Part 21. Customer Account Services

Chapter 4. Refund Inquiries

Section 5. Erroneous Refunds

21.4.5  Erroneous Refunds

Manual Transmittal

August 28, 2012

Purpose

(1) This transmits revised IRM 21.4.5, Refund Inquiries, Erroneous Refunds.

Material Changes

(1) Minor editorial updates.

(2) IRM 21.4.5.4 Added clarification about creating or updating the IDRS control when an erroneous refund is discovered.

(3) IPU 12U1451 issued 07-31-2012 IRM 21.4.5.4.3 Added clarification regarding how an assessment for overstated credit should be addressed if an amended return is filed.

(4) IPU 12U0659 issued 03-28-2012 IRM 21.4.5.5 Added a reference to IRM 21.7.7.5.4.5.3.1 Form 8038-CP Erroneous Refund Procedures, when an erroneous refund is identified on a Form 8038-CP.

(5) IPU 12U0092 issued 01-17-2012 IRM 21.4.5.5, IRM 21.4.5.6, IRM 21.4.5.8, IRM 21.4.5.9, IRM 21.4.5.10.1, and IRM 21.4.5.14.1.1 added a reference to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, for instructions on completing Form 12356, Erroneous Refund Worksheet.

(6) IPU 12U1083 issued 05-30-2012 IRM 21.4.5.5(14) Added a note to indicate that if the erroneous refund date is a future date, the employee is to request on the Form 12356 that the Accounting Function input the TC 844.

(7) IPU 12U0872 issued 04-25-2012 IRM 21.4.5.5.1 added instructions to use Form 3210, Document Transmittal when routing the Erroneous Refund Package to the Accounting Function.

(8) IPU 12U1451 issued 07-31-2012 IRM 21.4.5.5.1.1 Clarification added on how to complete Form 14165, Erroneous TC 840/846 Report and added information regarding the new Form 14165-A, Duplicate Manual Erroneous Refund Feedback.

(9) IRM 21.4.5.5.1.1 Added additional instructions on how to complete the Form 14165-A, and that the complete form needs to be returned to the Business Operating Division (BOD) point of contact within 10 days.

(10) IRM 21.4.5.10 Added instructions for when an erroneous refund is identified on an Identity Theft case.

Effect on Other Documents

IRM 21.4.5 dated September 16, 2011 (effective October 1, 2011) is superseded. The following interim procedural updates (IPUs), issued from January 17, 2012 through July 31, 2012, have been incorporated in this IRM: 12U0092, 12U0659, 12U0872, 12U1083, and 12U1451.

Audience

Employees located in all business operating divisions who have contact with taxpayers either by phone, correspondence or personal contact.

Effective Date

(10-01-2012)

Ivy S. McChesney
Director, Accounts Management
Wage and Investment Division

21.4.5.1  (10-01-2006)
Erroneous Refunds Overview

  1. This IRM provides procedures on how to identify and recover erroneous refunds.

  2. An erroneous refund is defined as "the receipt of any money from the Service to which the recipient is not entitled." This definition includes all erroneous refunds regardless of taxpayer intent or whether the error that caused the erroneous refund was made by the IRS, the taxpayer or a third party.

  3. The recipient of an erroneous refund has a legal obligation to repay the amount to the IRS. Legally, however, the IRS must follow specific guidelines to recover and collect erroneous refunds. For the IRS to recover an erroneous refund, the IRS must clearly show:

    • An erroneous refund was issued,

    • The amount of the erroneous refund, and

    • The applicable limitation period has not expired.

  4. There are five categories of erroneous refunds. Each category has a specific method that must be used to recover the erroneous refund and different statutes of limitation apply. The following IRM sections will provide the necessary guidance.

  5. Whenever this IRM refers to disclosing any tax information to the taxpayer or their authorized representative, always make sure proper disclosure procedures are used.

    1. Be sure you are speaking with the taxpayer or authorized representative. See IRM 21.1.3.2, General Disclosure Guidelines, for more information.

    2. Review procedures in IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail, before leaving a message on a taxpayer's or authorized representative's answering machine or voice mail.

    3. Review procedures in IRM 11.3.1.11, Facsimile Transmission of Tax Information, before faxing confidential information to the taxpayer or authorized representative.

21.4.5.2  (10-01-2010)
Examples and Causes of Erroneous Refunds

  1. The following situations may cause or create an erroneous refund (this list is not all inclusive):

    1. Misapplied Payments – A payment applied to the wrong taxpayer identification number (TIN). The misapplied payment overpays the account, causing an erroneous refund.

    2. A taxpayer's designated payment posts to the correct TIN but the wrong type of tax or tax year.

    3. A credit refund of any type if the taxpayer is not entitled.

    4. Return of court ordered restitution.

    5. An incorrect tax assessment or adjustment causing an incorrect refund.

    6. A joint refund issued in one spouse's name only (if the other spouse did not benefit in any way).

    7. Two taxpayers file refund returns, using the same TIN, and the refund goes to the wrong taxpayer.

    8. A taxpayer fraudulently or by mistake, receives refunds from more than one TIN for the same tax period.

    9. A taxpayer receives both a manual (transaction code (TC) 840) and a computer generated (TC 846) refund for the same overpayment.

    10. A taxpayer files a claim on a lost check, receives a replacement check, finds the original check and cashes both.

    11. Incorrectly computed interest.

    12. A direct deposit is applied to the wrong person's bank account due to IRS error (owner of account may or may not be known).

    13. Improper release of the TC 700 (false credit) "-U " Freeze. See Document 6209, Section 8A.2, for a complete description of TC 700.

      Note:

      On Category D erroneous refunds, the Submission Processing, Accounting / Erroneous Refund Unit (A/ER), inputs a TC 700 to remove the erroneous refund amount from Master File and the account is reestablished in Accounting. This action is taken to prevent administrative collection action (liens or levies) from occurring on the erroneous refund liability. Do not release the TC 700 credit. Do not reverse or transfer the false credit, TC 700 with document code 58 and blocking 950-999.

    14. Refund statute barred refunds.

    15. Taxpayer receives erroneous Health Care Tax Credit (HCTC).

21.4.5.3  (10-01-2006)
Recovering Erroneous Refunds

  1. There are three primary steps for recovering an erroneous refund:

    1. Identify the appropriate erroneous refund category. Refer to IRM 21.4.5.4, Erroneous Refund Categories and Procedures.

