Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

IRS tells its attorneys to pursue penalties for erroneous refundable credits

Chief Counsel Notice 2016-002

In a Chief Counsel Notice, IRS’s Chief Counsel’s office has instructed its attorneys that, as a result of a provision in the recently enacted Protecting Americans from Tax Hikes Act (PATH Act), they should not concede accuracy-related or fraud penalties based on disallowed refund claims for erroneous refundable credits when a statutory notice of deficiency asserted those penalties.

Background. An accuracy-related or fraud penalty is imposed on certain underpayments of tax. (Code Sec. 6662(a); Code Sec. 6663(a)) For these purposes, 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). (Code Sec. 6664(a))

For purposes of determining a taxpayer’s deficiency, Code Sec. 6211(b)(4) provides that refundable credits are taken account as a negative amount of tax. Before the PATH Act, no such rule applied when determining an underpayment for purposes of the accuracy-related or fraud penalties.

In Rand, (2013) 141 TC 376141 TC 376, the Tax Court held that disallowed refundable credits must be taken into account when determining “the tax shown on the return,” but cannot reduce the tax shown on a return below zero. Consistent with this holding, IRS issued Chief Counsel Notice 2014-007, instructing attorneys to calculate any accuracy-related or fraud penalty involving disallowed refundable credits in accordance with the Rand decision and to concede penalties in excess of the amount provided for by Rand.

Section 209(a) of the PATH Act amends Code Sec. 6664(a) to provide that “a rule similar to the rule of Code Sec. 6211(b)(4) shall apply for purposes of this subsection.” Under Code Sec. 6664 as amended, disallowed refundable credits must be taken into account when determining the tax shown on the return and can reduce the tax shown on a return below zero for purposes of calculating the underpayment subject to penalty under Code Sec. 6662 and Code Sec. 6663. Section 209(d)(1) of the PATH Act provides that the amendment is effective for all returns filed after Dec. 18, 2015, and all returns filed on or before Dec. 18, 2015 for which the period of limitations had not expired as of that date.

IRS Chief Counsel’s office instructs its attorneys regarding the PATH Act provision. IRS Chief Counsel has instructed its attorneys not to follow Rand and Chief Counsel Notice 2014-007 and not to concede Code Sec. 6662 or Code Sec. 6663 penalties based on disallowed refund claims for erroneous refundable credits when the statutory notice of deficiency asserted those penalties. Pending further guidance on procedures for handling pending and future Tax Court cases, attorneys should contact IRS Procedure and Administration.

References: For definition of “underpayment” for purposes of accuracy-related and fraud penalties, see FTC 2d/FIN ¶  V-2052; United States Tax Reporter ¶  66,644; TaxDesk ¶  863,003; TG ¶  71627.