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Part 25. Special Topics

Chapter 6. Statute Of Limitations

Section 1. Introduction (Cont. 2)

25.6.1  Introduction (Cont. 2)

25.6.1.9 
Assessments

25.6.1.9.13 
Civil Penalties

25.6.1.9.13.1  (07-29-2008)
Civil Penalty Research

  1. To handle Civil Penalty tax modules, you may need to refer to other Internal Revenue Manuals (IRMs) and Internal Revenue Code (IRC) Sections such as:

    • IRM 21.2.4, Master File Accounts Maintenance

    • IRM 20.1, Penalty Handbook

    • IRC Section 6652, Failure to file certain information returns, registration statements, etc

    • IRC Section 6652(f), Returns required under Section 6039C registration statement, etc

    • IRC Section 6679, Failure to file returns, etc., with respect to foreign corporations or foreign partnerships

    • IRC Section 6686, Failure to file returns or supply information by DISC or former FSC

    • IRC Section 6694(a), Understatements due to unrealistic positions

    • IRC Section 6695, Other assessable penalties with respect to the preparation of income tax returns for other persons

    • IRC Section 6702, Frivolous tax submission

    • IRC Section 6707, Failure to furnish information regarding tax shelters

    • IRC Section 6707A, Failure to include reportable transaction information with return regarding tax shelters

25.6.1.9.13.2  (07-29-2008)
Civil Penalty Procedures

  1. The Omnibus Budget Reconciliation Act (OBRA) of 1989 consolidated and renumbered several IRC provisions containing penalties relating to information shown on or omitted from the return. The proscribed conduct is now addressed in IRC § 6662 under the Accuracy-Related Penalty. See IRM 20.1.5.1.1, Background, for a list of the penalties. The penalty is assessed through the use of PRN 680 (positive dollar amount) and abated with PRN 680 (negative dollar amount). When the penalty posts to MF, IMFOL or BMFOL it will reflect TC 240 (assessment) or TC 241 (abatement) along with the reference number 680.

    Note:

    The civil fraud penalty was also renumbered as IRC § 6663 by OBRA 89 and made applicable only to return-related conduct. See IRM 20.1.5.12, Civil Fraud penalty, for more information. An increase to the penalty for a fraudulent failure to file was enacted at IRC § 6651(f).

  2. The examining officer in the area office will determine the SCD for civil penalty assessments under the following code sections:

    IRC Section 6652
    IRC Section 6652(f)
    IRC Section 6679
    IRC Section 6686
    IRC Section 6694(a)
    IRC Section 6695
    IRC Section 6702
    IRC Section 6707
    IRC Section 6707A

    For a valid Penalty Reference number (PRN) for any of the penalties listed above, please refer to the current revision of Form 8278, Computation and Assessment of Miscellaneous Civil Penalties.

    Note:

    The Unpostable function will correct unpostable documents where there is no statute issue involved.

  3. A taxpayer may voluntarily pay the penalty imposed by IRC § 6723 and IRC § 6724 for failure to provide a Taxpayer Identification Number (TIN). If a case is referred to the Statute function with an imminent statute, you must do the following:

    1. Prepare Form 5734 to assess the payment amount using TC 200 in item 9 to indicate a penalty assessment.

    2. Staple the source document to the case file.

    3. Route to the Non Master File (NMF) Accounting Function.

25.6.1.9.13.3  (04-01-2007)
The Period of Assessment

  1. In general, the delinquency penalties, the accuracy-related penalty and information reporting penalties are assessed, collected, and paid in the same manner as taxes pursuant to IRC §§ 6665(a) and 6671(a). The general rules for determining the period for assessment are provided at See IRM 25.6.1.9, Assessments, and the guidance for when a return is filed at See IRM 25.6.1.6.15 , When a Document is Treated as Filed Under the IRC.

    Note:

    The Service is not required to make a separate assessment of the accruals on the IRC § 6651(a)(2) and § 6651(a)(3) delinquency penalties to collect the accruals. See United States v. Krasnow, 548 F. Supp. 686 (S.D.N.Y. 1982) (involving collection action to collect accruals for the addition to tax under IRC § 6651(a)(3)). These penalties could not be given full effect if the Service were required to assess within three years from the filing of the tax return because they can accrue over a 50 month period. The penalty accruing can not exceed 25% in the aggregate.

  2. The Preparer Penalties are penalties under IRC § 6694(a) or § 6695 may be assessed within three years after the filing of the return or claim for refund with respect to which the penalty is assessed. There is no period of limitations regarding a willful attempt to understate tax or a reckless or intentional disregard of the rules or regulations under IRC § 6694(b). See IRC § 6696(d).

