Tax Articles and Tips

Private tax collection about to begin—IRS outlines mechanics & taxpayer safeguards
Source: Federal Taxes Weekly Alert (preview) 08/31/2006, Volume 52, No. 35

IRS says it will kick off a new private debt collection initiative in September, by referring 12,500 taxpayers to three private collection agencies (PCA), with the number reaching about 40,000 by the end of 2006. It prepares taxpayers and their advisers for this event with an announcement providing an overview of the initiative, plus news releases on how the program works and steps taxpayers can take to prevent tax scams in connection with the private debt collection program. [See above "at a glance" announcement of availability of IRS web resources page.]

Background. To help facilitate tax collection, the American Jobs Creation Act of 2004 allows IRS to enter into qualified tax collection contracts with private debt collection agencies (which IRS now refers to as private collection agencies, or PCAs). (Code Sec. 6306(a)) PCAs are authorized to:

(A) locate and contact any taxpayer specified by IRS;
(B) request full payment of the amount of Federal tax specified by IRS, and, if the taxpayer can't pay the full amount, to offer him an installment agreement providing for full payment over a period not to exceed 5 years; and

Code Sec. 6306(b) puts in place several taxpayer privacy safeguards, such as prohibiting PCAs or their employees from committing any act or omission that IRS employees are prohibited from committing in performing similar services.

Earlier this year, IRS announced it had selected three PCAs to participate in the first phase of the debt initiative and issued Fact Sheet 2006-18 listing in considerable detail the taxpayer protection measures it has set in place (see Federal Taxes Weekly Alert 03/16/2006).

Ann. 2006-63, 2006-37 IRB provides taxpayers and their advisers with an overview of how the new PCA program will work, and the taxpayer protection measures that will apply. Here's a summary of the more important provisions.

What IRS will provide to the PCA. When IRS refers a taxpayer's account to a PCA, the information it will provide includes:

taxpayer's name, last known address, and social security number (or taxpayer identification number);
name and social security number of the spouse (if he or she jointly owes the tax liability);
tax year and amount of the assigned debt, and the date when the statute of limitations for collection expires; and
name, address, telephone number, and authority level of any person the taxpayer has given a power of attorney or taxpayer information authorization.

Installment agreement details. To be eligible for an installment agreement, a taxpayer must file all required Federal tax returns. PCAs will request that the taxpayer provide information regarding tax return filing compliance. To verify the accuracy of the taxpayer's responses about return filing, the PCAs must confirm the information with IRS. Only IRS employees can access IRS records to investigate the return-filing issue. During evaluation of payment arrangements, the PCA may request taxpayer financial information that will be forwarded to IRS.

If a taxpayer wants an installment agreement and the PCA has been told he hasn't filed all required returns, its employees will advise the taxpayer to file any delinquent returns and make any payments to a designated IRS address, not to the PCA. If a taxpayer mistakenly sends a return or payment to the PCA, it must immediately transmit the return or payment to IRS.

Although IRS retains the right to approve or reject any installment agreement negotiated between PCAs and taxpayers, PCAs must obtain specific IRS approval of any installment agreement involving payment of more than $25,000 or covering a period of more than 36 months. PCAs can't OK more-than-60-month installment agreements, or those providing for less than full payment of the taxpayer's liability. In such cases, PCAs will serve only to gather financial information for transmittal to IRS.

If the taxpayer proposes an installment agreement to the PCA and IRS rejects it, the taxpayer may appeal the rejection to IRS. If the IRS assigns a PCA to monitor an installment agreement and the PCA determines the taxpayer is in default, the taxpayer may appeal to IRS if the installment agreement is terminated. In both situations, the taxpayer must first appeal to IRS's office supervising the PCA's day-to-day work, but if not satisfied he can continue the appeal to IRS's Office of Appeals.