    2. Complete the required actions within the applicable statutes to correct the error that caused the erroneous refund.

    3. Follow the required collection procedures to recover the erroneous refund amount.

  2. The following IRM sections will provide the definition for each of the erroneous refund categories. The IRM sections will also provide examples, the applicable statute, and the necessary account actions required to recover the erroneous refund.

21.4.5.3.1  (10-01-2006)
Statutes of Limitations and Erroneous Refunds

  1. The following Statutes of Limitation are used when recovering erroneous refunds:

    1. The ASED is generally three years from the date the return was filed. See IRC 6501 or IRM 25.6.1.9.2, General Assessment Period. The ASED is applicable when assessments are needed to recover an erroneous refund and applies to all erroneous refund categories except Category D.

    2. The Collection Statute Expiration Date (CSED) is generally ten years from the date of assessment. See IRC 6502 or IRM 25.6.1.12, Collection Statute Expiration Date (CSED). Once the assessment has been made to correct the error that caused the erroneous refund, the CSED will apply. The CSED is used for collecting all erroneous refund categories except for Category D erroneous refunds.

    3. The Erroneous Refund Statute Expiration Date (ERSED) is generally used to recover Category D erroneous refunds.

      Note:

      The ERSED can also be applicable for all erroneous refund categories when the ASED or CSED has expired but the ERSED is still open. See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED.

    4. The ERSED is two years from the date of the erroneous refund check or direct deposit. However, a five year statute will apply if the IRS can show the erroneous refund was induced by fraud or a misrepresentation of a material fact. See IRM 21.4.5.14, Collection Methods for Category D Erroneous Refunds, for additional information on the ERSED.

21.4.5.4  (10-01-2012)
Erroneous Refund Categories and Procedures

  1. When an erroneous refund has been identified, you must determine the appropriate erroneous refund category. In other words, what erroneous action generated the refund?

    Example:

    Mr. Smith filed his 2011 tax return expecting a refund of $350. However, an estimated tax payment of $20,000 that belonged to another taxpayer had been erroneously applied to Mr. Smiths' account and a refund of $20,350 was issued. In this example, the error that caused the erroneous refund was the misapplied payment and the erroneous refund amount is $20,000.

  2. The erroneous refund Categories, "A1" , "A2" , "B" , "C" , and "D" , are explained in IRM 21.4.5.4.1 through IRM 21.4.5.4.5.

  3. If an erroneous refund is discovered and the case is not closed by the end of the day, establish a new IDRS control base or update the existing IDRS control base with Category Code "ERRF" . Follow additional required actions located separately under each Category section.

21.4.5.4.1  (10-01-2011)
Category A1
Erroneous Refunds

  1. Category A1 erroneous refunds involve the following types of taxes: income tax, estate tax, gift tax and excise tax. The Category A1 erroneous refund occurs when the tax liability has been understated due to an error on either a tax assessment or on an adjustment to the tax liability and the error results in a refund.

    Example:

    Jane Doe filed a Schedule A with her amended return for tax year 2011 to decrease her tax liability. She was expecting a refund of $500. The IRS processed her amended return and erroneously decreased the income tax liability on the 2011 income tax account by $5,000. A refund in the amount of $5,000 was issued. Since the erroneous refund of $4,500 resulted from an adjustment that decreased the 2011 income tax liability, this would be a Category A1 erroneous refund.

  2. The Category A1 erroneous refund is generally recovered with a deficiency assessment by the Examination function. The notice of deficiency must be issued within the assessment statute period or by the ASED. See IRC 6501 (a) or IRM 25.6.1.9.2, General Assessment Period.

    Note:

    If the ASED has expired, Category A1 erroneous refunds may still be recovered using the ERSED, if the ERSED is still open. In this instance, the Category D procedures would be used.

    See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED.

  3. Once the erroneous amount has been assessed, normal collection procedures apply and the amount can be recovered within the Collection Statute. See IRC 6502 or IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

  4. Take the following account actions to recover Category A1 erroneous refunds:

    • Prepare Form 4442, Inquiry Referral, or Form 5101, Examination Referral Slip, and include any information pertinent to the erroneous refund. Forward to your local Examination function for the issuance of a deficiency notice.

    • Follow local procedures when referring Category A1 cases to the Examination function. If a case is referred from another campus or office, the receiving campus is to follow their local examination procedures.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Input a TC 971 Action Code (AC) 663 regardless of the dollar amount. See Exhibit 21.4.5-1 TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

  5. If the Category A1 erroneous refund is identified during a telephone contact with the taxpayer, advise the taxpayer a referral will be made to the Examination division. See IRM 21.4.5.11, How to Repay an Erroneous Refund or Return an Erroneous Refund Check or Direct Deposit, if the taxpayer volunteers to repay the amount. It is not necessary to advise the taxpayer the referral is being made unless the error is identified through direct telephone contact.

  6. The 510C Letter is not issued on Category A1 erroneous refunds. Do not input a TC 470 or a TC 844 on these accounts.

  7. See the following table:

    If the: Examples The Erroneous Refund Category is:
    Erroneous refund involves a TC 150, 29X, or 30X and the Master File Tax (MFT) is not 01, 08, 09, 10, 11, 12, 14, 16 or 17.

    1. The IRS lowered the tax when processing the original return

    2. Incorrect tax assessment or incorrect adjustments (TC 29X or 30X) on an amended return

    		 Category A1 Erroneous Refund
    Examples 1 and 2: Refer to Examination for deficiency procedures. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

21.4.5.4.2  (10-01-2011)
Category A2
Erroneous Refunds

  1. Category A2 erroneous refunds involve errors on refundable or non-refundable credits that are subject to deficiency procedures. These credits include, but are not limited to:

    • Education Credits

    • Child Tax Credit

    • Credit for Certain Uses of Gasoline and Special Fuels

    • Credit for Increasing Research Activities

    • Earned Income Tax Credit

    • First-Time Homebuyer Credit

    • Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds

    • Health Coverage Tax Credit

    • Making Work Pay Credit

    • Adoption Credit

    • Prior year minimum tax credit

    • Recovery Rebate Credit

    Example:

    John Smith filed his 2011 income tax return expecting a refund of $900. He indicated on his return that he was not eligible for the Earned Income Tax Credit (EITC) because of his nontaxable income. When his return was processed, the IRS allowed a $2,000 EITC in error and a refund was issued in the amount of $2,900. Since the IRS erroneously allowed the EITC, $2,000 of the refund is a Category A2 erroneous refund.

