PATH brings changes to federal penalty computations.

• Author: Yates, Ronald J., Jr.
• Position: Protecting Americans From Tax Hikes Act of 2015

The Protecting Americans From Tax Hikes Act of 2015 (PATH), part of the Consolidated Appropriations Act, 2016, P.L. 114-113, which was signed by President Barack Obama on Dec. 18, 2015, contains numerous far-reaching procedural and administrative provisions (in addition to the many temporary and permanent individual and business income tax extensions it included). This item discusses the PATH legislation's immediate impact on certain federal penalty computations and the guidance issued on Dec. 30, 2015, by the IRS Chief Counsel's Office that reversed the government's application of the accuracy-related and fraud penalties in cases involving disallowed refundable tax credits.

Amended Sec. 6664

PATH Section 209 contains administrative provisions pertaining to penalty application. Section 209(a) amends Sec. 6664(a) defining underpayment of income tax by adding the following language: "A rule similar to the rule of Sec. 6211(b)(4) shall apply for purposes of this subsection." Under Sec. 6664, as amended by PATH, disallowed refundable credits must be taken into account when determining the tax shown on the income tax return. Therefore, if it applies, Sec. 6664 will now serve to reduce the tax shown on a return below zero for purposes of calculating the underpayment of tax subject to penalty under Sec. 6662 and Sec. 6663. Sec. 6662 applies to the imposition of the 20% accuracy-related penalty on the specified underpayment of tax, while Sec. 6663 applies to the imposition of the 75% fraud penalty.

For these purposes, under Sec. 6664(a), the term "underpayment" means the excess of the amount of tax actually due over the amount of tax shown on the return (and/or previously assessed or collected). To determine a taxpayers deficiency, Sec. 6211(b)(4) now provides that refundable credits are taken into account as a negative amount of tax. Before the PATH amendments, no such rule applied when calculating what an underpayment was for accuracy-related or fraud penalty purposes.

Upon the passage of PATH, penalties for erroneous refund claims may now apply to disallowed refundable portions of tax credits. PATH Section 209(d)(1) provides that this provision applies to income tax returns filed after Dec. 18, 2015, as well as retroactively for tax years open for assessment as of Dec. 18, 2015, under Sec. 6501.

Reversal of Tax Court's Rand Decision

PATH Section 209 also effectively reverses the Tax Court's decision in Rand, 141 T.C. 376 (2013), by specifying...