M. Abatement of Excise Taxes

(1) Under Sections 4961 and 4962, abatement is available for the following taxes:

(2) To qualify for abatement of second tier tax, the taxable event must be corrected

within the correction period. See Section 4961(a). The taxpayer qualifies for abatement of first tier tax if the taxpayer establishes to the IRS’ satisfaction that the taxable event:

a. Was due to reasonable cause.

b. Wasn’t due to willful neglect.

c. Was corrected within the correction period. Section 4962(a).

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(3) The correction period begins on the date the event occurs and ends 90 days after

the mailing date of a notice of deficiency in connection with the second tier tax imposed on that taxable event (Section 4963, Section 6212). That time is extended by:

a. Any period in which a petition to the Tax Court for redetermination of the

deficiency is pending. (Section 6213(a)).

b. Any other period the IRS determines is reasonable and necessary to correct

the taxable event.

(4) If correction hasn’t occurred or doesn’t occur, abatement is unavailable . If

correction is made, consider whether abatement is applicable for the first tier tax (other than Section 4941 tax, for which abatement is not available). Correction within the correction period requires abatement of the second tier tax.

Note: In practice, assessment of the tax is on hold until after the 90-day period (plus any court time) has elapsed. If correction is made, Mandatory Review and the EO Closing Unit adjust the assessment amount to reflect only the first tier tax.

(5) If correction is made before a statutory notice of deficiency is issued, don’t

propose the second tier tax. Any subsequent statutory notice will exclude consideration of the second tier tax.

(6) If correction is made after the correction period has expired, abatement isn’t

available under Section 4962.

Note: If you receive a request for abatement or claim for refund, verify whether the second tier tax was assessed via an examination. If needed, request a copy of a previous examination report via RCCMS using source code 45.

(7) If the taxpayer requests abatement during the examination, verify correction first.

If the facts don’t warrant abatement, document the willful neglect and failure to establish reasonable cause. If the facts warrant abatement, don’t propose the tax. Address the issue in an advisory closing letter. See IRM 4.70.14, Resolving the Examination.

(8) See the lists below for examples of abatement/non-abatement of the first tier tax.

(9) Possible abatement:

Example: The foundation incurred a Section 4943(a) liability when an unrelated third party exercised its property rights on an ownership interest in a jointly owned business enterprise. This was done at a time, and in a manner that made it difficult for the foundation to identify its risk in a timely manner despite prudent precautions.

Example: The foundation incurred a Section 4945(a) liability when it gave scholarships for the first time without obtaining advance approval of its scholarship procedures. Upon review of its procedures, an EO specialist determined that the procedures met the criteria for advance approval at the time the scholarships were originally given.

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Example: The foundation relied, in good faith, on the written, reasoned advice of an attorney or accountant (dated before the transaction) that the transaction wasn’t subject to Chapter 42.

(10) Likely non-abatement (though pertinent facts must be considered):

Example: The foundation’s officers, directors, and representatives state they were ignorant of the provisions of the law.

Example: The Form 990-PF return for the tax period was prepared by a compensated attorney, accountant, or enrolled agent. The return gave no notice that a specifically identified questionable transaction had occurred.

Example: The foundation, a related foundation, or a predecessor foundation had a previous Chapter 42 tax amount abated under Section 4962 for the same type of taxable event.

Example: The taxable transaction wasn’t identified as a potential violation of Chapter 42 by any party until an examination began.

(11) See IRM 4.70.17, Claims and Abatements, for information to work abatement

requests.