  2. The Category A2 erroneous refund is generally recovered with a deficiency assessment by the Examination function. The notice of deficiency must be made within the assessment statute period or by the ASED. See IRC 6501 (a) or IRM 25.6.1.9.2, General Assessment Period.

    Note:

    If the ASED has expired, Category A2 erroneous refunds may still be recovered using the ERSED, if the ERSED is still open. In this instance, Category D procedures would be used.

    See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED.

  3. Once the erroneous amount has been assessed, normal collection procedures apply and the amount can be recovered within the CSED. See IRC 6502 or IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

  4. Take the following actions to recover Category A2 erroneous refunds:

    • Prepare Form 4442, Inquiry Referral, or Form 5101, Examination Referral Slip, and include any information pertinent to the erroneous refund. Forward to your local Examination Function for the issuance of a deficiency notice.

    • Follow local procedures when referring Category A2 cases to the Examination function. If a case is referred from another campus or office, the receiving campus is to follow their local examination procedures.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Input a TC 971 AC 663 regardless of the dollar amount. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

  5. When the Category A2 erroneous refund is identified during a telephone contact with the taxpayer, advise the taxpayer a referral will be made to the Examination division. See IRM 21.4.5.11, How to Repay an Erroneous Refund or Return an Erroneous Refund Check or Direct Deposit, if the taxpayer volunteers to repay the amount. It is not necessary to advise the taxpayer the referral is being made unless the error is identified through a direct telephone contact.

  6. The 510C Letter is not issued on Category A2 erroneous refunds. Do not input a TC 470 or TC 844 on these accounts.

  7. See the following table:

    If the: Examples The Erroneous Refund Category is:
    Erroneous refund involves refundable or non-refundable tax credits that would be subject to deficiency procedures such as EITC or Child Tax Credit Taxpayer or IRS calculates the EITC incorrectly and the refund is issued before the error is identified. Category A2 Erroneous Refund
    Refer to Examination for deficiency procedures. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

21.4.5.4.3  (07-31-2012)
Category B
Erroneous Refunds

  1. The Category B erroneous refunds occur when taxpayers overstate their Federal income tax withholding credits or estimated income tax payments on a return or a claim for refund.

    Example:

    John Brown filed his 2011 income tax return claiming a refund of $700. When he prepared his return he made an error in his calculations and overstated his withholding by $300. The IRS did not correct the error and issued a refund for $700. Since the taxpayer overstated his withholding, $300 of the refund is a Category B erroneous refund.

  2. If the IRS caused the overstatement of withholding or estimated tax payments, the erroneous refund becomes a Category D erroneous refund and can only be recovered through the Category D erroneous refund procedures. See IRM 21.4.5.5, Account Actions for Category D Erroneous Refunds.

  3. IRC 6201(a)(3) gives IRS the authority to assess any overstatement of Federal income tax withholding credit or estimated income tax payment without deficiency or math error procedures:

    1. That is allowed against the tax shown on the return, or

    2. Which is allowed as a credit or refund

  4. As a result, Category B erroneous refunds are generally recovered with an assessment (a TC 290) for the amount of the overstated withholding credit or in limited circumstances with a reversal (TC 807) of the overstated amount.

  5. A TC 290 results in a legal assessment that allows the IRS to correct the overstated credits using the provisions of IRC 6201(a)(3). The TC 807 or the reversal of estimated income tax payments is not a legal assessment. Another determining factor is whether the taxpayer claimed the overstated amount as a refund or if the overstated credits resulted in a refund or credit transfer.

  6. Therefore, if the overstated amount of withholding credit or estimated payments did not result in a refund or a credit transfer, and the taxpayer did not claim the overstated amount as a refund, the overstated credit can be recovered with a reversal of the credit (i.e., TC 807, TC 662).

    Example:

    Mary Smith filed her 2011 income tax return reporting a tax liability of $700 and withholding credits of $500. She overstated her withholding by $100 and the error was not corrected when IRS processed the return. Since Ms. Smith did not claim the overstated amount as a refund (she reported a balance due) and the overstated amount did not result in a refund, a TC 807 may be used to correct the overstatement.

    Example:

    Using the same facts as in the previous example, except there were math errors on Ms. Smith's return that resulted in a refund of $200. In this example, Ms. Smith did not claim a refund of the overstated withholding credit but the recalculation of her tax liability (due to the math errors) resulted in a refund of the overstated credit. Consequently, $100 of the refund is a Category B erroneous refund and the TC 807 can not be used to correct the overstatement. A TC 290 assessment of $100 must be used.

    Caution:

    Counsel has advised if a refund claim is pending (the taxpayer has included the overstated amount as a refund), an assessment using a TC 290 must be used to recover the overstated credit. This is true even if the IRS was able to stop the refund from being issued (the error is identified and the refund is prevented from being issued). If the taxpayer files an amended return eliminating the overstated prepayment credits, no TC 290 assessment of the overstated credits should be made because the normal processing of the amended return eliminates the concerns behind this caution.

  7. The TC 290 assessment is done using Command Code (CC) REQ54 and inputting a TC 290 for the overstated amount with a Reason Code 051. See Exhibit 2.4.16-4, Input Screen CC ADJ54, for an example of TC 290 input screen.

    Example:

    Mr. Smith filed his 2011 tax return expecting a refund of $800. He overstated his income tax withholding by incorrectly adding his income tax withholding of $600 to his medicare tax withholding of $200. This error was not corrected when IRS processed the return and a refund of $800 was issued. His account can be corrected with a TC 290 for $200 and a reason code 051. Since the overstated amount of withholding resulted in a refund, a TC 807 would not be used.

  8. In the Remarks Section of the ADJ54 screen, provide sufficient comments to support the adjustment. Cite the reason the withholding is being adjusted.

  9. While the Category B assessments are not subject to the deficiency procedures, the assessments must be made within the ASED. See IRC 6501.

