A Controversial Position Reversed

9/1/2012 | Written by: Karen Reed

For more than two years, the IRS has been taking a controversial position with regard to accuracy–related penalties on disallowed refundable tax credits. Taxpayers ineligible for refundable credits who mistakenly claimed them were being assessed a 20% penalty on their unallowed credit amount based on a misguided and convoluted interpretation of the formula for making the underpayment calculation. A recent technical assistance memorandum reverses that position.

According to Program Manager Technical Advice (PMTA) 2012–16, the Chief Counsel’s office has reconsidered its advice in regard to the accuracy–related penalty in situations that involve frozen refunds. This may apply to taxpayers who claimed but never received refundable credits such as the Earned Income Tax Credit, the Adoption Credit or the First–Time Homebuyer Credit because they were deemed to be ineligible. The memo explains that in such situations an underpayment penalty does not exist because there is no underpayment based on a change in the interpretation of the computation. Without an underpayment there can be no liability for the accuracy–related penalty. Other penalties may apply, however, when the taxpayer lacks a reasonable basis for claiming a refundable credit.

Taxpayers who have already paid a penalty that was incorrectly assessed should consider filing Form 843, Claim for Refund and Request for Abatement. This form is used to request a refund of a penalty resulting from erroneous written advice from the IRS.