Taxpayer safeguards. Ann. 2006-63, 2006-37 IRB includes numerous taxpayer safeguard and privacy measures, including the following:

Subject to certain limited exceptions, PCAs can't contact third parties during the course of their work for IRS. However, while trying to locate or obtain financial information about a taxpayer, PCAs may access non-IRS computer databases or web sites.
PCA employees can't call or write any third party, such as the taxpayer's employer, bank, or neighbors, to ask about the taxpayer's financial condition. They may speak to intermediaries, such as a taxpayer's spouse, or leave a message on an answering machine, for purposes of trying to contact the taxpayer by phone.
Once the PCA knows how to reach a taxpayer directly, its employees can't contact third parties in an effort to reach the taxpayer at a different temporary location.
PCA employees can't contact the taxpayer at any unusual time or place, or at a time or place that they should know to be inconvenient, without a taxpayer's prior consent. Generally, no contacts will be made earlier than 8 a.m. or later than 9 p.m. local time at the taxpayer's location, pursuant to Code Sec. 6304(a) (fair tax collection practices).
PCA employees can't suggest or imply to the taxpayer or anyone else that the PCA may be able to initiate enforced tax collection activity (e.g., file a lien, issue a levy, make a property seizure, or commence a legal action) or recommend enforced collection action to the IRS. They also can't suggest or imply that the taxpayer's failure to pay the tax debt may affect the taxpayer's credit rating or that the unpaid tax debt may be reported to a credit bureau.

What the private forms won't be able to do. IRS says that PCAs can't take enforcement actions or work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation. Rather, PCAs will only get cases in which the taxpayer has not disputed the liability. The PCAs will only contact taxpayers to make payment arrangements.

RIA observation: As is evident from the limited scope of a PCA's powers, and the limits on its work practices, the private debt collection program will deal only with relatively simple and straightforward cases.

What taxpayers can expect when PCA action is initiated. IRS also spells out for taxpayers what they can expect when a PCA action is initiated, and explains how they can protect themselves against scam artists who may try to exploit the program.

RIA Research References. For collection of taxes by private companies, see FTC 2d/FIN ¶ V-5000.2; United States Tax Reporter ¶ 63,064; TaxDesk ¶ 901,031; TG ¶ 71901.

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Plan now to avoid dealer status for "investment" land
Source: Federal Taxes Weekly Alert (preview), 04/20/2006, Volume 52, No. 16

This Practice Alert (excerpted from a more extensive article in RIA/WGL Practical Tax Strategies Journal Nov. 2005) explains how the increased involvement of real estate investors in land they own can unintentionally turn their capital gains into ordinary income unless they take appropriate steps to solidify their investor status.

The problem. By being classified as a dealer in real estate, a taxpayer can owe at least double the tax an investor would have paid. Without proper knowledge and planning, an "investor" can fall into the "dealer" trap even before Uncle Sam asks why the investor reported the gain as long-term capital gain. To add insult to injury, a dealer in real estate also could incur self-employment taxes on his or her "dealer" income. Proper classification depends on a subjective analysis of all the facts and circumstances. Fortunately for the taxpayer, planning can help structure the "facts and circumstances" in his or her favor.

Growing concern. Why is this classification issue more of a problem today? While the dealer versus investor issue has been the subject of many tax controversies over the last 50 years, the manner in which real estate progresses from investment to development (investor to user) has significantly changed in recent years. In high growth areas of our country, the old investment scenario of buying a chunk of undeveloped land (raw land), holding it for many years until the growth pattern of the communities nearby caught up, and then selling the chunk to a homebuilder who would convert it into usable plats, lots, or subdivisions is no longer viable. Today, homebuilders and shopping center developers use "just in time" inventory control mechanisms (just like their manufacturing brethren) to control their supply of ready-to-build lots. Meanwhile, governments have matured in their regulatory processes so that it is very difficult for the unsophisticated investor to make much out of his chunk of land.

The result is that the size of such chunks are increasing, the number of speculative investors are decreasing, and those that remain must do much more to advance the status of their property as a maturing investment. Raw land investing has become almost as sophisticated as "going public" in the corporate world. Just as in the corporate world, more time, planning, and sophisticated knowledge (requiring more money) are necessary ingredients. The upside is that the numbers are larger, but so is the incentive for the IRS to challenge the "investor's" status.

Legal principles. The operative Code provision is Code Sec. 1221(a)(1). It defines the term "capital asset" as property held by the taxpayer (whether or not connected with the taxpayer's trade or business), but expressly excludes, among other items, "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." The U.S. Supreme Court has noted that the purpose of this provision is to differentiate between profits and losses arising from the everyday operation of a business on the one hand, and the realization of appreciation in value accrued over a substantial period on the other.

