ERC Interest Abatement Denied: The Clock Started in 2021, Not When the Money Arrived

What the court decided in Matto

The case is Matto v. Commissioner, T.C. Memo. 2026-60, decided July 21, 2026. David and Krista Matto filed a timely 2020 Form 1040 that included Schedule E income from two S Corporations, Ala Moana Dental Care and Diamond Head Dental Care. Ordinary facts. The trouble started three years later.

In late 2023, after the ERC money came through, both S Corporations filed amended corporate returns reducing the qualified wage deductions they had claimed for 2020. That is required. It also flows straight through to the owners, so the Mattos filed a 1040-X reporting more 2020 income, and paid the resulting $37,546 of additional tax. The IRS then assessed $5,438 in underpayment interest for the 2020 year.

They asked for that interest back on Form 843, making two arguments. First, that no interest should run for 2020 because the liability did not exist until the 2023 amendments were processed. Second, that an IRS agent had told them on the phone that no interest would be charged. The court rejected both and granted the Commissioner summary judgment, meaning it found nothing worth a trial.

Why the interest runs from the original due date

The Mattos’ first argument has real intuitive force. They paid what they owed as soon as the amended numbers existed. Charging interest for a period when nobody, including the IRS, knew there was a shortfall feels like a penalty for the government’s own program design.

The court did not engage with the fairness of it, because the timing question was already answered. Under Notice 2021-20 and Notice 2021-49, the reduction in the wage deduction caused by the ERC belongs to the tax year the qualified wages were paid or incurred. Not the year the credit shows up in the bank account. So the 2020 return was wrong the day it was filed, in the eyes of the Code, and interest began accruing on May 18, 2021, the day after that year’s postponed filing deadline.

The opinion puts it flatly. Interest accrued as a matter of mathematical operation, and an IRS officer does not abuse his discretion when he follows published IRS guidance. There is no discretion to exercise where the agency is applying its own notices to undisputed facts.

The oral advice argument, and why winning it changed nothing

Here is the part practitioners should sit with. The court accepted that the taxpayers were told what they said they were told. It assumed the phone call happened and that the agent gave bad information. They won the factual point and still lost.

Two independent reasons. The older one is that erroneous oral advice from an IRS employee does not bind the Commissioner, a principle that has survived decades of sympathetic facts. The second is narrower and more useful to understand. Section 6404(e)(1) only permits abatement where the underpayment is attributable to an unreasonable error or delay in performing a ministerial or managerial act. Treasury Regulation 301.6404-2(b) says a decision concerning the proper application of Federal tax law is neither ministerial nor managerial.

So the agent’s statement about whether interest applies was a legal conclusion, which places it outside the statute entirely. Had the agent instead lost the file for eight months, or failed to transfer a case after being told to, that is the kind of clerical failure section 6404(e)(1) was written for. The court also repeated a line worth memorizing: reasonable cause is never the basis for abating interest. Reasonable cause gets penalties removed. It does nothing to interest.

Who this actually reaches

Closely held S Corporations that claimed the credit

This is the exact fact pattern for a large share of the professional practices we work with. Dental groups, medical practices, law firms, and agencies that claimed the ERC through a payroll provider or a credit shop, then discovered later that somebody had to amend the corporate return and reduce the wage deduction. The owners absorb the income at the personal level and the interest follows.

If your entity claimed the credit and nobody has amended the wage deduction for the relevant year, that is not a savings. It is an unbooked liability accruing interest daily, and the Mattos’ case shows the accrual is not negotiable after the fact. Get the amendment done and quantify what is owed rather than waiting for a notice to set the number for you.

Anyone still holding an unpaid ERC claim

The other group is quieter. Businesses whose ERC claims are still pending, or whose claims were paid and later challenged, are sitting on a wage deduction that will have to move whichever way the claim resolves. Model both outcomes now. The interest exposure on the disallowance side is knowable today, and it is easier to plan for a number you have calculated than one that arrives in a letter.

Owners who relied on a phone call

If a conversation with the IRS is the reason you believe you do not owe something, that belief has no legal weight. It was never worth much. After Matto it is worth arguing about even less, because the subject matter of most such calls is the application of tax law, which the regulation carves out by name.

What is still open

Matto is a memorandum opinion, so it is not binding precedent in the way a division opinion would be, and it applies settled law to clean facts rather than breaking new ground. Do not read it as the last word on every ERC interest dispute.

Genuine ministerial failures remain abatable, and the ERC backlog has produced plenty of them. Claims that sat unprocessed for two years, files transferred between units and lost, correspondence that went unanswered past the agency’s own timelines. Those are delays in performing ministerial acts, and section 6404(e)(1) still reaches them. What Matto forecloses is the softer version of the argument, the one that says the whole situation was unfair and the client acted in good faith. That argument is aimed at reasonable cause, and reasonable cause is not on the menu for interest.

Watch for a separate line of cases on whether interest can be abated where the IRS itself caused the delay in paying the credit that triggered the amendment. Nobody has cleanly litigated that shape yet.

How The Reed Corporation works with clients on this

Most of the ERC cleanup we handle arrives the same way. A client learns from a third party that the corporate return needed amending, and by then two filing seasons have passed. Our work is unglamorous: pull the credit computation, confirm which wages were actually disallowed, amend the entity return, and push the corrected flow-through figures onto the owners’ personal returns with the interest calculated rather than guessed.

For the entity side that runs through corporate and partnership return preparation. When a client is already holding a notice or a bill for accrued interest, it starts with notice assistance instead, where the first question is whether the assessment is even correct. We have seen ERC interest computed off the wrong year more than once. That is worth challenging. The theory that the interest should not exist at all is not.

Clients who own multiple entities usually need the sequencing planned before anything gets filed, which is tax strategy work. Amending in the wrong order can strand a payment on the wrong year.