Stakes Raised on Oversized Refund Claims

Taxpayers who receive “excessive” refunds can now be tagged with a 20% penalty on the overpayment. The provision is one of several revenue enhancers included in the recently passed Small Business and Work Opportunity Tax Act of 2007.

The change to IRC § 6676(a) assesses the penalty on any claim or credit for an excessive amount unless the taxpayer has a “reasonable basis” for the claim. However, section 6676(c) essentially waives the penalty on any portion of the excessive claim that also would be subject to accuracy-related or fraud penalties imposed by sections 6662, 6662A or 6663. The new penalty applies to claims filed after May 25, 2007, the date President Bush signed the legislation. Previously, no penalty applied to the excessive refund if the taxpayer was not subject to a penalty under the aforementioned accuracy-related or fraud penalty statutes.

The growing prevalence of refund fraud has been identified in numerous reports from the Treasury Inspector General for Tax Administration in the past several years. A 2006 audit report of fiscal years 2000 through 2005 said refund fraud increased 36.2% between 2003 and 2005. The audit is available at www.treas.gov/tigta/auditreports/2006reports/200610074fr.pdf. A letter to Congress, issued in June 2005 by Inspector General J. Russell George, identified prison inmates as a large source of refund fraud cases. The letter is available at www.treas.gov/tigta/congress/congress_062905.pdf.