Applicability of sec. 6662 accuracy-related penalties to refund claims.

• Author: Urban, Michael A.
• Position: Internal Revenue Code

A taxpayer may be subject to an accuracy-related penalty under Sec. 6662 for a tax return position that either is not (1) supported by substantial authority or (2) adequately disclosed and lacks a reasonable basis. (Special rules apply for tax shelter items.) The question arises whether Sec. 6662 penalties apply to positions first taken on a refund claim or amended return (hereinafter collectively referred to as refund claim).

Under Sec. 6662, the amount of each accuracy-related penalty is determined by reference to the tax underpayment that results from the taxpayer's negligence, intentional disregard of rules or regulations, substantial understatement, etc. Unlike IRS-initiated adjustments to the amount of taxable income shown on a taxpayer's original return, complete or partial disallowance by the Service of a refund claim would not result in a tax underpayment. Disallowance of a refund claim would not constitute an IRS determination that the taxpayer owes additional tax; instead, it indicates that the Service does not agree with the taxpayer's contention that its tax liability has been overstated and overpaid on the original return.

Taxpayers and their advisers should be aware, however, that, under certain circumstances, a position taken on a refund claim might trigger Sec. 6662 accuracy-related penalties. Specifically, this could happen if the claimed refund is issued by the IRS, but it later determines that the taxpayer's correct income tax liability is greater than that shown on the refund claim.

Under this scenario, the refund would constitute a "rebate erroneous refund." Because a tax deficiency, within the meaning of Sec. 6211, generally is created by a rebate erroneous refund, the incorrectly refunded amount can be assessed through normal deficiency procedures (provided the limitation period for assessment under Sec. 6501 has not expired) and can be collected through the Service's administrative collection tools (e.g., lien, levy, seizure and offset under Sec. 6402). Alternatively, a rebate erroneous refund may be recovered from a taxpayer by civil action brought in the name of the U.S. under Sec. 7405(a); such a suit may be the IRS's only recourse if the limitation period for assessment under Sec. 6501 has expired.

Accordingly, if the Service issues...