code Sec. 6707A(c) listed transactions from the suspension of interest rules, didn't apply for any interest accruing before Oct. 4, 2004. Sec. 903(d)(2), PL 108-357, 10/22/2004 before amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 . But the exception was retroactively, Sec. 303(a)(2), PL 109-135, 12/21/2005 , made to apply with respect to interest accruing on or before Oct. 3, 2004, unless one of the exceptions described at (A), (B), or (C) above applies. Sec. 903(d)(2)(B)(i), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 .
In addition, before amended retroactively to apply to interest accruing on, before, or after Oct. 3, 2004 ( Sec. 426(b)(2), PL 109-432, 12/20/2006 ; Sec. 303(a)(1), PL 109-135, 12/21/2005 ), Sec. 903(d)(2)(B)(iii) (i.e., the rule (B) reasonable cause exception above) provided that the Secretary of the Treasury (rather than the Secretary of the Treasury “or the Secretary's delegate”) had to except the transaction from the continuation of interest rules. Sec. 903(d)(2)(B)(iii), PL 108-357, 10/22/2004 as amend by Sec. 303(a)(1), PL 109-135, 12/21/2005 and before amend by Sec. 426(b)(1), PL 109-432, 12/20/2006 .
For tax years beginning before Jan. 1, 2004, the rule at (4) above, excepting interest with respect to any gross misstatement from the suspension of interest rules, didn't apply. Sec. 903(d)(1), PL 108-357, 10/22/2004
Before Oct. 22, 2004, Code Sec. 6404(g)(1) 18-month period for providing notice and beginning the suspension period (see above) was to be reduced to one year for tax years beginning after Dec. 31, 2003. Code Sec. 6404(g)(1)(A) before amend by Sec. 903(a), PL 108-357, 10/22/2004 ; Code Sec. 6404(g)(3)(A) before amend by Sec. 903(a), PL 108-357, 10/22/2004 . However, the reduction was retroactively eliminated by the 2004 American Jobs Creation Act for tax years beginning after Dec. 31, 2003. Sec. 903(d)(1), PL 108-357, 10/22/2004 .
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