Matto v. Commissioner: Tax Court Denies Interest Abatement for ERC-Related Underpayment

The $5,438 Interest Dispute: Why the IRS Won’t Waive ERC-Related Underpayment Penalties

The Tax Court’s July 21 ruling in Matto v. Commissioner (T.C. Memo. 2026-60) delivers a sharp rebuke to taxpayers seeking relief from underpayment interest tied to Employee Retention Credit (ERC) adjustments—a dispute that hinged on a mere $5,438 in penalties but carries sweeping implications for the thousands of businesses that amended 2020 returns to claim pandemic-era credits. The court’s decision to grant the IRS’s Motion for Summary Judgment, denying the Matto’s petition for interest abatement under Section 6404(e)(1), underscores the Tax Court’s deference to the agency’s discretion—even in cases where taxpayers argue the IRS’s own administrative failures prolonged their liability. For practitioners and taxpayers alike, the ruling signals that the court will not second-guess the IRS’s refusal to waive interest unless the agency’s errors are so egregious that they shock the conscience, a threshold few taxpayers are likely to meet.

The case arrives amid a tidal wave of ERC-related amendments, where the IRS has faced criticism for inconsistent guidance and processing delays. Yet the Tax Court’s opinion suggests that the agency’s discretion under Section 6404(e)(1)—which allows abatement of interest for "unreasonable errors or delays" by the IRS—remains a high bar for taxpayers to clear. The ruling arrives as the IRS ramps up audits of ERC claims, leaving taxpayers in a precarious position: amend returns to claim refunds, but risk underpayment penalties and interest if the IRS later disputes eligibility. The Matto’s case serves as a cautionary tale—one where the court’s emphasis on the IRS’s broad authority to deny abatement could chill future challenges to similar penalties.

The Facts: How a 2023 ERC Adjustment Led to a 2020 Tax Bill

The Matto family’s tax troubles began with a routine filing. In 2020, they reported $40,083 in net income on their joint Form 1040, with $17,490 from Ala Moana Dental Care, Inc. and $16,212 from Diamond Head Dental Care Corp.—both S corporations. The returns were timely filed, and the income flowed through to their personal returns via Schedule E.

Three years later, the ERC storm hit. In December 2023, the S corporations received revised Schedules K-1 reflecting their 2020 eligibility for the Employee Retention Credit (ERC). The ERC—created by the CARES Act—allowed employers to claim a refundable payroll tax credit for wages paid during COVID-19 disruptions. But claiming the credit required an adjustment: the wages used to calculate the ERC had to be deducted from the employer’s taxable income in the year they were paid. Since the S corporations had already filed their 2020 corporate returns without accounting for the ERC, they amended those returns to reduce their wage deductions, which in turn increased the income passed through to the Mattos.

On December 18, 2023, the Mattos filed an amended Form 1040-X for 2020, reporting an additional $133,305 in income and $37,546 in tax owed. They paid the balance in full. The IRS processed the amendment on April 18, 2024, adjusting their account to reflect the additional income and tax. But four days later, the IRS dropped a bombshell: $5,438 in underpayment interest for 2020.

The Mattos immediately sought relief. In July 2024, they filed Form 843, arguing that the interest should be abated because they had relied on oral advice from an IRS agent that no interest would accrue for 2020. They also contended that the ERC funds weren’t received until 2023—the same year they amended their return—so the underpayment couldn’t have been avoidable. Their accountant submitted a letter echoing these points, but the IRS remained unmoved. On September 17, 2024, the agency issued a final determination denying the abatement, citing Section 6404(e)(1), which allows interest abatement only for “unreasonable errors or delays” by the IRS in performing ministerial or managerial acts. The Mattos promptly petitioned the Tax Court, setting the stage for a dispute over the IRS’s discretionary authority—and the limits of taxpayer reliance on informal guidance.

The Dispute: Did the IRS Act Unreasonably—or Did the Matto’s Misunderstand the Rules?