The decision that perhaps best illustrates the attributes that need to be examined is Fraley, (1993) TC Memo 1993-304, where the Tax Court confirmed the "attribute" laundry list that needs to be examined to determine the owner's intent. This list of attributes was detailed in a series of Sixth Circuit decisions issued in the late '70s, in which the court upheld the axiom that, "whether land is held primarily for sale to customers in the ordinary course of a taxpayer's trade or business is a purely factual determination." The '93 Fraley case merely reconfirms these attributes. They are:

(1) The purpose for which the property was acquired.
(2) The purpose for which the property was held.
(3) The extent of improvements made to the property.
(4) The frequency of sales.
(5) The nature and substantiality of the transactions.
(6) The nature and extent of the taxpayer's dealings in similar property.
(7) The extent of advertising to promote sales.
(8) Whether the property was listed for sale either directly or through brokers.

No one attribute is clearly determinative of the holding intent. Rather, all of the attributes are weighed with consideration of the importance or applicability of each.

More recent clarification. One recent Tax Court case and three very recent private letter rulings (all favorable for the taxpayer) add much improved definition to the interpretation of dealer versus investor in light of today's real estate cycle.

In Phalen, (2004) TC Memo 2004-206, the Tax Court applied the taxpayer's factual situation to the attributes in its previous Fraley decision and to several other Tax Court and circuit court decisions dealing with specific individual factual attributes. It further considered the factors articulated by the Tenth Circuit, to which this case would be appealed. The activities articulated in Phalen are very similar to those an investor may have to undertake today to maximize the value of his investment without crossing the line to engage in "dealership." The Phalen attributes include:

The owners of the development entity (some of whom were real estate developers in their other activities and owned their interests in the same percentages as investors) did not taint the taxpayer partnership's investment status.
A guarantee by the investment partnership of the performance of the development agreement with the municipal improvement district was not fatal.
The investment partnership succeeded to rights under the master plan and the development agreement put in place by the former bankrupt developer/owner, and assumption of these rights did not taint the investment purpose.
The sale of multiple tracts to different buyers (who also were developers) over four years, in this case, was acceptable.
The investment partnership's participation in financing the activity of the developer who was the buyer and financing the municipal improvement district (which was obligated to construct the improvements) was not fatal.
Soil testing to evaluate the development alternatives for the property was acceptable.
The investor partnership's participation in amended and final site plans was acceptable.
All corporate and partnership formalities were carefully followed-even between related investor/dealer entities.
Good business reasons existed for the sale to related (through ownership) development entities and for structuring of activity among the investment partnership, municipal improvement district, and the financing.
The individuals, personally, were not real estate brokers or agents.
All sales were unsolicited.
"Development" activities (in this context, physical improvements) were not directly undertaken by the investor partnership.

Three recent private letter rulings reveal how IRS views activities that owners undertake in their "maturing" real estate investment markets. The three rulings were issued to tax-exempt organizations that were concerned their investment activities would classify them as dealers, thus yielding unrelated business income tax (UBIT). While the specific issue was UBIT, IRS essentially had to examine the organizations' real estate attributes to determine if they were investors or dealers. If an organization was an investor, the gain would not be UBIT. The facts considered by IRS as positive or negative on the issue are instructive of how it might view a client's specific facts.

In PLR 200510029, the sale of nine land parcels was not unrelated business income. The charity, a school for disadvantaged children, owned farmland which was now suitable for development. The facts examined by IRS include:

The proposed buyers would bear the cost of the site plan and improvements. (The discussion there by IRS seems to imply it is concerned with "physical" not "paper" improvements.)
They will use a passive, patient, market approach.
The historic use of the land was for farming, an activity related to their exempt purpose.
The parcel was too large to sell to one buyer to "receive maximum value." (This implied that the investor could maximize value by selling to multiple buyers in different market segments.)
Multiple sales would allow the seller to "control the pace and type of development."
The buyers (developers) were responsible for on-site and off-site construction activities.
No improvement was required to make the property more attractive for sale. Utilities already abutted the site. (This implies again that IRS is concerned about physical improvements.)
The buyer would plat the subdivision of the lots.
There was a definitive change in ability to use the land for farming resulting in a "surplus land" status.

The taxpayer in PLR 200242041 was a religious school situated on a portion of the land to be sold. The land had been held for a long time. Attributes examined in this positive (for the taxpayer) ruling include:

This portion of the land was not suitable for school purposes (i.e., surplus property).
The parcel (45 acres) had to be divided in order to sell and maximize the gain.
A roadway needed to be constructed for access to the parcel, which was to be subdivided into three residential lots. The charity proposed to build the roadway, drainage, landscape, and trails as required by the township in which the parcel was located, and the charity was required to enter into a subdivision agreement with the town.
No active marketing would occur, although the charity may list with a realtor, if necessary, after a period of "self marketing."
The charity has no history of subdividing real estate.