  3. Promoter Penalties are penalties for promoting abusive tax shelters under IRC § 6700 or abetting an understatement of tax liability under IRC § 6701 may be assessed at any time because they do not relate to a return.

25.6.1.9.13.4  (11-15-2007)
Resolution-CVPN STAT/AM-X Transcripts

  1. Civil Penalty STAT transcripts are extracted using the minimum amount of time until the ASED. The "dummy" ASED date established for civil penalty accounts is 2 years and 6 months from the date of the control DLN in the module.

  2. You will request a hard copy MFTRA transcript for all civil penalty cases (complete entity and all active modules). You must establish a civil penalty name line by using Form 2363 and TC 013, if the master file name line of the taxpayer being assessed is joint. DO NOT change the name line of the MFT 30 account.

  3. A Master File (MF) entity must be established using Form 2363 for MFT 13 or 55, if MFTRA shows no record.

    Note:

    Each service center will establish local procedures with the Entity function to accomplish the establishment of entities described above.

  4. The Trust Fund Recovery Penalty Cases under IRC § 6672 (The 100% penalty) are processed in the Compliance Service Collection Operation (CSCO). The Statute function will route any 100% penalty cases received to CSCO.

  5. If there is a TC 240 in the account and research does not result in resolution, contact the area responsible for assessing the penalty for assistance in resolving the condition. If unable to determine the area responsible for assessing the penalty, and all other efforts have been exhausted to determine where the credit belongs, transfer the credit(s) to XSF as indicated in this IRM and IRM 3.17.22, Excess Collection File.

  6. If there are multiple penalties in the account, contact the area responsible for the last assessed penalty. (A TC 240 in a 59 blocking series indicates a systemically (computer) generated IRP civil penalty).

  7. If there is credit and no TC 240 on the account module, see the procedures in IRM 21.2.4.3.3.1, Civil Penalties Processing for resolution.

  8. If the Civil Penalty transcript is a STAT-01 caused by an unreversed TC 360, the procedures to resolve this type of transcript is found in IRM 21.2.4.3.29(6), Debit Balance, No Return (01-X).

25.6.1.10  (04-01-2006)
Claims, Abatements and Refunds

  1. This section provides instructions for processing claims for credit or refund, request for abatements and non-tax claims.

  2. To answer technical tax law questions, refer to individual tax law publications and the Internal Revenue Code (IRC) and the information provided in this section and the following provisions, which provide guidance or the rules for calculating the general period of limitations for claiming credit or refund:

    • See IRM 25.6.1.6.14, Criteria for Establishing a Statute of Limitation Period

    • See IRM 25.6.1.6.15, When a Document Is Treated As Filed Under the IRC

    • See IRM 25.6.1.7.3, Time When Payments and Credits are Considered to be Made

25.6.1.10.1  (05-17-2004)
Claims, Abatements and Non-tax Claims Research

  1. To handle claims, abatement requests and non-tax claims you may need to refer to the following Internal Revenue Manuals (IRMs):

    • IRM 21.5.1, General Adjustments

    • IRM 21.5.2, Adjustment Guidelines

    • IRM 21.5.3, General Claims Procedures

    • IRM 21.5.6, Freeze Codes

    • IRM 21.5.9, Carrybacks

    • IRM 25.6, Statute Of Limitations

  2. You may also need to refer to the following IRC sections:

    • IRC § 6407, Date of Allowance of Refund or Credit

    • IRC § 6511, Limitations on Credit Refund

    • IRC § 6513, Time Return Deemed Filed and Tax Considered Paid

25.6.1.10.2  (04-01-2006)
Requests for Abatement

  1. An abatement is the reduction or elimination of an assessment. The Service has general abatement authority. In addition, there are several circumstances in which a taxpayer may request an abatement.

    Note:

    Taxpayers can file requests for abatement relating to an assessed income tax as claims for credit or refund under IRC § 6402 or as claims for abatement under IRC § 6404(e). The Service may, where appropriate, consider the taxpayer's request and exercise its general abatement authority described in the next section below . See IRM 25.6.1.10.2.2, Taxpayer Requests, for processing requests even though the abatement requested is not one of those listed.

  2. Employees must not release credit balances for refund or offset where a Substitute For Return (SFR) assessment is on an account. SFR adjustments are input with a Hold Code 4. The hold code freezes the credit from refunding or offsetting and will cause an AM05, ST08 or AM-X05 Transcript to generate for review.