The Mattos’ petition hinged on two core arguments: first, that the IRS had erred by charging interest on a 2020 tax deficiency that they claimed did not exist until 2023, when they received their Employee Retention Credit (ERC) funds; and second, that they had relied on oral advice from an IRS agent that no interest would accrue. The IRS, however, framed the dispute as a straightforward application of statutory and regulatory rules, arguing that the Mattos’ misunderstanding of the law—not any IRS misconduct—was to blame for their liability.

The Mattos’ primary contention was that interest should not have accrued because the ERC funds, received in 2023, were the source of their 2020 tax underpayment. They argued that the IRS’s position ignored the economic reality of the situation—that the tax liability arose only when the ERC was claimed, not when the wages were paid in 2020. Their accountant echoed this view in a letter to the IRS, asserting that the agency’s refusal to abate interest was unreasonable given the unique circumstances of the ERC. The Mattos further claimed that an IRS agent had assured them during a phone call that no interest would be charged on the adjustment, a statement they now argued should bind the agency.

The IRS countered that the Mattos’ arguments misapplied the law. Under Section 6601(a), interest on an underpayment begins to accrue automatically on the due date of the return—May 18, 2021, in this case—regardless of when the taxpayer later receives funds to cover the liability. The agency pointed to Notice 2021-21, which clarified that ERC-related adjustments to prior-year returns trigger interest from the original due date, not the date the credit is claimed. The IRS also dismissed the Mattos’ reliance on oral advice, noting that Section 6404(e)(1) permits abatement only for “unreasonable errors or delays” in ministerial or managerial acts—not for erroneous legal interpretations. The agency’s Final Determination letter reiterated that the Mattos’ belief that the ERC funds “created” the tax liability in 2023 was legally unsound, as the tax was due in 2020 under then-applicable guidance.

The IRS further argued that its denial of interest abatement was not an abuse of discretion. The agency emphasized that it had followed Internal Revenue Manual 20.2.7.1.1, which requires taxpayers to demonstrate that an IRS error or delay was both unreasonable and not their fault. The Mattos, the IRS noted, had failed to show either. The agency also cited Treas. Reg. § 301.6404-2(b), which distinguishes between ministerial acts (e.g., clerical errors) and managerial acts (e.g., supervisory delays), neither of which applied here. The IRS’s position was that the Mattos’ misunderstanding of the ERC’s wage deduction rules—specifically, the requirement to reduce 2020 wage deductions when claiming the credit via amended return—did not constitute an IRS error. The agency’s refusal to abate interest, it argued, was a correct application of the law, not an unreasonable exercise of discretion.

The Court’s Analysis: Why the IRS’s Denial of Interest Abatement Stood

The Tax Court’s ruling in Matto v. Commissioner underscores the narrow scope of § 6404(e)(1), which permits interest abatement only for unreasonable errors or delays in ministerial or managerial acts. The court’s analysis hinged on two foundational principles: the abuse of discretion standard and the Chenery doctrine, both of which constrained its ability to second-guess the IRS’s decision.

The court first reiterated that § 6404(e)(1) authorizes abatement only where the IRS’s error or delay stems from a ministerial or managerial act. A ministerial act is defined as a procedural or mechanical task devoid of judgment, such as clerical errors or data entry mistakes. A managerial act, by contrast, involves supervisory or administrative discretion, such as delays in assigning cases or processing refunds. Crucially, the court emphasized that decisions concerning the proper application of Federal tax law—such as the Mattos’ misunderstanding of the ERC wage deduction rules—do not qualify as either ministerial or managerial acts. This distinction is critical: the IRS’s refusal to abate interest was not an error in process but a correct application of the law.

Under the abuse of discretion standard, the court’s review was highly deferential. The IRS’s denial of interest abatement would only be overturned if it was based on an erroneous view of the law or a clearly erroneous assessment of the evidence. The court cited King v. Fleming, 899 F.3d 1140 (10th Cir. 2018), for the proposition that deference is owed to the IRS unless its decision is arbitrary, capricious, or without rational basis. This standard is particularly stringent in interest abatement cases, where the Tax Court lacks jurisdiction to review mathematical computations of interest under § 6601(a). The court’s hands were further tied by the Chenery doctrine, which prohibits it from upholding the IRS’s decision on grounds not articulated by the agency. The Mattos’ arguments—including reliance on oral IRS advice—could not substitute for the IRS’s stated rationale, leaving the court with no basis to overturn the denial.