In PLR 200530029, a private foundation received, over time, various parcels of unimproved land from its founder, including several from his estate. Again, they were too large for most single buyers. IRS examined the following attributes in its positive ruling:

The parcels were to be subdivided into lots no smaller than 20 acres each.
A passive marketing approach was to be used. The foundation would attempt to sell through its prospectus sent to interested parties (sounds like a sales flyer/brochure). (Note that the passive marketing approach that appears in all three rulings and several cases.)
There would be a maximum of two sales per year over 20 years. (Is that good or bad? Could one not say they were regularly carrying on a trade or business?)
The foundation performed land planning and preliminary engineering to determine how to maximize the value of its investment.
All parcels were sold to developers.
The word "improvement" is connected to "construction" to connote a physical change in the property, not a paper change.

Conclusion. The dealer versus investor issue with regard to real estate recently has become the object of more attention because of the overheated real estate market. The growth of cities and urban areas has brought many long-held parcels to their ultimate market-i.e., residential and commercial development. The old attributes articulated in Fraley in '93, and cited in many cases thereafter, have been reexamined, confirmed, and given new application to recent market trends in real estate. Fortunately, there now is quite a bit of guidance, and at least in this area, favorable application for those investors who are willing to carefully structure their activities in bringing their investment property to market.

RIA observation: RIA editors note that non-C corporation taxpayers holding land should see if they qualify for the favorable Code Sec. 1237 five-year land subdivision rule. Under this rule, an individual, trust, estate or S corporation won't be treated as holding land primarily for sale to customers merely because the taxpayer subdivided a tract of land into lots or parcels and engaged in advertising, promotion, selling activities or the use of sales agents in selling lots in the subdivision, if the taxpayer:

hasn't previously held any part of the same land primarily for sale to customers in the ordinary course of business, and, in the year of sale doesn't hold any other real estate for sale to customers;
doesn't (while he holds the land or as part of a contract of sale with the buyer) make "substantial improvements" on the land that substantially increase the value of the lot sold (except, if elected, improvements needed to make marketable land that has been held for ten years or more); and
either has owned the land for five years or more, or acquired it by inheritance or devise.

However, if more than five lots or parcels in the same tract are sold or exchanged, 5% of any gain from the year in which the sixth lot or parcel is sold, and later years, is ordinary gain.

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Dividend distributions by S corporations save on FICA taxes
Source: Federal Taxes Weekly Alert (preview) 03/16/2006, Volume 52, No. 11

This Practice Alert (excerpted from a more extensive article in the December 2005 issue of RIA/WGL Practical Tax Strategies Journal entitled "FICA FACTORS FOR S CORPORATION PAYMENTS TO OWNER/EMPLOYEES" explains how S corporations and their shareholder-employees can save on employment taxes by characterizing more distributions as dividends rather than as compensation for services, the government's initiatives in this area, and how to help prevent a challenge from IRS.

Owner/employees. Owners of a closely held C corporation can enjoy a significant benefit from paying a shareholder/employee as much as possible in the form of salary (rather than dividends) in order to minimize the double tax. This strategy, however, is not applicable to a limited liability company (LLC) or an S corporation because these entities generally do not pay an entity-level income tax. To the contrary, an S corporation shareholder/officer benefits from having distributions classified as dividends. This is because a salary, unlike a dividend, is subject to federal employment taxes (i.e., FICA and FUTA).

Classifying a distribution as a dividend can also be beneficial for a shareholder/officer of an S corporation who retires before "normal" retirement age (i.e., 65 years and six months in 2005). Dividends, unlike salary for services rendered, do not reduce an individual's Social Security benefits.

Historical perspective. IRS first addressed the issue of dividends versus salaries received by shareholder/employees of an S corporation in '74. In Rev Rul 74-44, 1974-1 CB 287, it concluded that dividends received by the two sole shareholders of an S corporation were, in fact, "wages" for services rendered for which the corporation was liable for FICA and FUTA as well as the withholding of income tax.

In the 1980s, two district courts concluded that an officer of an S corporation was an employee for employment tax purposes. Both decisions were appealed to the Seventh and Ninth Circuit Courts of Appeal, which affirmed the lower courts' decisions.

