Rebate refund created an underpayment subject to deficiency procedures, limiting the erroneous-claim penalty

Plain-English summary

Chief Counsel considered a large erroneous income tax refund that was issued because the IRS treated the tax imposed as lower than the tax shown on the original return. The advice concludes that the refund was a rebate under IRC § 6211(b)(2), so it created an underpayment equal to the rebate refund. Rebate refunds are handled through deficiency procedures, making a statutory notice of deficiency appropriate. The advice also explains that if the underpayment is subject to the § 6662 accuracy-related penalty, the IRS cannot instead use the § 6676 erroneous refund claim penalty for that portion. That limitation applies even if the IRS chooses not to assert the § 6662 penalty, because § 6676(d) turns on whether the amount is subject to a Chapter 68, subchapter A, part II penalty.

Ruling snapshot

• Question: Did the erroneous rebate refund create a deficiency underpayment, and could the IRS use the IRC § 6676 penalty instead of § 6662?
• Outcome: Advice given
• Key authorities: IRC §§ 6211(b)(2), 6662, 6676(d); Clayton v. Commissioner, T.C. Memo 1997-327

Full text (IRS public release)

ID: CCA_2024042608581818 [Third Party Communication:

UILC: 6211.00-00, 6662.00-00, Date of Communication: Month DD, YYYY]

          6676.00-00

Number: 202514004
Release Date: 4/4/2025
From: ---------------------
Sent: Wednesday, April 26, 2024 8:58:25 AM
To: ------------------
Cc: ----------------------
Bcc:
Subject: RE: Request for advice on large erroneous refund and associated penalty

Hi -------,

There would be an underpayment in this case resulting from the refund. The refund
constituted a rebate, because the refund was made on the ground that the income tax
imposed for the year was less than the amount shown as tax on the taxpayer’s original
return for that year. See IRC § 6211(b)(2); Clayton v. Commissioner, T.C. Memo. 1997-
327, aff'd without published opinion, 181 F.3d 79 (1st Cir. 1998).

Therefore, the calculation should be:
[Amount of tax imposed] – ([Amount of tax shown on return] + [amounts not so shown
previously assessed] – [amount of rebates made])
---------------------– ----------------------------------------– --------------------= -----------------=
underpayment equal to the amount of refund constituting a rebate.

Refunds that constitute rebates are subject to deficiency procedures, and therefore a
SNOD would be appropriate. If the section 6662 penalty does apply and if, for whatever
reason, the Service doesn’t seek the 6662 penalty, it wouldn’t be able to seek the 6676
penalty. Just because we declined to seek the section 6662 penalty doesn’t mean that
the underpayment isn’t subject to the section 6662 penalty for purposes of applying
section 6676(d) (“This section shall not apply to any portion of the excessive amount of
a claim for refund or credit which is subject to a penalty imposed under part II of
subchapter A of chapter 68.” (emphasis added)).

I hope that this helps – please let us know if you have any other questions.

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