The court also rejected the Mattos’ argument that interest should not accrue because they did not owe additional tax until 2023, when they received the ERC funds. The court clarified that underpayment interest accrues automatically under § 6601(a) from the due date of the original return, not the date the tax liability is ultimately determined. This principle was reinforced by Notice 2021-21, which states that interest begins to accrue on the day after the return’s due date, regardless of when the taxpayer files an amended return. The Mattos’ amended 2020 return, filed in December 2023, did not alter the fact that interest had already begun accruing on May 18, 2021. The court’s deference to IRS guidance—Notices 2021-20 and 2021-49—further solidified its conclusion that the Mattos’ misunderstanding of the wage deduction rules did not constitute an IRS error.

Finally, the court addressed the Mattos’ claim that they had received oral advice from an IRS agent that no interest would accrue. The court dismissed this argument outright, citing longstanding precedent that erroneous oral advice from an IRS employee is not binding on the Commissioner. In Goldman v. Commissioner, T.C. Memo. 1981-223, the Tax Court held that oral advice cannot override statutory or regulatory requirements. Moreover, the advice in question concerned the proper application of Federal tax law, which, as the court reiterated, is neither a ministerial nor managerial act. The Mattos’ reliance on this advice was thus irrelevant to their § 6404(e)(1) claim.

In sum, the court’s analysis was a textbook application of judicial restraint. It deferred to the IRS’s interpretation of the law, upheld the agency’s discretionary decision, and rejected arguments that fell outside the narrow confines of § 6404(e)(1). The ruling reinforces the Tax Court’s limited role in reviewing IRS discretion, particularly in cases where the agency’s actions are grounded in published guidance and statutory mandates. For taxpayers seeking interest abatement, the message is clear: reliance on oral advice, misunderstandings of tax law, or disputes over interest accrual timelines will not suffice—the IRS’s discretion, when exercised within the bounds of the law, is nearly unassailable.

Impact: What This Ruling Means for Taxpayers Amending Returns Due to ERC Adjustments

The Tax Court’s decision in Matto delivers a stark warning to taxpayers relying on oral IRS guidance or disputing interest accrual timelines when amending returns for Employee Retention Credit (ERC) adjustments. The ruling underscores that interest on underpayments accrues automatically from the original due date of the return—regardless of when ERC funds are received—leaving taxpayers with no recourse under § 6404(e)(1) unless they can prove clear IRS error or delay.

The court’s analysis hinged on the interplay between IRC § 6601(a), which mandates that interest on deficiencies begins accruing on the original due date of the return, and IRC § 6404(e)(1), which permits abatement only for "unreasonable errors or delays" in ministerial or managerial acts. Petitioners argued that no interest should have accrued because they received erroneous oral advice from an IRS agent and did not receive ERC funds until 2023. The court rejected both arguments, emphasizing that oral advice from IRS employees is not binding (Goldman v. Commissioner) and that interest accrual is a mathematical certainty under § 6601(a), not subject to IRS discretion.

The ruling also dismantled the petitioners’ "reasonable cause" argument, clarifying that reasonable cause is never a valid basis for interest abatement. The court reiterated that § 6404(e)(1) requires proof of IRS misconduct—not taxpayer misunderstanding or reliance on informal guidance. This aligns with the Internal Revenue Manual’s explicit prohibition on using reasonable cause to abate interest.

For taxpayers navigating ERC-related amendments, the message is unequivocal: do not expect interest abatement unless the IRS itself committed a clear, documented error or delay. The Tax Court’s deference to IRS discretion—particularly when the agency follows published guidance—means that taxpayers must meticulously document their compliance with IRS rules, including the timing of wage deduction adjustments under Notice 2021-20. Reliance on oral advice, misunderstandings of tax law, or disputes over interest accrual timelines will not suffice. The court’s narrow interpretation of § 6404(e)(1) leaves taxpayers with little recourse beyond ensuring their amended returns strictly adhere to IRS guidance from the outset.