IRS Updates Practice Unit on Erroneous Claim for Refund or Credit Penalty (February 25, 2022)

The IRS has updated its practice unit discussing Erroneous Claim for Refund or Credit Penalty. The overview is as follows:

Congress enacted IRC 6676 to allow penalties for erroneous tax refund or tax credit claims. The penalty may be imposed on a taxpayer filing an original return, an amended return, a claim, or any other form or writing that contends the taxpayer made an overpayment of tax. In the “Protecting Americans from Tax Hikes (PATH) Act of 2015,” Congress amended IRC 6676 in three key ways: to remove the exception for erroneously claimed earned income credits, to change the “reasonable basis” exception to “reasonable cause,” and to revise the definition of underpayment under IRC 6664. This revised definition of underpayment allows refundable credits to reduce the amount for “tax shown on the return” below zero in calculating the underpayment amount.

Under IRC 6676, a 20 percent penalty may be imposed against the “excessive amount” of a claim for refund or credit. An excessive amount is the portion that exceeds the allowable amount of the claim. In other words, the excessive amount is the disallowed portion of the claim for refund or credit. The penalty typically applies to the not yet refunded/non-deficiency amount determined to be the excessive amount of the claim. However, it can be imposed when there is a deficiency under IRC 6211, which is subject to deficiency procedures. For example, a penalty may be imposed when there is a “frozen refund,” a situation where a taxpayer has claimed a refund on an original return, but it has not yet been refunded or credited to the taxpayer (as explained in IRM 20.1.5.18.4.) When an excessive amount depends on the determination of a deficiency, the penalty is subject to deficiency procedures.

IRC 6676 complements the IRC 6662 accuracy-related penalty. The IRC 6662 penalty applies only where an underpayment arises. The IRC 6676 erroneous claim for refund or credit penalty does not apply where an underpayment arises or if the IRC 6662, 6662A or 6663 penalties apply. For example, the erroneous claim for refund or credit penalty does not apply if a claim has been erroneously paid, but the IRC 6662 accuracy-related penalty would still apply.

The law provides an exemption from the erroneous claims penalty if the excessive amount is due to reasonable cause. Under the prior law, the penalty did not apply if there was a “reasonable basis for the excessive amount.” Any excessive amount attributable to noneconomic substance transactions described in IRC 6662(b)(6) are treated as lacking reasonable cause.

To guard against the possibility of a barred assessment, the Service should generally treat the erroneous claim for refund or credit penalty as if it has a three-year limitations period running from the date the claim for refund or credit was filed. If more than three years has run, contact local counsel for guidance.

See the full practice unit by clicking IRS Updates Practice Unit on Erroneous Claim for Refund or Credit Penalty (February 25, 2022).

Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.

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