Taxing Definitions

Definition — Erroneous Refunds

Thanks for sharing!
Image source: Free Picture, Currency Power ID: 184106 © Andres Rodriguez Dreamstime Stock Photos
Image source: Free Picture, Currency Power ID: 184106 © Andres Rodriguez Dreamstime Stock Photos

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.

What would you decide? or ?

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.

What would you decide? or ?

***

Other posts you might enjoy

Definition — The tipping point Image source: Sam Truong Dan on Unsplash   To tax those tips or not? Tips are not defined in the tax code or regulations so the determination of whether a payment is a tip depends on four factors. The absence of any one factor creates doubt as to whether the payments are tips. In Offi...
Definition — Identifying the employer Photo by Nick Hillier on Unsplash   What's your number? If you're required to file certain business tax returns, the answer is an employer identification number, or EIN. The IRS assigns employer identification numbers when you file an application (generally Form SS-4). In fiscal year 201...
Definition — Virtually taxable Image source: wpclipart.com   If you want to know the value of money, both real and virtual, you can try to borrow some. Or, in the case of digital currency, you could ask the Internal Revenue Service. The buying and selling of digital assets, including coins and tokens offered and so...
Definitions — Order in the court Image source: openclipart.org   If it please the court … A few weeks ago, the national taxpayer advocate released the 2017 Annual Report to Congress, as required by law. (Section 7803(c)(2)(B)(ii)) Part of the first volume of the report discusses the ten most litigated issues as measu...
Sorry, wrong answer :(
Right answer!
For the taxpayer. The record does not reflect that the April 2010 refund was the result of a substantive recalculation of tax liability. The record convinces us the April 2010 refund was a clerical 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.

Right answer!
Sorry, wrong answer :(
For the IRS. The refund was a “rebate refund” because the IRS recalculated the taxpayer’s tax liability in consequence of the conclusion, albeit erroneous, that the taxpayer had overstated the taxable portion of social security benefits.

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.

Tagged , , ,