Guidance was issued on December 7, 2016, and released on March 31, 2017, regarding reassessment after abatement. The Procedure and Administration Division of Chief Counsel’s office issued the guidance to an attorney in a field office. The guidance addressed the following question:
“Whether the statute of limitations for assessment of the section 6651(a)(2) addition to tax for failure to pay remains open after an erroneous administrative First Time Abatement, such that the Service may reassess the addition to tax.”
The guidance concludes that the normal three year statute of limitations for assessment does not apply to the addition to tax imposed in 6651(a)(2) and, therefore, the IRS can reassess a failure to pay addition to tax at any time during the ten year statute of limitations for collection. The guidance document, though relatively short, contains a couple of statute of limitations issues worth discussing.
The facts giving rise to the opinion deserve brief mention. In this case the taxpayer filed a joint return with her husband. They reported the tax on the return but failed to pay the tax reported on the return. Later they filed an amended return reporting more tax which they also failed to pay. The taxpayer’s husband filed a bankruptcy petition but she did not. The filing of the bankruptcy petition by one spouse causes the IRS to split the tax account from one master file account into two non-master file accounts. Guest blogger Marilyn Ames discussed master file and non-master file accounts in an earlier post and understanding the differences is important in interpreting IRS transcripts.
Depending on the timing of the bankruptcy, the husband might have discharged the 6651(a)(2) liability. For penalties and additions to tax, the provision governing discharge is found in BC 523(a)(7) and has a three year rule. For the same reason, discussed below, that the normal assessment rules do not apply to the 6651(a)(2) liability, the three year rule is a little different in a failure to pay situation since the liability derives from post-return actions (or inactions.) Whether the husband discharged this liability does not matter in this advisory opinion. The opinion focuses on the wife’s liability. Because she did not file bankruptcy, her husband’s discharge, if any, will have no impact on her. He might discharge not only the 6651(a)(2) liability but the tax and the interest. She would still have a liability for these amounts no matter how her husband’s bankruptcy treats them with respect to him.
Because she still owes this liability, she called the IRS and requested first time abatement. Steve has written a couple of excellent posts on first time abatement (FTA), here and here, which have proven to be among the most popular posts of all time. FTA more frequently occurs with late filing and not late payment but here the IRS person on the phone granted her FTA for late payment. However, sometime after granting her FTA, the IRS determined that it made a mistake because “she had a penalty or addition to tax within the three years prior to the tax period at issue.” I suspect the mistake related to the placing of her liability for the tax in a non-master file account.
When the IRS mistakenly abates a liability, it has a few good, but old, cases on which it relies to reverse the mistake and it cites to those cases in the advisory opinion. The first case is Carlin v. United States, 100 F. Supp. 451 (Ct. Cl. 1951) which held that “if the Commissioner abates the assessment, it ceases to exist or to have any effect thereafter. The Commissioner cannot subsequently rescind his actions or restore the assessment, but must rather make a new assessment unless, of course, the statute of limitations has previously expired.” The second case always cited in these situations is Crompton-Richmond v. United States, 311 F. Supp. 1184 (S.D.N.Y. 1970) holding that “if the statute of limitations has not run, the IRS may simply make a new assessment of the tax liability that has been abated.”
These cases allow the IRS to essentially have a “do over” when it erroneously abatement a taxpayer’s liability; however, they limit the do over to the statute of limitations. Although neither of the quotes in the preceding paragraph make precisely clear which statute of limitations it means, the relevant statute of limitations in these cases is the statute of limitations on assessment. That gives the IRS a relatively short window within which to fix the problem. The normal rule on the statute of limitations for assessment of three years from the due date of the return does not apply, however, if the liability comes from 6651(a)(2).
The guidance explains that the assessment period for a 6651(a)(2) liability cannot end three years from the due date (or filing date) of a return because this addition to tax runs for 50 months after the filing date. During the 50 months after the filing date, the taxpayer gets hit with another liability under the statute for every month that passes based on the outstanding liability as of that month. Because the assessment of this liability must extend past the normal three year period for assessment, the guidance concludes that the time period for assessment remains open for the ten year statute of limitations on collection. As with the reassessment after abatement case law, the case law on this ten year statute of limitations is fairly thin and exists in lower court opinions. The leading case is United States v. Estate of Hurd, 115 A.F.T.R.2d 2015-38 (C.D. Cal 2015).
So, the guidance concludes that because the statute of limitations on collection remained open in W’s case the IRS could reverse the abatement and reassess the liability against her. The guidance is not surprising and does not break new ground but because this issue does not arise and get discussed very often the guidance is worth looking at if you have a reassessment situation.