CCA addresses offsetting overpayments after an erroneous refund

Plain-English summary

Chief Counsel Advice considers whether the IRS may offset an overpayment of one excise tax against another tax liability when the liability was reported but never assessed before the assessment period expired. The taxpayer had paid the tax during the assessment period, received refund checks in error, and returned them after the period had expired. The advice concludes that returning the erroneous refund checks did not become a new payment, so the original payment remained relevant under IRC §§ 6401 and 6402.

Ruling snapshot

• Question: Could the IRS treat returned erroneous refund checks as a payment made after the assessment period for purposes of offsetting tax overpayments?
• Outcome: Advice given
• Key authorities: IRC §§ 6401 and 6402; Rev. Rul. 85-67; Lewis v. Reynolds

Full text (IRS public release)

ID: CCA_2012022107234547 Number: 201224032
Release Date: 6/15/2012
Office: --------------
UILC: 6402.00-00

From: ----------------------
Sent: Tuesday, February 21, 2012 7:23:57 AM
To: ---------------
Cc: ---------------------
Subject: FW: Lewis v. Reynolds

Hi--I have dwelled on this some more, and my analysis is below. Let me know if you want to discuss.

The original question involved offset of an overpayment of one type of excise tax against a liability for
another type of tax, pursuant to section 6402(a). The liability at issue was shown on a return, but
mistakenly never assessed. The assessment period has run. The Service issued refund checks and the
taxpayer returned them, recognizing that he owed the tax for the period and the refund check was issued
erroneously.

In our original response, we discussed the application of Rev. Rul. 85-67 and Lewis v. Reynolds, which
provides authority for the position that the Service is entitled to retain payments received during the
assessment period, even if the liability is never assessed and the ASED has now passed. Such payment
would not be an overpayment for purposes of section 6401. It follows that the liability could be offset
against overpayments for other taxes, under section 6402(a).

In our original response, we concluded that Rev. Rul. 85-67 did NOT apply under the facts of your case,
because there was no payment within the assessment period. It turns out we misunderstood your facts:
the taxpayer had paid the tax within the assessment period. Thus, I provided a corrected response in the
2/10 2:40 p.m. email below.

You are now asking whether we can argue that Rev. Rul. 85-67 is not applicable because of the
distinguishing fact that we issued refund checks to the taxpayer, and the taxpayer returned them (after
expiration of the ASED). In other words, can we argue that the relevant payment date is the date the
taxpayer returned the refund checks, rather than the original payment of tax within the assessment
period.

As I preliminarily concluded below, I don't see how the return of the refund check can be deemed a
"payment" of tax, given that the taxpayer had already paid the tax. I think it was an erroneous
refund. Because the taxpayer paid the tax within the assessment period, there was no overpayment of
tax under section 6401, as discussed in Rev. Rul. 85-67. As there was no overpayment, we had no
authority to issue a refund check and the refund was erroneous. As the refund was erroneous, the
taxpayer property returned the check.

I found no authority to suggest return of a refund check could be considered payment of the tax for
purposes of section 6401. There is law addressing whether a remittance is a "payment" v. "deposit" of
tax, and the relevant analysis is focused upon the intent of the taxpayer in making the remittance. A
taxpayer returning a check is not intending or attempting to pay the taxes, he is just voluntarily returning a
check he understands to be issued in error because he owed and previously paid the tax.

In this case, the taxpayer made a payment which was not an overpayment, under the analysis of Rev.
Rul. 85-67. Thus, the refund check was erroneous. If a return of an erroneous refund check could be
considered a "payment" for purposes of section 6401(a), it would be an overpayment because the check
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was returned after the ASED. Thus, by sending back the erroneous refund check, the taxpayer would
transform an erroneous refund into a legitimate overpayment, and be entitled to keep a check issued by
mistake. This doesn't make sense.