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The inevitability and practical unavoidability of interest on underpayments to Uncle Sam

One of the questions I get asked from time to time by my tax controversy clients is can we get rid of the interest component of their tax debt. Well, unfortunately, as a general rule the answer is no. If you owe taxes to the IRS and do not pay up on time, interest will accrue on the portion that remains unpaid. It is a fact of tax-life. To borrow a phrase that has gotten some recent publicity – “get over it.” That said, I will take a moment to introduce some of the limited exceptions to the imposition of interest on underpayments. I intend to only introduce these limited exceptions in this article and will save a more detailed dive into the various exceptions for future articles. Okay, to aid us in our efforts to “get over it,” let’s meet a few of these exceptions:

  1. Exception one involves Foreign Tax Refunds.
  2. Exception two involves persons who serve in combat zones or qualifying contingency operations.
  3. Exception three are abatements (reductions) for IRS conduct. Now don’t get too excited here – it is not the kind of conduct you probably think it is:
    1. Math errors in returns prepared by the IRS, and
    2. Unreasonable error or delay by the IRS in performing a ministerial or managerial act.
  4. Exception four involves suspension of interest (a) in return for a Waiver of Restrictions on Assessment, or (b) if the IRS fails to contact the taxpayer in a timely manner.
  5. Exception five is for federally declared disasters or acts of terrorism or military action. And finally,
  6. Exception six involves federal unemployment tax underpayments.

As you can see, the above “exceptions” involve rather specific situations that are not present for many taxpayers. In my decades of tax practice, without fail the IRS has proven very possessive of its “interest” component of tax debt. To be clear, when it comes to the interest component of tax debt, the IRS shows no signs of “getting over it.”

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