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Reassessing The Erroneous Refund Penalty: The IRS Flexes An Obscure Authority

By Megan L. Brackney
The CPA Journal
March 2023

Under IRC section 6676, the IRS has the authority to assess penalties against taxpayers for making erroneous claims for refund or credit. In a 2013 report, the Treasury Inspector General for Tax Administration found that the IRS had only imposed the excess refund penalty 84 times in the first six years after its enactment. That same report recommended that the IRS increase assessment of the penalty such that it would apply to over 575,000 taxpayers each year; however, the IRS did not expand enforcement to these levels [“The Law Which Penalizes Erroneous Refund and Credit Claims Was not Properly Implemented,” No. 2013-40-123, pp. 5–6 (Sept. 26, 2013)]. This made the IRS’s attempt to assess a $200 million erroneous refund penalty against Exxon Mobil Corp. especially surprising [43 F.4th 424 (5th Cir. 2022)]. This article first discusses the erroneous refund penalty, followed by a discussion of its application in the Exxon case.

What is the Erroneous Refund Penalty?

Currently, IRC section 6676(b) provides for a penalty of 20% of the “excessive amount” of a claim for refund or credit unless “it is shown that the claim … is due to reasonable cause.” [There is no reasonable cause exception for noneconomic substance transactions as defined in IRC section 6662(b)(6), making this a strict liability penalty for those transactions.] Note that the original version of IRC section 6676 did not apply to disallowed earned income credits, but this was added by the Protecting Americans from Tax Hikes Act of 2015. “Excessive amount” is the amount that “the claim for refund or credit for any taxable year exceeds the amount of such claim allowable … for such taxable year.”

Congress enacted IRC section 6676 because fraudulent refund schemes had “overwhelmed IRS resources to the point where the IRS was unable to prevent the issuance of erroneous refunds.” From 2011 to 2013, the IRS disallowed over $53 billion fraudulent refunds, but paid over $10 billion in fraudulent refunds [Joint Committee on Taxation, JCS-2-07, “Description of Revenue Provisions Contained in the President’s Fiscal Year 2008 Budget Proposal,” pp. 285–286; see also Wright, “Bogus Refunds & Bad Penalties: The Feckless and Fixable Refund Penalty System,” Akron Law Review, vol. 48, no. 33, Oct. 1, 2015]. At the time, because there was no penalty for erroneous refund claims, there was almost nothing preventing people from flooding the IRS with fraudulent claims. Congress thus enacted IRC section 6676 to discourage such claims.


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Published with permission of the CPA Journal a publication of the New York State Society of CPAs, March 2023.