25.6.1.10.2.1  (10-01-2007)
Service's General Authority

  1. The Service's general abatement authority is provided in IRC § 6404. The authority extends to the Service’s assessment that is excessive in amount that was made after the expiration of the ASED, or that was otherwise erroneous or illegal. IRM 1.2.12.1.15, Policies Statement, P 2-89 (Approved 09-20-1999) clarifies when the Service will reconsider an unpaid assessment. You can reduce the tax on a unpaid return up to the balance owed on the account. If you abate the tax and an overpayment is created, you must send the nonrefundable overpayment to Excess Collection File (XSF), and send a 106 C Letter to the taxpayer. Do not abate the tax after the ASED if the account is paid in full unless the taxpayer has filed a claim for credit or refund within the period of limitations and the 2 or 3 year rule for limitations on the amount of credits or refunds applies. Section 6511(a) provides that a claim for credit or refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. Section 6511(b) limits the amount of the credits or refunds to amounts paid within 2 or 3 years preceding the date of a claim depending on whether the claim was filed within the 3 year period of limitations prescribed in 6511(a). See IRM 25.6.1.10.2.7.2.1, and See IRM 25.6.1.10.2.7.2.2, for application of the 2 or 3 year limitation on the amount of credits or refunds provided for in section 6511(b). Instead, input a TC 29X with Blocking series 98/99, and send the taxpayer a disallowance letter (105C). If the taxpayer is entitled to partial refund based on the 2 year rule or 3 year rule, you must input the tax decrease to allow the payment(s) to refund, send any nonrefundable overpayment (interest and penalties due to the tax reduction) to XSF, and send the taxpayer a disallowance letter (106C).

  2. If you decide not to abate the balance owed or unable to verify documentation to abate the balance due amount, you can just send the taxpayer a 916C (no consideration) letter requesting full payment of the amount owed and instruct the taxpayer to file a claim for refund with all supporting documents. Do not send a disallowance letter on these types of cases.

  3. If an amended return is received before or after the ASED requesting an abatement of tax and there are conditions which meet Examination criteria, you must send to Exam for review before making the abatement. If Exam accepts the return as filed, the abatement can be made; however credits or refunds of overpayments are subject to the requirements of section 6511 as explained above, i.e. the period of limitations for filing a claim must be open and the amount of the credit or refund is limited to the 2 or 3 year rule.

25.6.1.10.2.2  (04-01-2006)
Taxpayer Requests

  1. In general, a taxpayer may request an abatement of an unpaid assessment of only employment or excise tax under IRC § 6404(b). (IRC § 6404(b) provides that taxpayers have no right to file a claim for abatement of income, estate, or gift tax.) A request is generally submitted on Form 843, Claim for Refund and Request for Abatement. The following is a list of some of the other items for which a taxpayer may request an abatement:

    • Abatement of interest relating to income, estate, gift, generation-skipping, and certain excise taxes whose accrual is attributable to any unreasonable error or delay in performing a ministerial or managerial act. IRC § 6404(e).

    • Abatement of any penalty or addition to tax (but not the tax or the interest) attributable to erroneous written advice from the Service pursuant to a specific written request and on which the taxpayer reasonably relied. IRC § 6404(f).

    • Abatement of penalty or interest for any taxpayer granted relief because of a Presidentially declared disaster or a terroristic or military action. IRC § 7508A(a)(2).

    • Abatement of a "math error" assessment (any reassessment must use the deficiency procedures). IRC § 6213(b)(2).

    • Reduction of the failure to timely deposit penalty when the taxpayer designates different periods from those to which the deposits were applied. IRC § 6656(e)(2).

    • Application of a zero net interest rate on overlapping tax underpayments and overpayments under Rev. Proc. 2000-26, 2000-1 C.B. 1257. IRC § 6621(d).

    • Removal of penalties under the Post-assessment Penalty Appeal process. IRM 8.11.1.6, Postassessment Penalty Appeal Procedure, (09-12-06).

25.6.1.10.2.3  (04-01-2007)
Abatement After the Assessment Statute Expiration Date (ASED)

  1. Although an abatement (tax, penalty, or interest ) may be made before or after the ASED, the tax cannot be reassessed if it is subsequently determined that the tax decrease was erroneous once the ASED has expired. See IRM 25.6.1.10.2.4, Erroneous Abatement, for more information. Therefore, it may be necessary to consider the ASED in determining whether it is appropriate to exercise the Service’s abatement authority, or to require the taxpayer to pay the assessed tax in full and file a claim for refund or petition the Tax Court with respect to a final notice of determination.

