CCA 200913048: A taxpayer could have a penalty underpayment and still receive a refund

Plain-English summary

Chief Counsel considered an accuracy-related penalty for a year in which the taxpayer was due a refund. An underpayment under the penalty regulation measures understatement of the correct tax liability without taking the taxpayer's payments into account. A taxpayer therefore can understate liability while still having overpaid enough to receive a refund. Based on the limited facts and supplied figures, Counsel concluded that the calculations supporting the penalty appeared correct. The reviewer did not see how the regulation's ordering rules applied, except possibly because other adjustments did not arise from negligence.

Ruling snapshot

• Question: Could an accuracy-related penalty rest on an underpayment when the taxpayer's payments still produced a refund?
• Outcome: Advice given: yes, because the underpayment calculation does not account for tax payments.
• Key authorities: Treas. Reg. §§ 1.6664-2 and 1.6664-3.

Full text (IRS public release)

ID: CCA_2008112418261264 Number: 200913048
Release Date: 3/27/2009
Office: --------------
UILC: 6664.00-00

From: ------------------
Sent: Monday, November 24, 2008 6:26:13 PM
To: ------------------------
Cc: ------------------------------------------------------------------ Subject: FW: Accuracy-related penalty in a year where there is an overassessment

Below is an email an attorney in my branch prepared. I am forwarding it after reviewing it. The numbers supplied by -------------in response to your questions support the penalty (although I do not see how the ordering rules of 1.6664-3 are involved, as -------------says - perhaps he is just saying that there were other adjustments not due to negligence).

-------------

In response to your question, it is possible to have an underpayment (as defined in Treas. Reg. § 1.6664-2) and still have a refund due the taxpayer. Though it is called an underpayment, it is more accurately described as an understatement of tax liability. This means that any tax payments made by the taxpayer are not taken into account in determining an underpayment. Thus, a taxpayer can understate their tax liability but still be owed a refund because they had overpaid. Dealing with these limited facts as presented it would appear that the calculations, as represented by -----------, are correct. Should you have any questions please contact me at your convenience.

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ATTACHMENT [Redacted]