What can the IRS do to collect when a refund is issued by mistake? The answer depends on whether the erroneous refund is a “rebate” refund or a “nonrebate” refund.
A erroneous rebate refund results from a recalculation of tax due. This can happen when the IRS mistakenly determines the actual balance due on your tax return is less than the amount you reported and sends you a refund for the difference.
An erroneous refund you receive due to a clerical error—say the IRS processes your return twice and duplicates your refund—is a non-rebate refund.
In the case of a rebate refund, the IRS can recover the money by following the procedural steps in the tax code (the deficiency procedures of sections 6211-6215, which include issuing a notice of deficiency).
For non-rebate refunds, the IRS can only recover by asking the taxpayer to voluntarily repay the refund, by filing a civil lawsuit within statutory time limits, or by an administrative procedure such as offsetting an existing tax liability.
The tax court considered two cases involving refunds this week.
In T.C. Memo. 2014-112 (YRC Regional Transport, Inc.) , the taxpayer filed for a $351,487 tentative refund for the 1999 tax year due to a net operating loss (NOL) carryback from tax year 2008.
The IRS processed the refund form twice and issued two separate checks, one in September 2009 and one in April 2010. The taxpayer received and deposited both checks. Neither the tax liability for tax year 1999 nor the amount of tentative carryback refund requested changed between the date when the first refund was issued and the date of the second refund.
Later, at a time not apparent from the record, the IRS determined that part of the NOL should be disallowed. The disallowance resulted in a $63,854 reduction of the refund. The IRS asked the tax court to increase the $63,854 deficiency by the amount of the duplicated refund (in other words, requiring the taxpayer to repay both the underpayment and the second refund check).
The taxpayer and the IRS agreed the first refund was a rebate refund. The dispute arose over the classification of the second refund.
In T.C. Memo. 2014-118 (Thomas), the taxpayer reported Social Security benefits in the correct amount on line 20b (“Taxable amount”) of Form 1040, but left line 20a (“Social security benefits”) blank.
During the processing of the return, the IRS treated the entry on line 20b as the gross amount and recomputed the taxable portion. The change increased the taxpayer’s refund by $548.
After the refund was issued, the IRS determined the taxpayer had completed the return correctly, and that the additional refund was an error. The IRS sent a notice of deficiency requesting repayment of the $548 additional refund.
The taxpayer and the IRS agree the taxpayer received a larger refund than was correct because the IRS recalculated the tax. Nevertheless, the taxpayer says he is not liable for any deficiency because he reported the correct tax liability and the erroneous refund was attributable to the IRS’s error.
We note that neither the taxpayer’s tax liability for tax year 1999 nor the amount of tentative carryback refund requested changed between the date of the first refund and the date of the second refund.
Consequently, we hold that the April 2010 refund was a nonrebate refund. The IRS may not use this deficiency procedure to recover the April 2010 refund. The IRS may pursue recovery under section 7405 in a district court or under administrative collection procedures, if either of those is available.
In other words, the refund was a rebate refund because of the IRS’s admittedly erroneous conclusion that “the amount of tax due is less than the tax shown on the return.” A refund is a rebate refund if it is “related to” the recalculation of a taxpayer’s tax liability.