Nu-Look Design, Inc. The two cases discussed above both involved S corporations that provided professional services (i.e., legal and accountancy) to the firm's clients. In 2003, IRS in Nu-Look Design, Inc., 93 AFTR 2d 2004-608, 356 F3d 290 (CA-3, 2004), again looked at payments from an S corporation to its sole shareholder/officer. Again, the issue to be resolved was whether the payments should be classified as dividends or wages for services rendered. This time, however, the S corporation did not provide professional services but rather was in the home improvement business.

Contention regarding S corporation shareholders. Citing Code Sec. 1366 and Code Sec. 6037(c), Nu-Look argued that S corporation shareholders should not be deemed employees. The Tax Court we rejected any suggestion that Nu-Look's passing through of its net income to its sole shareholder/officer precludes the finding of an employer-employee relationship.

In conclusion, the Tax Court found that Nu-Look's sole shareholder/officer performed "more than minor services for Nu-Look and that he had received remuneration for those services." As a result, the court held that he was an employee of Nu-Look under Code Sec. 3121(d); therefore, it was liable for employment taxes for '96, '97, and '98. The Third Circuit affirmed.

IRS guidance. In a memorandum dated July 5, 2002 and entitled "The Internal Revenue Service Does Not Always Address Subchapter S Corporation Officer Compensation During Examinations," IRS outlined four recommendations designed to remedy this issue. Two of these recommendations are summarized below:

(1) The Director, Compliance, Small Business/Self-Employed Division should provide technical guidance and resources (such as software) to field personnel to aid in determining reasonable officer compensation.

(2) The Director, Taxpayer Education and Communication, Small Business/Self-Employed Division should develop consistent materials for educating and informing taxpayers and representatives of their S corporation officer compensation tax obligations. Such materials could include sending out pre-filing literature to taxpayers electing S corporation status.

An example of the latter recommendation has already surfaced. IRS is now including additional information (some might say a "warning") on acceptance of the S corporation election on Form 2553. The following notice was dated Jan. 10, 2005: Notice of Acceptance as an S-Corporation:

We have accepted your election to be treated as an S corporation with an accounting period of December beginning Nov. 1, 2004.

We would also like to take this opportunity to inform you of your tax obligations related to the payment of compensation to shareholder-employees of S-corporations.

When a shareholder-employee of an S corporation provides services to the S corporation, reasonable compensation generally needs to be paid. This compensation is subject to employment taxes.

Tax practitioners and Subchapter S shareholders need to be aware that Rev Rul 77-44 states that the IRS will re-characterize small business corporation dividends paid to shareholders as salary when such dividends are paid to the shareholders in lieu of reasonable compensation for services.

Recent Treasury statement. On Aug. 5, 2005, the Treasury Inspector General for Tax Administration presented a report before the Senate Finance Committee regarding IRS's administration of certain employment tax laws. The report found that employment tax inequities exist between sole proprietorships and single-shareholder S corporations.

Specific conclusions of the report include the following:

(1) In Tax Year 2000, 78.9% of all S corporations were either fully owned by a single shareholder, or more-than-50% owned by a single shareholder. Therefore, in nearly 80% of S corporations, the individual who owns the business determines the salary paid to the shareholder operating the business.

(2) The S corporation form of ownership has become a multibillion dollar employment tax loophole for single-shareholder businesses. In Tax Year 2000, the owners of 36,000 single-shareholder S corporations received no salaries at all from their corporations, even though the operating profits of each of these corporations exceeded $100,000. This resulted in employment taxes not being paid on $13.2 billion in profits.

(3) The owners of single-shareholder S corporations have been setting their salaries at a decreasing percentage of corporate profits in the past several years. In Tax Year '94, these shareholders paid themselves salaries subject to employment taxes equal to 47.1% of their profits. This percentage fell to 41.5% by Tax Year 2001. In comparison, sole proprietors pay employment taxes on all their operating profits.

(4) In Tax Year 2000 alone, S corporations paid $5.7 billion less in employment taxes than would have been paid if the taxpayers were sole proprietors.

(5) Advising small businesses to save on employment taxes by forming S corporations has become a cottage industry. A search of the Internet yields many sites that advise entrepreneurs that they can save thousands of dollars a year in employment taxes simply by incorporating.

Conclusion. S corporations and their shareholder/employees have an employment tax incentive to distribute corporate earnings as dividends rather than as compensation to the shareholder employees. As IRS releases and court decisions indicate, however, IRS may scrutinize how an S corporation classifies its distributions, revise the classifications, and assess additional tax accordingly. With proper planning, however, an S corporation's compensation policy has a better chance of lowering its ultimate out-of-pocket employment tax costs.