25.6.1.10.2.4  (10-01-2007)
Erroneous Abatement

  1. If an amount is abated at the request of a taxpayer after a substantive re-determination of tax liability and the Service subsequently realizes that the tax decrease was erroneous, the amount above the tolerance level must be reassessed using the deficiency procedures (route case to the Examination Operation) before the ASED passes; e.g., the abatement does not agree with the taxpayer’s return position or it is believed that the facts provided by the taxpayer are incorrect. If Examination cannot reassess the tax decrease because the ASED has passed, you must prepare a Barred Assessment Report on Form 9355. See IRM 25.6.1.13.2.4,Identifying Barred Statute Cases, for more information on barred cases. The overpayment created by the tax decrease must be moved to XSF. Statute function employees must never reassess the tax on this type of case.

  2. An abatement/tax decrease request made in response to an amended return always constitutes a re-determination of tax even if the Service makes only a hasty review of the return before making the abatement. See IRM 25.6.1.10.2.4.2.1,Substantive Redetermination of Tax Liability, for more information.

  3. An abatement of small tax balances under IRC § 6404(c) is not a substantive determination, so no reassessment is made. See IRM 21.4.5.4.1, Category A1 Erroneous Refunds, for more information on this issue. See IRM 25.6.1.10.2.4.7(2) and (3),Tolerance Level , which states what account action is needed to resolve this type of case. If the small credit amount is still on the account, transfer the credit to XSF.

25.6.1.10.2.4.1  (03-01-2006)
Controlling Erroneous Abatement Cases

  1. This section provides guidance for controlling those erroneous abatement cases for which the Statute function is the "Central Control Point" between the function that made the erroneous abatement (the "Originating Function" ) and Accounting. See IRM 25.6.1.10.2.4.1.1,Controlling Erroneous Abatement Cases in Statute, for controlling such cases in Statute. The error involved in these cases is clerical and the Assessment Statute Expiration Date (ASED) has passed; such cases cannot be corrected on IDRS. See IRM 25.6.1.10.2.4.4, Remedies for Recovering an Erroneous Refund, for an overview of the legal remedies for such cases. As the "Central Control Point" Statute will ensure corrective actions are taken on the case.

  2. This section provides processing instructions for the Originating Function to initiate corrective action on cases for which the ASED has passed. See IRM 25.6.1.10.2.4.6,Processing of Erroneous Abatement Cases by the Originating Function, concerning the preparation of Form 3465, Adjustment Request, and Form 12810, Account Transfer Request Checklist.

    Note:

    If the Originating Function is an Area Office, Statute will initiate the corrective action.

  3. This section categorizes actions constituting erroneous abatements and provides an overview for:

    • Correcting erroneous abatements (including those involving clerical errors where the ASED has not expired) as well as those involving a substantive redetermination of tax liability to collect a balance due,

    • Recovering Erroneous Refunds and

    • Eliminating Overstated Estimated Tax or Withholding Credits.

25.6.1.10.2.4.1.1  (03-01-2006)
Controlling Erroneous Abatement Cases in Statute

  1. As the "Central Control Point" between an Originating Function and Accounting, the Statute team provides a tracking method to ensure that erroneous abatement (non-rebate) cases are being corrected. Statute will not review cases from other areas for accuracy, completion of case, etc.

  2. Statute will determine the responsible function for an erroneously abated tax. You must manually control all "Erroneous Abatement" cases on IDRS and use Category Code "ERAB" .

  3. When a case has been routed to the responsible function for corrective action, create and maintain a control on IDRS. Statute will control one and the Originating Function the other.

  4. You must route the case via transmittal, Form 3210, Document Transmittal, to the Originating Function area. Statute will retain one copy of Form 3210. If the case is not returned to Statute within 30 calendar days, Statute employees must access IDRS to determine if it is controlled and being worked by the Originating Function. The manager of the Originating Function should be notified that the turn-around time has expired, and Statute has not received the case file (method of notification is optional in each campus).

  5. The Originating Function will reassign their control base on IDRS to the control base assigned to Statute when the corrective action has been taken. The case will be routed to Statute via Form 3210. Statute will sign the Form 3210 reflecting date of receipt, check off case(s) by TIN, and return original Form 3210 to the Originating Function. Statute will update their control base at this time indicating the case has been sent to Accounting.

  6. Statute must request notification (via the two-way memo) from Accounting Journal Unit when the Accounting action is completed.

