Matto v. Commissioner, T.C. Memo. 2026-60, July 21, 2026

The intersection of the Employee Retention Credit (ERC) and amended tax returns has created a surge in litigation regarding the assessment of underpayment interest. A recent decision by the United States Tax Court, Matto v. Commissioner, provides critical clarity for tax professionals regarding the narrow scope of interest abatement under Internal Revenue Code (I.R.C.) § 6404(e)(1) and the limitations of relying on erroneous oral advice from IRS personnel.

Factual Background of the Dispute

The case involved taxpayers David J. Matto and Krista M Matto, who filed a timely 2020 Form 1040. Their return included Schedule E reporting net income from two S-corporations, Ala Moana Dental Care, Inc. and Diamond Head Dental Care Corp.

In late 2023, following the receipt of ERC funds, the S-corporations filed amended corporate returns to revise downward their previously claimed deductions for qualified wages. Consequently, the taxpayers were required to file an amended 2020 Form 1040-X to reflect increased income allocations. This amendment resulted in an additional tax liability of $37,546, which the taxpayers paid. However, the IRS subsequently assessed $5,438 in underpayment interest for the 2020 tax year, stemming from the original due date of the return.

The Taxpayers' Request for Relief

Seeking to mitigate the interest burden, the taxpayers filed Form 843, Claim for Refund and Request for Abatement. Their request for relief was predicated on two primary arguments. First, they asserted that interest should not accrue for the 2020 tax year because the underlying tax liability did not exist until the 2023 amendments were processed due to the receipt of ERC funds. Second, they claimed they had been verbally informed by an IRS Agent during a telephone conversation that no interest would be charged on the 2020 tax year.

Judicial Analysis of Interest Abatement Standards

In reviewing the taxpayer's claim, the Court first addressed the standard of review. Under I.R.C. § 6404(h)(1), the Tax Court reviews a denial of interest abatement for "abuse of discretion." As noted in the decision, "Abuse of discretion occurs if the IRS bases its denial 'on an erroneous view of the law or on a clearly erroneous assessment of the evidence.'"

The core of the legal dispute centered on the interpretation of I.R.C. § 6404(e)(1), which authorizes the Secretary to abate interest if the underpayment is "attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial or managerial act."

Crucially, the Court highlighted the narrow definition of these acts. According to Treas. Reg. § 301.6404-2(b), "A decision concerning the proper application of Federal tax law is neither a managerial nor a ministerial act." Furthermore, the Court emphasized that for interest abatement, "‘reasonable cause is never the basis for abating interest.’"

Application of the Law to the Facts

The Court's application of these standards effectively dismantled both of the taxpayers' arguments.

Regarding the timing of the tax liability, the Court noted that while the taxpayers' 1040-X correctly reported the increased tax, the underpayment interest "began to accrue automatically on May 18, 2021, the day after the due date for their 2020 return." This is because, per IRS guidance (including Notice 2021-49 and Notice 2021-20), a reduction in the deduction for qualified wages caused by the ERC "occurs for the tax year in which the qualified wages were paid or incurred, not for the year in which the ERC funds were received." Consequently, the Court concluded that "An IRS officer does not abuse his discretion when he follows published IRS guidance," and the interest accrued as a "matter of mathematical operation."

Regarding the claim of erroneous oral advice, the Court accepted the taxpayers' representation that such advice was given but held it to be legally insufficient. The Court reiterated the long-standing principle that "erroneous oral advice from an IRS employee is not binding on the Commissioner." Even if the advice were considered, the Court noted that the subject of the advice—the proper application of tax law—falls outside the scope of ministerial or managerial acts, meaning it cannot serve as a basis for abatement under § 6404(e)(1).

Final Determination

Finding no material facts in dispute and no evidence of an unreasonable error or delay in performing a ministerial or managerial act, the Court granted summary judgment in favor of the Commissioner. The decision underscores a vital takeaway for practitioners: interest accrual is an automatic, mathematical consequence of the original filing due date, and the legal determination of tax liability via amended returns cannot be mitigated by claims of erroneous oral guidance or the timing of ERC fund receipts.

Prepared with assistance from LM Studio google/gemma-4-26b-a4b.