Sec. 6676: there's a new penalty in town.

• Author: Hodes, Rochelle L.

The Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28, [section] 8247(a), added a new taxpayer penalty under Sec. 6676 for erroneous refund claims, effective for claims filed or submitted after May 25, 2007. Under this provision, if a taxpayer makes a claim for refund or credit with respect to income tax for an excessive amount, the IRS may impose a 20% penalty on that amount unless the taxpayer shows that the claim for such excessive amount has a reasonable basis. Sec. 6676 (b) defines "excessive amount" as the amount of the claim or refund for any tax year that exceeds the amount of the claim allowable under the Code for the tax year. There is no statutory reasonable cause exception to the Sec. 6676 penalty.

The Sec. 6676 penalty does not apply to the portion of the excessive amount subject to a penalty under Sec. 6662 (accuracy-related penalty on underpayments), Sec. 6662A (reportable transaction understatement penalty), or Sec. 6663 (fraud penalty). In addition, unlike the penalties under Secs. 6662, 6662A, and 6663, which are subject to deficiency procedures, the Sec. 6676 penalty is immediately assessable and must be paid upon notice and demand. This means that the taxpayer's ability to challenge the penalty before paying it may be severely limited unless the IRS provides an administrative process to do so.

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Need for Guidance

The IRS has not provided guidance on the Sec. 6676 penalty, despite the fact that the penalty has been included in its Priority Guidance Plan every year since the penalty's enactment in 2007. Thus, the application of the Sec. 6676 penalty is fraught with uncertainty. Taxpayers and IRS personnel need guidance to ensure that the IRS is fairly, correctly, and consistently applying the penalty, particularly given that it is an assessable penalty.

If proposed regulations are not possible at this time, the government has other options. When needed, the IRS and Treasury have provided useful interim guidance that the public can rely on. The IRS has also provided immediate guidance by providing instructions to IRS personnel and making these instructions public. In whatever form, there are four Sec. 6676 issues that are in need of immediate guidance.

Definition of reasonable basis: Sec. 6676 is not applicable if the claim for the excessive amount has a reasonable basis. The statute is silent as to what "reasonable basis" means. However, Regs. Sec. 1.6662-3(b)(3) defines the term for...