    Note:

    If the ASED has expired, Category B erroneous refunds may still be recovered using the ERSED, if the ERSED is still open. In this instance, the Category D procedures would be used. See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED.

  10. Once the amount of the overstated withholding credit or estimated payments has been assessed or reversed, normal collection procedures apply and the assessment can be recovered within the CSED. See IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

  11. If the overstated amount was applied as a credit elect, the IRS can make an assessment for either tax year. The overstated amount can be assessed on the year in which the overstatement was made or it can be assessed on the year the credit elect was claimed.

    Example:

    The taxpayer overstated her withholding in the amount of $500 for tax year 2011 and requested the overpayment be applied as a credit elect for tax year 20012. The IRS can correct the overstated withholding on either the 2011 or the 2012 account.

  12. Input a TC 971 AC 663. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

  13. The 510C Letter is not issued on category B erroneous refunds. Do not input a TC 470 or TC 844 on these accounts. Do not use Hold Codes on the adjustment that will prevent the notice from being generated.

21.4.5.4.4  (01-07-2011)
Category C
Erroneous Refunds

  1. Category C erroneous refunds involve Business Master File (BMF) accounts and taxes reported on forms such as Form 940 (Employer's Annual Federal Unemployment Tax Return), Form 941 (Employer's QUARTERLY Federal Tax Return), Form 943 (Employer's Annual Tax Return for Agricultural Employees), Form 944 (Employer's ANNUAL Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax). The erroneous refund can result from an error made by either the taxpayer or the IRS.

    If the: Example: The Erroneous Refund Category is
    Error relates to BMF TC 150, 29X, and/or TC 30X and the MFT is 01, 08, 09, 10, 11, 12, 14, 16 or 17. IRS makes an incorrect tax assessment (TC 150) by assessing less tax than the tax reported on the return. Category C Erroneous Refunds
    Use a TC 290 to assess the difference between the tax reported on the return and the tax that was assessed.
    IRS makes an incorrect adjustment to tax (TC 29X or TC 30X). Use a TC 290 to assess the difference between the tax reported on the return and the tax that was assessed.

  2. Category C erroneous refunds are generally recovered by an assessment (a TC 290) within the assessment statute period and must be assessed by the ASED. Once the assessment has been made, the CSED will apply. See IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

    Note:

    If the ASED has expired, Category C erroneous refunds may still be recovered using the ERSED, if the ERSED is still open. In this instance, the Category D procedures would be used. See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED, and IRM 21.4.5.14, Collection Methods for Category D Erroneous Refunds.

  3. Whenever the tax shown on an original or amended return is reduced because of a processing error, rather than a redetermination of tax, IRS may summarily assess the difference between the tax that was reported on the return and the tax that was previously assessed. Ensure the total tax shown on the account is the amount the taxpayer reported on his original return. If the taxpayer files an amended return, base the tax assessment on the amended return. Adjust the tax:

    1. Use CC REQ54 with TC 290. See Exhibit 2.4.16-4, Input Screen CC ADJ54, for an example of TC 290 input screen.

    2. Input a TC 971 AC 663. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

    3. Advise the taxpayer of the processing error and that he will receive a bill for the additional amount of tax assessed.

    4. Do not send the 510C Letter. Do not input a TC 470 or TC 844. Do not use Hold Codes on the adjustment that will prevent the notice from being generated.

21.4.5.4.5  (12-06-2010)
Overview of
Category D Erroneous Refunds

  1. Category D erroneous refunds include any erroneous refund that is not included in any other erroneous refund category.

  2. The Category D erroneous refunds can also include any Category A1, Category A2, Category B, and Category C erroneous refunds if the ASED has expired but the ERSED is still open. See IRM 21.4.5.9, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED, and IRM 21.4.5.14, Collection Methods for Category D Erroneous Refunds.

  3. Category D erroneous refunds are controlled by the ERSED and can only be recovered by an erroneous refund lawsuit, refund offset, or voluntary repayment. Administrative collection actions such as the issuance of a lien or a levy can not be taken to recover Category D erroneous refunds. The ASED and the CSED do not apply to this category of erroneous refunds.

    Note:

    The Erroneous Refund Unit in Accounting, Submission Processing, will input a false credit, a TC 700, on the Category D erroneous refund. This action is taken to remove the erroneous refund amount from Master File and the account is reestablished in Accounting. This is done to prevent notices and administrative collection action (liens or levies) from occurring on the erroneous refund liability. The TC 700 credit can be identified by a Document Code 58 and a blocking series 950-999 in the Document Locator Number (DLN). These accounts will have a -U Freeze (generated by a TC 844) and it informs other employees the account is being worked and monitored in Accounting. Do not release the -U freeze. Do not reverse or transfer the false credit, TC 700 with document code 58 and blocking 950-999.

  4. If the taxpayer does not repay the erroneous refund, the refund amount can be considered income to the taxpayer in the year received. See IRM 3.17.80.1.19, Form 1099 - Unrecoverable Unassessable Erroneous Refunds.

  5. The following are examples and causes of Category D erroneous refunds. This list is not all inclusive:

    1. Misapplied Payments: A payment is misapplied to the wrong TIN, overpays the account and generates an erroneous refund.

    2. A taxpayer receives both a manual refund (TC 840) and a systemically generated refund (TC 846).

    3. A taxpayer files a non-receipt claim on a refund check and receives a replacement check. The taxpayer cashes both checks.

    4. A direct deposit is applied to the wrong taxpayer's bank account (unintended recipient) due to IRS error.

    5. A refund of court ordered restitution.

  6. Integrated Automation Technologies (IAT) has developed an erroneous refund tool to automate processes related to Category D erroneous refund processing. AM is required to use the IAT tools per Exhibit 21.2.2-2,, Accounts Management Mandated IAT Tools.

21.4.5.5  (05-30-2012)
Account Actions for
Category D Erroneous Refunds

  1. When a Category D erroneous refund is identified within the ERSED statutes, either verbally request the taxpayer repay the erroneous refund amount or issue a 510C Letter or equivalent, such as the 274C Letter used by Offer in Compromise (OIC).

    Exception:

    If the erroneous refund is from a Form 8038-CP refer to IRM 21.7.7.5.4.5.3.1, Form 8038-CP Erroneous Refund Procedures, in order to determine to whom the 510C Letter should be issued.

