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Interest for Delinquent Taxes Accrues Until IRS Receives Payment

FEB. 14, 1997

FSA 1997-11

DATED FEB. 14, 1997
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Citations: FSA 1997-11

 

Date: February 14, 1997

 

 

Refer Reply to: CC:DOM:FS:PROC

 

LACamillo

 

 

INTERNAL REVENUE SERVICE MEMORANDUM

 

 

TO:

 

Associate District Counsel, Kansas-Missouri CC:MSR:KSM:KCY

 

 

FROM:

 

Assistant Chief Counsel (Field Service) CC:DOM:FS

 

 

SUBJECT:

 

* * *

 

 

[1] This responds to your request for advice dated November 1, 1996. Although your request was initially addressed to the General Litigation Division, it was forwarded for Field Service Advice on November 21, 1996, as it involves the payment of interest on underpayments of tax under I.R.C. section 6601, an issue within the jurisdiction of Field Service's Procedural Branch.

 

DISCLOSURE LIMITATIONS

 

 

[2] Field Service Advice constitutes return information subject to I.R.C. section 6103. Field Service Advice contains confidential information subject to attorney-client and deliberative process privileges and, if prepared in contemplation of litigation, the Examination, Appeals, or Counsel recipient of this document may provide it only to those persons whose official tax administration duties with respect to this case require such disclosure. In no event may this document be provided to Examination, Appeals, Counsel or other persons beyond those specifically indicated in this statement. Field Service Advice may not be disclosed to taxpayers or their representatives.

[3] Field Service Advice is not binding an Examination or Appeals and is not a final case determination. Such advice is advisory and does not resolve Service position on an issue or provide the basis for closing a case. The determination of the Service in the case is to be made through the exercise of the independent judgment of the Field Office with jurisdiction over the case.

 

ISSUE

 

 

[4] In a situation where the Service exercises its right to set-off amounts owed by the Department of Defense to the taxpayer against the taxpayer's delinquent tax liabilities, does interest imposed by I.R.C. section 6601 stop accruing when the amounts owed by the Department of Defense become payable to the taxpayer or when the payment is actually received by the Service?

 

CONCLUSION

 

 

[5] Interest under I.R.C. section 6601 does not stop accruing until payment is actually received by the Service.

 

FACTS

 

 

[6] The taxpayer, * * *, is a contractor who performs work for the Department of Defense. Pursuant to contracts between the Department of Defense and the taxpayer, periodic payments for services rendered are sent to the taxpayer from the Department of Defense.

[7] In an effort to collect the delinquent tax liabilities of * * *, the IRS made an official request by way of a letter to the Department of Defense, requesting that any distributions now due and any subsequent distributions that will become due to * * * be sent directly to the Service. The Service, in turn, would apply the payments it received from the Department of Defense to the taxpayer's delinquent tax liability. In its letter, the IRS advised the Department of Defense that the United States has a right of set off, regardless of priority, on amounts due to the taxpayer under a Government contract.

[8] The Department of Defense complied with the Service's request. The Service has received at least $* * * in payments from the offsets with the Department of Defense. However, for some unknown reason, the Department of Defense did not remit payments to the Service immediately after such payments were due to be paid to the contractor. Instead, payments due the contractor were remitted to the Service anywhere from zero to 415 days after they became payable. In correspondence with the Service, the Department of Defense acknowledged that "some offset amounts were not paid to the IRS in a timely manner."

[9] The taxpayer has asserted that it should not be charged interest for the time period between when the offset occurred and when the payments were received by the Internal Revenue Service. In support of its position, the taxpayer notes that the funds were always in the hands of the United States, although not with teh same agency. Accordingly, the United States had the "use of the money from the time the payments were due to be paid to the contractor up until the time they were remitted to the Service.

[10] Ordinarily, a payment is processed when it is actually received by the Service. In this regard, IRM 5831(1)(c) provides that, when completing a payment posting document, the date the payment is actually received by the Service is used.

 

DISCUSSION

 

 

[11] The right of set-off is a method of collecting unpaid taxes which is available to the government in limited situations. The right of set off "belongs to every creditor to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due him." United States v. Munsey Trust Co., 332 U.S. 234, 239 (1947). In the present context where the Department of Defense owed a debt to the delinquent taxpayer, the Department of Defense was entitled to apply the debt it owed to the taxpayer against the taxes owed by the taxpayer to the Service. See Capuano v. United States, 955 F.2d 1427 (11th Cir. 1992).

[12] As a general rule, all taxpayers who fail to pay the full amount of a tax due under the Internal Revenue Code must pay interest at the applicable rate on the unpaid amount from the last date prescribed for payment of the tax until the date the tax is paid. I.R.C. section 6601. Thus, the dates marking the accrual period are (1) "the date prescribed for payment" and (2) the date the tax is "paid." Interest is assessed, collected, and paid in the same manner as the tax to which it is related. I.R.C. section 6601(e)(1). Thus, interest is a derivative liability; it exists when and to the extent that liability for tax exists.

