Failure-to-pay additions could be reassessed within the original collection period

Plain-English summary

The IRS mistakenly granted a taxpayer first-time abatement of additions to tax for failing to pay the amount shown on a return. Chief Counsel advised that the IRC § 6651(a)(2) addition is not governed by the ordinary three-year assessment period in IRC § 6501(a). Amounts first assessed less than ten years earlier could therefore be assessed again after the erroneous abatement. An amount first assessed more than ten years earlier could not be reassessed because the collection period had expired. A new assessment would not restart or extend the original ten-year collection period.

Ruling snapshot

• Question: Could the IRS reassess a failure-to-pay addition after discovering that it had granted an erroneous first-time abatement?
• Outcome: advice given, reassessment was allowed only while the original collection period remained open
• Key authorities: IRC §§ 6501(a), 6502(a), and 6651(a)(2)

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 201713001
           Release Date: 3/31/2017
           CC:PA:02: CCONRAD
           GL-132506-16

 UILC:     6651.00-00, 6501.00-00

  date:    December 07, 2016

     to:   Beth A. Nunnink
           Senior Attorney
           (Small Business/Self-Employed)

  from:    Ashton P. Trice
           Chief, Branch 2
           (Procedure & Administration)


subject:   The statute of limitations for assessment of the section 6651(a)(2) addition to tax for
           failure to pay the amount shown as tax on a return

           This Advice responds to your request for assistance. This advice may not be used or
           cited as precedent.

           ISSUE

           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.

           CONCLUSION

           The statute of limitations for assessment of the section 6651(a)(2) addition to tax is not
           subject to the section 6501(a) three year statute of limitations for assessment. The
           period of limitations for assessment remains open following the erroneous
           administrative First Time Abatement for amounts initially assessed less than ten years
           ago. The ten-year limitations period on collection would preclude making a new
           assessment for amounts for which that period has run.

           BACKGROUND

           ----------(TPW) and -----------(TPH) ------------------filed a joint return for taxable year -------,
           and did not pay the amount shown as tax on the return. The reported tax was assessed
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on ---------------------------. The taxpayers filed an amended joint return that reported
more tax, which was assessed on --------------------------. The Service assessed accrued
amounts of the section 6651(a)(2) addition to tax for failure to pay on -------------------------
------------------------------------------------------------------, and -------------------. On ----------------,
TPH went into bankruptcy and the joint accounts were split into two MFT31 accounts.

On ------------------------the Service, during a phone call with TPW, granted TPW a First
Time Abatement (FTA) for the full amount of the section 6651(a)(2) addition to tax for
failure to pay on TPW’s MFT31 account. On -----------------------, the Service determined
that TPW should not have been granted a FTA. The Service discovered that TPW did
not meet the eligibility requirements for a FTA because she had a penalty or addition to
tax within the three years prior to the tax period at issue.

You have asked for assistance in determining whether the Service may reassess the
section 6651(a)(2) addition to tax for failure to pay on TPW’s MFT31 account upon the
discovery that TPW should not have been granted a FTA for this tax period.

LAW AND ANALYSIS

If the Service abates an assessment of tax, and later determines that such abatement
was erroneous, it may reassess the abated tax if the statute of limitations for
assessment remains open. See Carlin v. United States, 100 F. Supp. 451, 455 (Ct. Cl.
1951) (“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.”); see also Crompton-Richmond v. United States,
311 F. Supp. 1184, 1186 n.2 (S.D.N.Y. 1970) (“If the statute of limitations has not run,
the IRS may simply make a new assessment of the tax liability that has been abated.”).

The section 6651(a)(2) addition to tax for failure to pay an amount shown as tax on a
return applies unless the failure is due to reasonable cause and not due to willful
neglect. The addition to tax accrues in the amount of 0.5% of the amount of tax shown
on the return if the failure to pay is for one month, with an additional 0.5% added to the
tax for each additional month during which the failure continues, up to the maximum
penalty of 25%. I.R.C. § 6651(a)(2).

Courts have discussed, but not explicitly defined the period of limitations for assessment
and collection of the section 6651(a)(2) addition to tax. The section 6651(a)(2) addition
to tax is not subject to the section 6501(a) three-year limitations period for the
assessment of tax. United States v. Krasnow, 548 F. Supp. 686, 689 (S.D.N.Y. 1982).
If the tax shown on the return remains unpaid, the section 6651(a)(2) addition to tax
accrues to its maximum amount over the course of fifty-months. Courts reason that the
addition to tax could not be given its full effect if the Service was required to assess the
addition within three years of the due date for filing a timely return because the
maximum addition takes more than three years (fifty-months) to accrue. United States v.
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Krasnow, 548 F. Supp. 686, 689 (S.D.N.Y. 1982); United States v. Estate of Hurd, 115
A.F.T.R.2d 2015-386 (C.D. Cal.).

The United States District Court for the Central District of California rejected the
argument that assessments of the section 6651(a)(2) addition to tax were time-barred
when made seven and eleven years after the assessment of the underlying tax. See
United States v. Estate of Hurd, 115 A.F.T.R.2d 2015-386 (C.D. Cal.) (rejecting
taxpayer’s argument that assessment was time-barred by the ten-year collection period
of limitations provided for in section 6502(a)(1) when the penalty had not previously
been assessed).

These cases show that the section 6651(a)(2) addition to tax for failure to pay is
generally not subject to the limitations period on assessment. Section 6502 imposes a
ten-year limitations period on collection, however. The penalty has been assessed in
parts at various times. The earliest assessment was ---------------------------, more than
ten years ago. We know of no event that suspended the collection period. As a result,
the Service may not now seek to collect the amount that was initially assessed in
--------------------- and that amount should not be re-assessed. The collection statute on
the other amounts assessed has not yet run, although there is only a short period left on
the amounts initially assessed in -------. Those amounts, which were abated
erroneously, may be assessed again, but the collection statute will run from the date of
the initial assessment. The Service may not effectively extend the limitations period on
collection by virtue of making a new assessment.

In United States v. Updike, 281 U.S. 489 (1930), the Supreme Court construed the
predecessor to section 6502(a), which had language virtually identical to the language
of section 6502(a). In considering whether the limitations period on collection had
begun when the Service had assessed a tax to which no limitations period on
assessment applied, the Court stated:

      An actual assessment having been made, it must be assumed that the
      government was in possession of the facts which gave rise to the liability
      upon which the assessment was predicated. In such case to allow an
      indefinite time for proceeding to collect the tax would be out of harmony
      with the obvious policy of the act to promote repose by fixing a definite
      period after assessment within which suits and proceedings for the
      collection of taxes must be brought.

The same policy is present here. The Service would violate that policy if it attempted to
manipulate abatements and assessments to extend the period of limitations on
collection.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS
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