    Exception:

    If the erroneous refund module contains a bankruptcy indicator, the erroneous refund issue must be addressed by Field Insolvency or Centralized Insolvency Operation (CIO). Refer to IRM 21.5.6.4.44 , -V Freeze. Do not request repayment or issue a 510C Letter. Refer the case to CIO in Philadelphia. CIO will determine the appropriate action.

  2. The 510C Letter is generated using CC LETER and is the way IRS "demands" the erroneous refund be repaid. The date of the letter is considered to be the date of demand. See IRM 21.4.5.13, Interest and Penalty Consideration for Category D Erroneous Refunds.

  3. Since there is a delay from the time the 510C Letter request is input until the time the letter is actually mailed, add 7 workdays from the date you input CC LETER, not counting the day of input, weekends or holidays, to determine the date of demand (the date of demand must be on or after the 23C date of the refund).

  4. When applicable, selective paragraphs in the 510C Letter may be used to advise the taxpayer if they repay the erroneous refund within 21 calendar days from the date of the letter, interest will not be charged (see exceptions at IRM 21.4.5.13).

    Note:

    The 510C Letter is used only on Category D erroneous refunds.

  5. To determine whether the taxpayer owes interest when issuing a 510C Letter, see the table below.

    If Then
    IRS caused the error and $50,000 or less Interest is owed from the date repayment is demanded. Taxpayers have 21 days, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to repay to avoid additional interest. Refer to IRM 20.2.7, Abatement and Suspension of Interest, for exceptions to amounts over $50,000 if IRS caused the error.
    Taxpayer caused the error, deliberate or not, and any amount over $50,000 Interest is assessed from the date of the refund (TC 846 / 840).

  6. If speaking to the taxpayer and you request him/her (unintended recipient) to repay the erroneous refund, the date you request repayment is the date of demand.

    1. Document the telephone request for repayment in the case file and on Account Management Service (AMS).

    2. Add a history item on CC ENMOD with Activity Code "PHTPERRF" or "510C/ERRF" .

    Note:

    When there is telephone contact with the taxpayer, you must ensure you are speaking with the taxpayer or authorized representative before disclosing any tax information. See the Taxpayer Authentication guidelines in IRM 21.1.3, Operational Guidelines Overview. Also see IRM 11.3.1.11, Facsimile Transmission of Tax Information, for fax procedures and IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail, for procedures on answering machines.

  7. Employees must input a TC 844 and a TC 470 on the account when a Category D erroneous refund is identified. The TC 844 generates a "-U" freeze on the account and the TC 470 will stop all systemic notices and collection processes.

    Exception:

    If the erroneous refund is from a Form 8038-CP do not input a TC 844 and refer to IRM 21.7.7.5.4.5.3.1, Form 8038-CP Erroneous Refund Procedures. The TC 470 needs to be input on these accounts.

  8. Input TC 844 for taxpayer error or refunds more than $50,000.

    Exception:

    If the erroneous refund is from a Form 8038-CP do not input a TC 844 and refer to IRM 21.7.7.5.4.5.3.1, Form 8038-CP Erroneous Refund Procedures.

    1. Input TC 844 using CC REQ77 / FRM77. See Exhibit 2.4.19-6, Examples of Command Code FRM77, for an example of TC 844 input.

    2. Enter the date of the erroneous refund (TC 840 or 846) in the "TRANS−DT" field.

  9. Input TC 844 for IRS error and $50,000 or less.

    Exception:

    If the erroneous refund is from a Form 8038-CP do not input a TC 844 and refer to IRM 21.7.7.5.4.5.3.1, Form 8038-CP Erroneous Refund Procedures.

    1. Input TC 844 using CC REQ77 / FRM77. See Exhibit 2.4.19-6, Examples of Command Code FRM77, for an example of TC 844 input.

    2. Enter the Date of Demand in the "EXTENSION−DT" field.

    3. Enter the date of the erroneous refund (TC 840 or 846) in the "TRANS−DT" field.

    4. Enter the erroneous refund amount in the "FREEZE−RELEASE−AMT " field.

  10. Input a TC 470 using CC REQ77 / FRM77. If the taxpayer's account will be in a balance due status, use a closing code 93. See Exhibit 2.4.19-2, Command Code REQ77 Response, for an example of FRM77 input screen.

  11. Input a TC 971 AC 663. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

  12. Update the Integrated Data Retrieval System (IDRS) Category Code to ERRF, reassign the IDRS control base to the A/ER, change the status to "M" with activity code "ERRORREF." The first five digits of the Erroneous Refund Units IDRS numbers are as follows:

    • Austin - 06113

    • Cincinnati - 02116

    • Fresno - 10117

    • Kansas City - 09113

    • Ogden - 04117

    Note:

    To determine the appropriate campus, see IRM 21.4.5.5.1, Routing Category D Erroneous Refund Packages.

  13. Prepare Form 12356, Erroneous Refund Worksheet. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

    1. Notate any 510C Letter or conversations with the taxpayer.

    2. Notate other important case details.

    3. Refer the case to the A/ER.

  14. At a minimum, include the following information:

    • TC 844 input

      Note:

      If the erroneous refund date is a future date, request on the Form 12356, that a TC 844 be input by the Accounting Function upon receipt of the case. Ensure the date of demand is on or after the 23C date of the refund.

    • Erroneous refund category and what caused it

    • Documentation of all actions taken (verbal, C Letters, etc.)

    • All pending actions

    • Context of telephone conversations

    • Prints of CCs ENMOD, TXMOD, etc.

    • Copies of all letters (i.e., 510C Letter, Quick Notes, etc.)

    Note:

    If a TC 840 created the erroneous refund, the manual refund document must be secured.

    Note:

    Employees who identify a Category D erroneous refund are responsible to complete these actions before making the referral to the appropriate A/ER Unit.