Planning tip. The following actions could help in preventing the IRS from declaring that dividends distributed by an S corporation to a shareholder/employee should be treated as compensation and subject to withholding and employment taxes:

Develop a salary or wage policy (e.g., per month or per hour) and compensate the shareholder/employee in accordance with the policy.
Consider the following nonexhaustive list of factors when setting compensation in order to maintain reasonable levels of compensation:

... Employee qualifications.
... Nature, extent, and scope of work performed.
... Nature and size of business.
... Comparison of salaries with financial results.
... Compensation paid for similar work in comparable companies.
... Document the above elements in the corporate minutes.

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IRS provides guidance on interest abatement where it fails to notify individuals of deficiency
Source: Federal Taxes Weekly Alert (preview) 07/14/2005, Volume 51, No. 28

Rev Proc 2005-38, 2005-28 IRB 81
A new revenue procedure explains how an individual can seek abatement of interest after July 10, 2005 where IRS has improperly assessed interest for periods during which interest should have been suspended under Code Sec. 6404(g). That provision suspends interest where IRS fails to notify a taxpayer of the amount and basis for a deficiency.

Background. Under Code Sec. 6404(a), IRS can abate an assessment of tax or any liability related to the tax (including interest) if the assessment is excessive in amount, untimely, or erroneously or illegally assessed. Notwithstanding this rule, Code Sec. 6404(b) precludes taxpayers from filing administrative claims for abatement for income, estate, or gift taxes. In what IRS characterizes as a limited exception to this general prohibition against abatement claims, Code Sec. 6404(e) allows IRS to abate an assessment of interest that is attributable in whole or in part to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act.

The accrual of interest is suspended under Code Sec. 6404(g)(1), with some exceptions, for an individual who files an income tax return if IRS fails to specifically notify him of the amount due and the basis for the liability within 18 months of the later of the unextended return due date or the date the return was filed. The suspension period begins on the day after the close of the above 18-month period, and ends on the date that's 21 days after IRS provides the required notice. (Code Sec. 6404(g)(3))

The Tax Court has jurisdiction over any action brought by a taxpayer who meets a net worth and size requirement to determine whether IRS's failure to abate interest was an abuse of discretion, and to order an abatement. (Code Sec. 6404(h)) IRS notes that these provisions do not apply where it has failed to suspend interest under Code Sec. 6404(g), except as provided in Rev Proc 2005-38, Sec. 3.03, below. (Rev Proc 2005-38, Sec. 2)

New procedures for abating interest. Except as provided in Rev Proc 2005-38, Sec. 3.03, below, taxpayers cannot submit claims for abatement of interest assessed for periods during which interest should have been suspended under Code Sec. 6404(g). However, Rev Proc 2005-38, Sec. 3.01 provides that taxpayers may notify IRS that interest was assessed in violation of Code Sec. 6404(g) by submitting Form 843, "Claim for Refund and Request for Abatement." Taxpayers should write "Section 6404(g) Notification" at the top of the Form 843.

IRS will review the Form 843 notification and decide whether to abate interest under Code Sec. 6404(a). IRS's abatement determination isn't a final determination letter which would allow the taxpayer to petition the Tax Court. IRS says this is because Code Sec. 6404(g) is an interest suspension provision, rather than an interest abatement provision, and because Code Sec. 6404(b) generally bars claims for abatement for income tax. (Rev Proc 2005-38, Sec. 3.01)

If IRS doesn't abate interest alleged to have been assessed in violation of Code Sec. 6404(g), the taxpayer can pay the disputed interest assessment, file an administrative claim for refund and, if that claim is denied or not acted upon within six months from the date of filing, bring suit for refund. (Rev Proc 2005-38, Sec. 3.02)

Ministerial or managerial acts. If a taxpayer asserts that IRS failed to suspend interest under Code Sec. 6404(g) as a result of an unreasonable error or delay in performing a ministerial or managerial act, he can submit a claim for abatement on Form 843. IRS will consider the claim and issue a notice of final determination. If IRS denies the claim in whole or in part, a taxpayer who otherwise qualifies can petition the Tax Court to determine whether the denial was an abuse of discretion. Under Code Sec. 6404(b), a claim can't be submitted under Rev Proc 2005-38, Sec. 3 asserting only that interest was assessed for periods during which interest should have been suspended under Code Sec. 6404(g). (Rev Proc 2005-38, Sec. 3.03)

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