Accuracy-related penalty generally takes priority when an erroneous refund creates an underpayment

Plain-English summary

Chief Counsel advised that the first question for a large erroneous refund is whether the refund created an underpayment under IRC § 6664. If it did and the underpayment resulted from negligence or disregard of rules and regulations, the § 6662 accuracy-related penalty should apply. IRC § 6676 generally imposes a 20 percent penalty on an excessive refund or credit claim lacking reasonable cause, but it excludes amounts subject to penalties under §§ 6662, 6662A, or 6663. The advice therefore treats § 6676 as the alternative when the erroneous claim does not produce an underpayment attributable to conduct covered by those other penalties. It also cautions that the mere existence of an underpayment is not enough by itself to impose § 6662.

Ruling snapshot

• Question: Should an erroneous refund be penalized under IRC § 6662 or under the alternative erroneous-claim penalty in § 6676?
• Outcome: Advice given
• Key authorities: IRC §§ 6662, 6662A, 6663, 6664, 6676; Treas. Reg. § 1.6664-2(a)

Full text (IRS public release)

ID: CCA_2024042413474918 [Third Party Communication:

UILC: 6662.00-00, 6664.01-00, Date of Communication: Month DD, YYYY]

          6676.00-00

Number: 202514003
Release Date: 4/4/2025
From: ---------------------
Sent: Wednesday, April 24, 2024 1:48:00 PM
To: ------------------
Cc: ----------------------
Bcc:
Subject: RE: Request for advice on large erroneous refund and associated penalty

Hi -------,

The key question is whether the erroneously issued refund resulted in an
underpayment. If it did, a section 6662 penalty would likely be appropriate instead of the
section 6676 penalty.

Generally, section 6676 imposes a 20 percent penalty on the excessive amount of a
claim for refund or credit that lacks reasonable cause. §6676(a). The penalty does not
apply to any portion of the excessive amount which is subject to an accuracy-related
penalty under sections 6662 or 6662A or a fraud penalty under section 6663. §6676(d).

A section 6662 penalty can exist only when there is an underpayment as defined in
section 6664. §6662(a); §6664(a). The section 6664 regulations define an
underpayment of income tax for purposes of section 6662 as the excess of the amount
of income tax imposed under Subtitle A over the excess of (A) the sum of (i) the amount
shown as the tax by the taxpayer on his return, plus (ii) amounts not so shown
previously assessed (or collected without assessment), over (B) the amount of rebates
made. Treas. Reg. §1.6664-2(a).

The mere fact of an underpayment, however, is not sufficient to impose a penalty under
section 6662. Based on your email, we can assume that the erroneously issued refund
resulted in an underpayment, and that the underpayment is attributable to negligence or
disregard of the rules and regulations. In that case, the section 6662 negligence penalty
should apply. However, if the underpayment is not attributable to negligence and
similarly would not result in another section 6662 penalty, a section 6662A penalty, or a
section 6663 penalty, then the section 6676 penalty should be imposed on the
erroneous claim for refund.
2

Please let us know if you have any questions.

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