  15. The necessary account actions will depend on what caused the erroneous refund:

    Cause of Error Issue 510C Letter or advise by phone Input TC 844 and Refer to Accounting Other Account Actions
    TC 840 and TC 846 for same overpayment Yes Yes None
    Taxpayer cashed lost check and replacement check Yes Yes None
    IRS Direct Deposit Error Yes, if account owner known Yes Issue Manual Refund to correct taxpayer
    Misapplied payments to wrong TIN Yes Yes Credit transfer to correct TIN
    Refunds issued after the Refund Statute has expired Yes Yes None
    Form 8038-CP Yes, send the letter to the bond issuer, not to the trustee. No Refer to IRM 21.7.7.5.4.5.3.1, Form 8038-CP Erroneous Refund Procedures

21.4.5.5.1  (04-25-2012)
Routing Category D Erroneous Refund Packages

  1. Forward Category D erroneous refund packages to the A/ER function where the erroneous refund generated (see Exhibit 3.17.80-4, for a list of A/ER functions and their corresponding Erroneous Refund Coordinators), using a Form 3210, Document Transmittal. Refer to Exhibit 21.3.4-30, Form 3210, Document Transmittal.

  2. To determine the appropriate campus, use the 8th and 9th position of the Refund Schedule Number (RSN). See Exhibit 3.17.79-5, Refund Schedule Number Format.

    Example:

    A refund has an RSN showing 2010046281Z. The 8th and 9th position is 28 which represents Philadelphia.

    Note:

    Due to Submission Processing consolidation, Atlanta will be sent to Kansas City; Brookhaven and Memphis will be sent to Cincinnati; Andover will be sent to Fresno; and Philadelphia will be sent to Ogden.

  3. The gaining A/ER function will:

    1. Control case and input TC 700.

    2. Input another TC 844, if applicable.

    3. Issue a second 510C Letter.

    4. Communicate (through Planning and Analysis Staff or management channels) to the originating site, information about cases that were forwarded with missing data or required actions omitted.

21.4.5.5.1.1  (10-01-2012)
Form 14165, Duplicate Manual Refund Report and Form 14165-A, Duplicate Manual Erroneous Refund Feedback

  1. Treasury Inspector General for Tax Administration (TIGTA), Government Accountability Office (GAO), and other management internal control reviews cited a high incidence of duplicate refunds. Because of this, the Wage and Investment Commissioner has asked for additional focus on duplicate, manual, erroneous refunds.

  2. Any time a manual refund results in a duplicate refund (i.e. a manual refund and a computer generated refund (TC 846), or two manual refunds, were issued), Form 14165, Duplicate Manual Refund Report, must be completed and forwarded to the Accounting / Erroneous Refund function where the manual refund generated. This form must be completed even if the refund has been repaid.

  3. The following are line by line instructions for completing Form 14165:

    1. Block 1, Check the Campus where the report is being sent. This is the campus where the manual refund generated.

    2. Block 2, Enter the name, organization, and phone number of the employee who discovered the erroneous refund and who is completing the report.

    3. Block 3, Enter the name and address of the taxpayer who received the erroneous refund.

    4. Block 4, Enter the tax form or MFT.

    5. Block 5, Enter the TIN of the taxpayer who received the erroneous refund.

    6. Block 6a, Enter the date of the erroneous TC 840/846.

    7. Block 6b, Enter the date the erroneous refund was discovered. This is the date that the employee listing in block 2 discovered the erroneous refund.

    8. Block 7, Check who identified the erroneous refund.

    9. Block 8a, Enter the principal amount of the erroneous refund.

    10. Block 8b, Enter the interest amount refunded.

    11. Block 8c, Enter the erroneous TC 840 or TC 846 amount.

    12. Block 9, Enter the Business Operating Division (BOD) of the employee who issued the manual refund.

    13. Block 10, Enter the reason for the erroneous refund.

    14. Blocks 11 through 13 will be completed by the Accounting Function after the form has been sent.

  4. When the Accounting Function has received the Form 14165, Duplicate Manual Refund Report, they will complete a Form 14165-A, Duplicate Manual Erroneous Refund Feedback, and will send it to the Business Operating Division (BOD) Point of Contact (POCs) for the area that created the duplicate refund. For a listing of the BOD POCs refer to Exhibit 3.17.80-16, Business Operating Division (BOD) Points of Contact (POCs) for Duplicate, Manual, Erroneous Refund Feedback, Form 14165a.

  5. When a Form 14165-A is received in the area from the BOD POC, complete boxes 10, 11, and 12 and return the completed form to the BOC POC within 10 days. For instructions on completing and returning the Form 14165-A, refer to IRM 3.17.80.1.2.1, Monthly Reporting and Error Feedback for Duplicate, Manual, Erroneous Refunds.

21.4.5.6  (01-17-2012)
Adjustments and Credit Transfers on Category D Accounts

  1. If the erroneous refund was not the taxpayer's fault, and transferring the credit from the account creates a debit balance ≡ ≡ ≡ ≡ ≡ , input a TC 570 on the debit side of the credit transfer to suppress "CP 60 and CP 260" (issued to advise taxpayer of credit reversal account adjustment).

  2. If a credit transfer or reversal of an erroneous offset is needed on a module to resolve the case, take the following actions:

    1. Input TC 570 on debit side of transfer.

    2. Input TC 470, closing code 93 , and Cycle Delay of 1.

    3. Input TC 844.

      Note:

      See IRM 21.4.5.5 (8), Account Actions for Category D Erroneous Refunds, for instructions on inputting a TC 844 for erroneous refunds resulting from taxpayer error or that are more than $50,000. See IRM 21.4.5.5 (9) for instructions on inputting TC 844 for erroneous refunds resulting from IRS error and are less than $50,000.

    4. Send 510C Letter.

    5. Refer to the IRM 21.5.8, Credit Transfers, for more information.

    6. Complete all applicable account actions and document all actions on Form 12356, Erroneous Refund Worksheet. See IRM 21.4.5.5.1, Routing Category D Erroneous Refund Packages, for routing instructions. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

  3. If a correction of tax must be made and deficiency procedures do not apply, take the following actions:

    1. Input a TC 290 for the amount of tax.

    2. Use Hold Code 3.

    3. Input TC 470, closing code 93 and Cycle Delay of 1.

    4. Input TC 844 per taxpayer error/refund over $50,000 or IRS error.

    5. Send 510C Letter.

    6. Update IDRS Category Code to "ERRF" .

    7. Reassign IDRS control base to A/ER function with Activity Code "ERRORREF" .

    8. Update IDRS status to "M" .

    9. Complete all applicable account actions and document all actions on Form 12356, Erroneous Refund Worksheet. See IRM 21.4.5.5.1, Routing Category D Erroneous Refund Packages, for routing instructions. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

    10. If attaching original documents, reassign the document(s) to the A/ER function using CC ESTAB.

    11. If original return and/or any adjustment documents were filed at a campus other than your own, do not request these documents before forwarding the case file to your A/ER function. This would cause delays in resolving the case and may prevent IRS from obtaining repayment of the erroneous refund.