  7. Statute employees will review the tax module to ensure a TC 400 has posted to the master file when the Journal Unit notifies the Statute Team that action was taken to reverse the erroneous abatement and the taxpayer has been sent a copy of the reversal document.

    Note:

    You must allow 45 days for Accounting to complete the action necessary to reverse the abatement. The statute examiner who has responsibility of the case must notify their manager if notification is not received within 45 days. The statute manager should notify Accounting of any delays.

  8. Close your control base on IDRS once you receive notification from Accounting that all actions outlined above were taken.

25.6.1.10.2.4.2  (04-01-2007)
Corrective Actions for Erroneous Refunds

  1. Erroneous refunds can be divided into four types for purposes of applying corrective actions; those which are:

    1. Assessable substantive redeterminations of tax liability (these were generally referred to in the past as erroneous "Rebate" ),

    2. Assessable other liabilities, including negative amounts of tax constituting a deficiency under 6211(b)(4), amount assessable under math error procedures and overstated income tax pre-payments assessable under 6201(a)(3),

    3. Unassessable errors, including clerical errors (these were generally referred to in the past as erroneous Non-rebates) and

    4. Otherwise assessable amounts which became unassessable by expiration of the ASED.

25.6.1.10.2.4.2.1  (10-01-2007)
Substantive Redetermination of Tax Liability

  1. A substantive redetermination of a tax liability is a decrease in the tax shown on the taxpayer’s tax return or an abatement to tax shown on the tax return that is made after deciding to make a change to the tax liability (e.g., those made by the Service after an examination or a telephone contact or by the taxpayer on an amended return).

  2. An example of a substantive redetermination of a tax liability is when a taxpayer submits an amended return requesting a decrease in tax, which the Service makes without fully screening the return. The abatement of tax results in a reduction in the tax liability shown on the taxpayer's account even though the Service makes only a hasty review of the return or inadvertently fails to screen the entire return to determine if the reduction in the tax should be made.

25.6.1.10.2.4.2.2  (03-01-2006)
Clerical Errors

  1. A clerical error is a change to an assessment that is not based on an adjustment in the tax liability, as shown on the taxpayer's account as stated above.

  2. Two examples of a clerical error are:

    1. An input document is misread or a keypunch error is made; e.g., misreading an input document with a disallowance of a deduction to be an allowance or keypunching a $15,000 abatement instead of a $1,500 abatement.

    2. An abatement is entered for the wrong tax year, wrong tax type, or wrong taxpayer based on a misreading of input documents or a keypunch error.

25.6.1.10.2.4.3  (10-01-2007)
Correction after a Substantive Redetermination of Tax Liability

  1. To make a correction to the tax liability on or before the ASED, the tax liability erroneously decreased must be reassessed before the ASED (by use of the Examination Operation procedures for the underlying tax including where applicable, the deficiency procedures) in order to collect any balance due that would result after correcting the erroneous tax abatement. "Statute Employees" do not have the authority to reassess the tax decrease even if the overpayment created is still on the account.

  2. If Examination Operation cannot reassess the tax because it is below the amount required for assessment or the ASED has passed and the overpayment credit is still on the account, you must do the following 4 things:

    1. Send the overpayment credit to the Excess Collection File (XSF)

    2. Input a transaction code (TC) 29X for zero using Blocking Series 98/99 and send a disallowance letter (105C), and

    3. Prepare Form 9355, Barred Assessment Report, if the abatements meets the tolerance level stated in See IRM 25.6.1.13.2.4 , for erroneous abatements.

    4. Input transaction code (TC) 971 action code (AC) 90 on IDRS if the abatement does not meet the tolerance level. See IRM 25.6.1.10.2.4.7 , Tolerance Level, for erroneous abatements cases.

  3. If a refund was erroneously sent to the taxpayer and Examination did not reassess the tax or the ASED has expired, the Service may file a civil suit per IRC § 7405 and per IRM 3.17.80.1.5, Methods Used to Recover Erroneous Refunds, to recover the erroneous refund.

  4. If Examination makes the assessment or reassessment before the ASED on an erroneous refund sent to the taxpayer, the amount maybe collected under the statutory right of offset under IRC § 6402 against any outstanding tax liability (or certain non-tax liabilities) of the taxpayer.

