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).

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.

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 in IRM 25.6.7.2.1, above.

Two examples of a clerical error are:

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.

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:

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.

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.

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 25.6.3.4(5)(b).

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

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:

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.

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

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

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.

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:

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.

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 (which are described in IRM 25.6.7.3.1, above).

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).

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 can not be legally reversed on the taxpayer’s account.

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

Recovery by civil suit of an erroneous refund due to a clerical error may be pursued as described in IRM 25.6.7.4.1(2), above.

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.