  4. If a joint refund was issued in one spouse's name only, and the other spouse did not benefit in any way, take the following actions:

    Caution:

    The refund must not have been deposited into the joint bank account.

    1. Request an allocation from the taxpayer. See IRM 21.6.1.4.8, Allocating Jointly Filed Case Procedures.

    2. Determine the amount of refund the taxpayer is entitled to.

    3. Issue a manual refund to the requesting spouse.

    4. Input TC 470, closing code 93.

    5. Input TC 844 per taxpayer error/refund over $50,000 or IRS error/less than $50,000.

    6. Send 510C Letter to the spouse who received the original refund.

      Note:

      The erroneous refund amount will be the amount of the manual refund.

    Reminder:

    Joint filers can request their refund be issued in one name only, see IRM 21.4.3.4.5.2.1, Joint Filers Request Refund Check in One Name. If that is the case, do not apply the above procedures.

  5. The following IRMs will assist in determining whether additional account actions or taxpayer notification is required:

    • IRM 21.4.1, Refund Research

    • IRM 21.4.2, Refund Trace and Limited Payability

    • IRM 21.4.3, Returned Refunds/Release

    • IRM 21.4.4, Manual Refunds

    • IRM 21.4.6, Refund Offset

    • IRM 21.5.1, General Adjustments

    • IRM 21.5.2, Adjustment Guidelines

    • IRM 21.5.5, Unpostables

    • IRM 21.5.6, Freeze Codes

    • IRM 21.5.7, Payment Tracers

    • IRM 21.5.8, Credit Transfers

    • IRM 21.6, Individual Tax Returns

    • IRM 21.7, Business Tax Returns and Non Master File Accounts

    • IRM 20.1, Penalty Handbook

    • IRM 20.2.6, Methods of Computing Interest

    • IRM 20.2.11, Miscellaneous Interest Provisions

    • IRM 25.6, Statute of Limitations

    • IRM 2.4.37, Command Code NOREF Overview

21.4.5.7  (10-01-2011)
Erroneous Refunds on Designated and Non-Designated Payments

  1. A taxpayer may designate a voluntary payment three ways:

    1. Tax year and the type of tax is designated on the front of the check.

    2. Payment is attached to or included in an envelope with an IRS payment voucher (completed) or with an IRS notice for the tax period and type of tax intended.

    3. Taxpayer correspondence is associated with the payment and identifies the tax period and type of tax to which the payment should be applied.

    Note:

    Electronic payments should be treated as designated payments since electronic systems typically make the user designate the tax year and type of tax.

  2. A refund of the taxpayer's own payment results in an erroneous refund if the taxpayer designates a payment for a specific tax liability and the IRS fails to apply the payment to the intended account.

    Example:

    John Doe filed his 2011 income tax return and reported a balance due of $700. He designated his payment of $700 to be applied to his 2011 account. The IRS applied the payment to his outstanding balance of $100 on his 2010 account because the 2011 return had not posted. A refund of $600 was issued on the 2010 account. Although the refund of $600 was issued on the 2010 account, the erroneous refund is actually on the 2011 account because IRS failed to apply the payment to the designated account.

    In these cases, the designated payment must be moved to the designated account. The TC 84X must also be moved to the designated account so the erroneous refund procedures can be applied. See IRM 21.5.2.4.23.10, Moving Refunds, for additional information.

    Example:

    Continuing with the example above, the 2010 account would have the following transactions: TC 150: $100, TC 670: $700, TC 846: $600, TC 672: $700 and TC 841: $600. These transactions would correctly leave the 2010 account with a balance of $100 plus any applicable penalties and interest. Normal collection procedures would apply to the 2010 balance. The 2011 account would have the following transactions: TC 150:$700, TC 670:$700 and TC 840:$600. Follow Category D erroneous refund procedures on the 2011 account. See IRM 21.5.8, Credit Transfers, when transferring credits to ensure the proper procedures are used.

  3. When a taxpayer properly designates a payment for a specific liability, the payment is considered to have legally satisfied that liability regardless of how IRS applies the payment. The IRS cannot take administrative collection action on the liability to which a payment was properly designated (up to the amount of the payment), even though the IRS improperly applied the payment to another liability. Therefore, if a properly designated payment has been misapplied, the payment should be transferred to the designated account. Prior to transferring the payment, extreme caution should be used to ensure the payment was properly designated.

  4. Generally, if the taxpayer does not designate how a payment should be applied, the IRS is entitled to apply the payment in the best interest of the government. Once applied, the IRS is not required to move the payment. See the following table.

    If Then
    Erroneous refund was a refund of the taxpayer's voluntary payment and the payment was properly designated The credit must be moved to the designated tax year and type of tax.
    Any portion of the payment has refunded and the taxpayer did not designate the payment DO NOT transfer the credit. Advise the taxpayer the payment refunded. Until the taxpayer repays the full amount previously refunded, IRS can not post a credit to the account. Interest and penalties continue to accrue until the tax is paid in full.

  5. Do not transfer the payment (in part or in whole) if the payment has refunded unless the payment was designated to a specific tax year and type of tax. If designation cannot be verified via internal research, the taxpayer must submit proof of proper designation.

  6. When a taxpayer states they requested a credit elect, but instead received a refund, instruct the taxpayer on how to return the refund check or direct deposit. See IRM 21.4.5.11, How to Repay an Erroneous Refund or Return an Erroneous Refund Check or Direct Deposit. Advise the taxpayer, upon receipt of the returned refund amount, the credit will be transferred to the next tax year as a credit elect. The failure of the IRS to transcribe the credit elect line on a tax return during original processing will only be a Category D erroneous refund if we transfer the funds before the refund is returned.

21.4.5.8  (01-17-2012)
Reversal of TC 844

  1. When an account has been identified incorrectly with the Erroneous Refund TC 844, "-U" Freeze, and the 510C Letter was sent, a Quick Note of apology, or the appropriate Correspondex letter, must be sent to the taxpayer.