[13] Liability for interest may not be forgiven if there is an underlying liability for a principal amount of tax. This rule follows from the statute, which provides that interest at the annual rate "shall be paid" for the period of nonpayment of the underlying tax liability. I.R.C. section 6601(a). Consequently, the Service may accept less then the full amount of interest only where, for example, a portion of the tax is abated or the entire liability is the subject of a compromise or the Service has abated interest pursuant to I.R.C. section 6404.

[14] In the instant case, as far as we know, no portion of the tax is abated and the liability is not the subject of a compromise. Moreover, although the IRS has the authority to abate interest in certain narrowly defined circumstances, those circumstances do not appear to be present in this case. In this regard, the IRS has authority to abate interest on a deficiency that is attributable in whole or in part to either a failure by the Service to perform a ministerial act in a timely manner or an error on the part of the IRS in performing a ministerial act. I.R.C. section 6404(e)(1). However, such abatements are subject to the following requirements:

  • There must have been an assessment of interest.

  • The accrual of the interest must be attributable to an error or delay by an IRS official in performing a ministerial act.

  • No significant aspect of the delay can have been caused by the taxpayer.

  • The taxpayer must have been contacted by the IRS in writing about the deficiency.

 

Temp. Reg. section 301.6404-2T.

[15] The temporary regulations define a ministerial act 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. Reg. section 301.6404-2T(b)(1); see also Rev. Proc. 87-42, 1987-2 C.B. 589. Examples contained in the temporary regulations concerning the definition of ministerial act suggest that interest abatement situations are restricted to office delays in issuing a notice of deficiency after one has been approved, delays in transferring a case to another office after the transfer has been approved and the like.

[16] We are not aware of any delay by an IRS official regarding * * *'s tax liabilities that is ministerial. In fact, the Department of Defense caused the delay that resulted in the accrual of the interest that forms the subject of the taxpayer's complaint in this case. As noted above, the Department of Defense has acknowledged that some of the setoff payments were not made in a timely manner. We do not know the reason for the Department of Defense's delay but, inasmuch as such delay cannot be attributed to any IRS official, it is our view that the taxpayer cannot rely on such delay as justification for abatement of interest pursuant to I.R.C. section 6404. Moreover, we are aware of no other authority which would allow the Service to forego collection of the interest at issue under the facts and circumstances of this case.

[17] Section 6601(a), which imposes interest on underpayments of tax from the last date prescribed for payment until the date paid, is based on the principle that a taxpayer who does not pay its tax liability in a timely manner has the use of funds rightfully in the possession of the government. See Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950). In the instant case, the taxpayer argues that, inasmuch as it did not have the use of the funds for the time period beginning when payments from the Department of Defense were due to be paid and ending when such amounts were actually remitted to the Service, the taxpayer should not have to pay interest during this period. The taxpayer's argument is based upon the fact that the funds were in the hands of the United States government for the entire period.

[18] The taxpayer's argument has some logic in that it seems equitable that the entity that actually had the use of the money should be responsible for paying interest. Some superficial support for the taxpayer's argument can be gathered from the case law, which makes no attempt to distinguish different government agencies. See e.g., The May Department Stores Co. v. United States., 36 Fed. Cl. 680 (1996). We note that the facts of May show no other government agency was involved, so that the use of the term "government" seems to be intended as a synonym for the Service. Here, it is undisputed that the Service did not have use of the money for the time period at issue. We can find no basis to support the taxpayer's assertion that interest on delinquent taxes should not be charged for the time period when ANY agency of the United States government (not necessarily the Service) possessed the funds.

[19] The provisions of the Internal Revenue Code relating to deficiency interest are designed so as to assimilate it to the tax itself, so that the taxpayer who pays both can and should proceed to seek to recover both together through one proceeding. Alexander Proudfoot Company v. United States, 454 F.2d 1379, 1382 (Ct. Cl. 1972). Accordingly, the taxpayer in this case is primarily liable to pay the full amount of the deficiency and the interest. The Service has no authority to release the taxpayer from such liability under the facts and circumstances of this case.

[20] We are not unsympathetic to the taxpayer's argument that it should not pay interest for period when it did not have the use of the money. In this case, the Department of Defense was responsible for the delay for the period at issue. Thus, an argument can be made that the Department of Defense should be liable for interest. In this regard, the taxpayer may be able to bring some type of administrative or legal action to collect the interest at issue from the Department of Defense. 1 However, this does not in any way release the taxpayer from its liability to remit the full amount of the deficiency and interest to the Service.

[21] If further information is needed, please call Lynne A. Camillo at FTS (202) 622-7940.

DEBORAH A. BUTLER

 

 

By: SARA M. COE

 

Chief, Procedural Branch

 

Field Service Division

 

FOOTNOTE

 

 

1 It appears that the taxpayer in this case may have a remedy under the Prompt Payment Act, 31 U.S.C. section 3901 et seq. or the Contract Disputes Act, 41 U.S.C. section 605.

 

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