  5. The refunded amounts may also be recovered under the non-statutory right of offset. Further, the refunded amount may be recovered by a request for voluntary repayment. It should be noted that in determining whether the Service made a timely action to recover an erroneous credit, the date the credit is applied against an assessment in the account to which it is moved is the date that starts the IRC § 6532(b) period. In contrast, the date the credit is allowed starts the limitation period for offset. A credit is allowed on the date on which the Secretary first authorizes the scheduling of an overassessment in respect of any internal revenue tax. See IRM 25.6.1.7.2(5)(b), Time When Payments and Credits are Considered to be Made, for more information on when a credit is allowable.

    Note:

    See IRM 25.6.1.9, Assessments, concerning the period of limitation on assessments.

  6. If you are making a correction to the tax liability after the ASED, you must not do the following:

    1. Collect any balance due. Any balance due that would result after correcting the erroneous abatement may not be collected if the correction is not made until after the ASED.

    2. Offset against a claim for credit or refund. However, if the taxpayer claims a credit or refund of an amount paid on or before the ASED, the amount of the erroneous abatement may be used to offset the claim. See Rev. Rul. 85-67, 1985-1 C.B. 364. See IRM 25.6.1.10.2.5.7 , Offsetting the Amount of a Refund With a Time-barred Adjustment, for more information on offset due to a timely barred claim.

      Note:

      To the extent that the amount claimed was not paid before the ASED, the taxpayer is entitled to a refund upon filing a timely claim. See Rev. Rul. 74-580, 1974-2 C.B. 400.

25.6.1.10.2.4.3.1  (10-01-2007)
Correction after a Clerical Error

  1. In general, an erroneous abatement due to a clerical error may be reinstated before or after the ASED without special processing (see Crompton-Richmond Co. v. United States, 311 F.Supp. 1184 (S.D.N.Y. 1970); Bugge v. United States, 99 F.3d 740 (5th Cir. 1996)) and any resulting balance due collected unless either of the following circumstances exists:

    1. The taxpayer is prejudiced by the reinstatement. See American Trucking Ass'ns. v. Frisco Transportation Co., 358 U.S. 133, 144-46 (1958) (A government agency has authority to correct inadvertent errors as long as there is no prejudice to the citizen), or

    2. The taxpayer has paid the assessment by a designated payment. See Bilzerian v. United States, 86 F.3d 1067 (11th Cir. Fla. 1996), acquiescence in result only, 1998 AOD LEXIS 8 (erroneous refund following taxpayer's designated payment of the original assessment does not revive that assessment to permit enforced collection of the amount erroneously refunded).

    Example:

    If the Service intends to move an assessment from tax year 1 to tax year 2 but inadvertently abates an assessment in the wrong taxpayer’s account, the assessment to the wrong taxpayer’s account for tax year 1 may be reinstated (if there is no prejudice or the assessment has not been paid); however, the assessment to the correct taxpayer’s account for tax year 2 is not a reinstatement; it is an initial assessment which must be made by the ASED.

  2. Whether there is prejudice to the taxpayer is a question of fact. See McKay v. Commissioner, 89 T.C. 1063, 1068 (1987), aff'd, 886 F.2d 1237 (9th Cir. 1989); United States v. Cooper, 83-1 USTC P9266 (D.D.C. 1983) (Allowing abatement to be reinstated when the taxpayer did not allege prejudice); Frieling v. Commissioner, 81 T.C. 42 (1983) (Inconsequential errors do not prejudice taxpayers). One important factor to consider is whether the Service formally notified the taxpayer that an abatement has been made. If an erroneous refund has been issued to the taxpayer in connection with the abatement, the taxpayer will generally be prejudiced by the reinstatement, and any associated effort to recover the erroneous refund.

  3. An assessment is extinguished when it is paid by a designated payment and not even an erroneous refund may revive it.

    Note:

    The government had contended in the past that a non-rebate refund could be recovered without assessment if the erroneous refund did not exceed the amount of the original assessment even if that assessment had been fully paid by the taxpayer. The government no longer takes that position. See Bilzerian, above.

  4. Not every credit to a taxpayer's account will constitute a payment in satisfaction of an assessment. See Bilzerian v. United States, 1998 AOD LEXIS 8.

    Example:

    If the Service inadvertently credits an account with another taxpayer's payment or misapplies money the taxpayer designated to another tax year, the assessment that the payment was misapplied to is not satisfied so the Service can continue to collect that assessment after correction of the misapplication. Likewise, when the Service returns funds collected as a result of a levy to a third party or the taxpayer pursuant to IRC § 6343, the liability to which the funds were applied is not satisfied and the Service can continue to collect that liability based on the original assessment.

    Example:

    A taxpayer’s return shows a $750 tax liability which the Service assesses. During pipeline processing the Service transcribes an entry to the wrong line causing a limitation on a deduction not to be applied and the Service notifies the taxpayer the assessment will be reduced to $500. The taxpayer pays $300. Later, the Service realizes the entire amount of the expense could not be deducted due to the limitation and the entire abatement is erroneous. If there is no prejudice to the taxpayer, the $250 erroneous abatement may be reinstated to the extent of the unpaid assessment [$750 - $300 = $450].

  5. For processing corrections on or before the ASED, you should follow the procedures in IRM 21.4.5.4.3, Category "B" Erroneous Refund or IRM 21.4.5.4.5 , Overview of Category "D" Erroneous Refund.

  6. The role of Statute in the reinstatements of an erroneous abatement after the ASED due to a clerical error is the primary subject of this IRM. Master File computer programming prevents the reversal of an abatement after the ASED. To handle such erroneous abatements you may need to reference:

    • Integrated Data Retrieval System (IDRS)

    • IRM 3.17.243.9, Reversal of Erroneous Abatements

    • IRM 3.17.46.2.9, Reversing Erroneous Abatements

  7. The role of the Accounting Function after the ASED is to reinstate the assessment on Non-Master File (NMF) using an automated accounting system and, if a balance remains on the account, bill the taxpayer pursuant to IRM 3.17.46.2.9, Reversing Erroneous Abatements. When the reinstatement must be made expeditiously, the Accounting Function will use IRM 3.17.243.9, Reversal of Erroneous Abatements.

25.6.1.10.2.4.4  (10-01-2007)
Remedies for Recovering an Erroneous Refund

  1. You may need to reference the following:

    • IRM 21.4.5, Erroneous Refunds

    • IRM 3.17.80, Working and Monitoring Category D, Non-Rebate Erroneous Refund Cases in Accounting Operations

  2. In processing the recovery of refund, you must route all IMF Rebate Refund Cases to the Examination function for assessment before the ASED expires. For Non-Rebate Refund Cases, you should follow the procedures in IRM 21.4.5.4, depending on the type of clerical error in you case.

25.6.1.10.2.4.4.1  (04-01-2007)
Recovery of Assessable Erroneous Refunds

  1. Recovery may be made by tax assessment procedures to the extent an erroneous refund results from an erroneous abatement due to a substantive redetermination of tax liability. The assessment may be recovered through tax collection procedures described above.

    Note:

    The Service would assess more than the amount of the erroneous refund if more was owed (e.g., interest, penalty, and etc.).

  2. Recovery by civil suit is another way an erroneous refund may be recovered by the Service. IRC § 7405 allows recovery by a civil suit. The refund may result from a refund made after the time for filing a claim for refund or a refund sent after the time for filing a refund suit, or a refund "otherwise" erroneously made. "Otherwise" erroneous is a broad category; e.g., see Pesch v. Commissioner, 78 T.C. 100, 117 (1982), the Tax Court recognized that a civil suit is an alternative method of recovering a tentative refund made under IRC § 6411. The period of limitations for bringing suit is 2 years from the date of the refund (5 years if any part of the refund was induced by fraud or a misrepresentation of a material fact). See IRC § 6532(b).

    Note:

    An Erroneous Abatement (Rebate) case must not be reassessed on Masterfile or Non-masterfile after the ASED has expired. It would be an illegal assessment of a tax.

  3. If an erroneous abatement has occurred due to a substantive redetermination of tax liability (Rebate Abatement) after the ASED has passed and the credit is still on the account, you must send the credit to the Excess Collection File (XSF) and not reassess it on the taxpayer’s account. You must prepare a barred assessment report (i.e., Form 9355 Barred Statute Report) because the assessment cannot be legally reversed on the taxpayer’s account.

25.6.1.10.2.4.4.2  (04-01-2007)
Recovery of Unassessable Erroneous Refunds

  1. This section generally involves " double" refunds made to a taxpayer or a refund made to the wrong party.

  2. Recovery by civil suit of an erroneous refund due to a clerical error may be pursued. See IRM 25.6.1.10.2.4.4.1(2), Recovery of Assessable Erroneous Refunds, for more information on recovery due to a clerical error.

  3. Common law right of offset. The government has the same common law rights as any other creditor to apply funds owed to its debtor against the debt owed. See United States v. Munsey Trust Co., 332 U.S. 234 (1947). See also 31 U.S.C. § 3711, which provides a statutory remedy for non-tax debts due the Government. The statutory right of offset for tax debts provided by IRC § 6402 does not usually permit an offset of a tax overpayment against a non-tax debt except in specific circumstances.

    Note:

    The amount refunded cannot be recovered by the tax administrative procedures. The refund is not based on an amount originally owed as a tax liability; rather, the amount is an unjust enrichment.

25.6.1.10.2.4.5  (04-01-2007)
Overstated Estimated Tax or Withholding Credits

  1. You may need to reference IRM 21.4.5, Erroneous Refunds, (see Category "B" Erroneous Refunds).

  2. If a taxpayer overstates the amount of Estimated Tax Credits (ES) or Withholding Credits (WH) on his or her income tax return, and the overstated amount was allowed against the tax reported on the return, then the overstated amount of ES or WH Credits will be assessed as an amount due on the taxpayer's account, just like an assessment made for a math error. You must input a TC 29X for the ES or WH overstated amount and use reason code for ES or WH on your adjustment without reference number. Unlike the math error, the taxpayer may not request an abatement of the assessment and any balance due may be assessed per IRC § 6201(a) (3). With respect to overstated ES or WH credits, you are allowed to reverse these credits after the ASED expires. However, you must not reverse other prepaid credits (i.e., EIC, Additional Child Tax Credit (ACTC) after the ASED expires). You must not make an adjustment to reduce the amount of EIC or Advance Child Tax Credits after the ASED expires because it will create a negative tax amount per IRC § 6211 (b) (4) (B). If you allow any of the other prepaid credits after the ASED, the credit must be applied to the Excess Collection File, and a Barred Statute Report (Form 9355) must be prepared.

  3. A refund based on overstated credits may be recovered by a civil suit. See IRM 25.6.1.10.2.4.4.1(2), Recovery of Assessable Erroneous Refunds, for more information on this type of refund recovery.

  4. If the overstated ES or WH credits are discovered before a refund is issued, the overstated credits should be assessed rather than " reversed" on the taxpayer’s account on Master File, unless a notice regarding the disallowance of the claim for refund based on the overstated credits is sent by certified or registered mail. See IRC § 6532(a)(1).

25.6.1.10.2.4.6  (03-01-2006)
Processing of Erroneous Abatement Cases by the Originating Function

  1. The originator of the erroneous abatement must initiate the corrective action whether or not assigned to Statute.

    Exception:

    If the initiator is an employee in an Area Office, Statute will correct the erroneous abatement.

    Note:

    The Originating Function is responsible for corrective actions on cases where the originator is no longer working in the area where the erroneous abatement occurred. This is regardless of whether the statute assessment has/has not expired.

  2. Employees who are responsible for correcting erroneous abatement cases must follow the instructions below on cases above the (See LEM 25.6.1.10.2.4.6) tolerance level where errors were made or discovered after the ASED had expired.

    1. Prepare Form 3465, Adjustment Request and Form 12810, Account Transfer Request Checklist. The Originating Function will prepare a Form 3465 and Form 12810 requesting Accounting to reverse the erroneous abatement using the date the assessment posted to MF of the prior tax assessment (i.e. TC 150, 290, 300). Multiple assessment dates must be addressed and included on Form 12810 if the erroneous abatement being reversed exceeds the prior tax assessment. Show the amount of erroneous abatement to be reversed. Enter the amount in red on Form 12810

    2. Request Accounting to transfer the account to Non-Master File (NMF) using TC 400 procedures.

    3. Compute any penalty, addition to tax, and interest as if the erroneous abatement had never occurred. (Penalties, additions to tax, and interest should continue to accrue as if the erroneous abatement had not occurred).

    4. Enter taxpayer’s name, address, TIN and all other pertinent information.

    5. Enter in the "Remarks" area: "Reversal of Erroneous Abatement-For NMF Processing" .

    6. State on Form 12810 "Do Not Bill The Taxpayer." Circle this entry in red.

    7. Include a current MFTRA transcript with case.

    8. Prepare credit transfer document(s), if appropriate.

    9. Prepare a 510C Letter to the taxpayer if a balance due results from the reversal. Compute penalty, addition to tax, and interest to the date of billing and provide the taxpayer with the balance due. In addition, include an explanation to the taxpayer.

    Note:

    Do not send the letter at this time but include it with the case file. Accounting will send the letter and the bill to the taxpayer.

  3. Two-Way Memorandum-

    1. The Originating Function will prepare a two way memo to the Chief, Accounting Operation.

    2. The memo will set forth the conditions surrounding the erroneous abatement, the amount of tax considered still due, penalty, ad