    Note:

    The manager or lead must review the Quick Note before sending to the taxpayer.

  2. Only the A/ER, is authorized to release the TC 844 with the input of a TC 845.

  3. Prepare Form 12356, Erroneous Refund Worksheet, and refer to your servicing A/ER Unit, explaining the error and request the input of a TC 845. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

  4. If an account identified with an erroneous refund issue is resolved, but the TC 844 has not been reversed, prepare a referral. Notate all actions taken and explain why the release of TC 844, "-U" freeze is needed. Forward to your servicing A/ER function for follow up actions.

21.4.5.9  (01-17-2012)
Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED

  1. When the ASED has expired on a Category A1, A2, B, or C Erroneous Refund but the ERSED is still open, take the following account actions:

    1. Prepare Form 12356, Erroneous Refund Worksheet, listing pertinent information and forward to the appropriate A/ER function. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

    2. Do not send the 510C Letter.

    3. Do not input the TC 844 or 470.

    4. Do not advise the taxpayer the referral is being made.

  2. These procedures are also applicable to an erroneous refund of any category when all applicable statutes have expired.

21.4.5.10  (10-01-2012)
Erroneous Direct Deposit

  1. A direct deposit into an account that is not the taxpayer's is a Category "D" erroneous refund only if the error was made by the IRS.

  2. The IRS is not responsible for misdirected direct deposits that are a result of bank error or the taxpayer providing the wrong Routing Transit Number (RTN) or bank account number.

  3. Refund Anticipation Loans (RAL) or Refund Anticipation Checks (RAC) are agreements between the taxpayer and tax preparer. It is important to keep in mind that whether a taxpayer states he received a RAC or a RAL, it remains a direct deposit refund.

  4. See the following table.

    If Then
    IRS error caused the refund check to go to the wrong address IRS will reissue the refund check.
    IRS error caused the direct deposit to go to the wrong account IRS will reissue the direct deposit refund.
    It was taxpayer error or the error was made by the Electronic Return Originator (ERO), or the tax return preparer IRS will not reissue the refund.
    A tax related identity theft with Accounts Management Taxpayer Assurance Program (AMTAP) involvement See IRM 21.9.1, Taxpayer Assurance Program.
    A tax related identity theft case involving a previously issued manual refund Refer to IRM 21.9.2, Accounts Management Identity Theft.

21.4.5.10.1  (01-17-2012)
IRS Error Direct Deposit

  1. All IRS direct deposit errors are Category D erroneous refunds and have an ERSED of two years from the refund issuance date.

  2. If the financial institution or Financial Management Service (FMS) identifies the account owner of the erroneous direct deposit, and the bank does not return the credit, the Refund Inquiry Unit must follow Category D erroneous refund procedures. Upon obtaining the account owner's name, social security number (SSN) and address, complete the following actions:

    1. Move the refund (TC 846) to the erroneous taxpayer's account (unintended recipient). See IRM 21.5.2.4.23.10, Moving Refunds, for the actions required when moving refunds.

    2. Monitor the account for the TC 840 to post.

    3. Input TC 844 using CC REQ77 / FRM77.

    4. Send 510C Letter.

    5. Enter date of demand (Extension Date) on CC FRM77. See IRM 21.4.5.5, Account Actions for Category D Erroneous Refunds, to determine the date of demand.

    6. Enter the IDRS posting date of the erroneous refund (TC 846 or TC 840) as the "TRANS-DT."

    7. Enter the erroneous refund amount as the freeze release amount, (FREEZE-RELEASE-AMT).

    8. Prepare an erroneous refund package (all pertinent information) and forward to the appropriate A/ER function. See Exhibit 3.17.80-4, for a list of A/ER functions and their corresponding Erroneous Refund Coordinators.

    9. Input a TC 971 AC 663. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

  3. If the financial institution or FMS does not identify the account owner of the erroneous direct deposit, and the bank does not return the credit, the Refund Inquiry Unit will take the following actions:

    1. Issue a manual refund to the taxpayer.

    2. Prepare a Category D erroneous refund package that includes a copy of the case file and Form 12356, Erroneous Refund Worksheet. Notate actions taken and research conducted. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

    3. Input a TC 971 AC 663. See Exhibit 21.4.5-1, TC 971 AC 663 - Identifying Erroneous Refunds, for more information.

    4. Send the completed Category D erroneous refund package to the appropriate A/ER function for posting of a TC 700 (false credit). See Exhibit 3.17.80-4, Erroneous Refund Coordinators for a list of A/ER functions and their corresponding Erroneous Refund Coordinators.

  4. When the disposition of the direct deposit is learned and the identity of the taxpayer in receipt of the erroneous direct deposit (unintended recipient) is not obtainable, the Refund Inquiry Unit must forward the case file to the appropriate A/ER function, noting recipient of the direct deposit could not be identified. See IRM 21.4.1.4.7.5, Non-Receipt of Direct Deposit Refunds-"Refund Inquiry Employees."

21.4.5.11  (12-06-2010)
How to Repay an Erroneous Refund or Return an Erroneous Refund Check or Direct Deposit

  1. If an erroneous taxpayer (unintended recipient) advises he/she has received another taxpayer's refund in error, use the following table to advise the erroneous taxpayer how to return or repay an erroneous refund check:

    If Advise the taxpayer to:
    The recipient has not cashed the refund check

    1. Write "Void" in the endorsement section on back of the check.

    2. Submit check within 21 days of the "date of demand" to the taxpayer's filing campus.

    3. Do not staple, bend, or paper clip the check.

    4. Attach a note stating "Return of Erroneous Refund Check."

    The recipient has cashed the refund check

    1. Submit payment within 21 days of the "date of demand" to the taxpayer's filing campus. If the taxpayer wants to repay in installments, see IRM 5.19.1.2.1, For All Employees.

    2. Write on check or money order: "Payment of Erroneous Refund " , the tax period (for which the refund was issued, i.e. 2001112), the account type (IMF or BMF), and the TIN (i.e., SSN, employer identification number (EIN), or IRS Taxpayer Identification Number (ITIN)).

    3. Advise recipient of possible interest accruals.

    Follow the erroneous refund procedures for the applicable category.

  2. Use the following table to advise the erroneous taxpayer (unintended recipient) how to return or repay an erroneous direct deposit:

    If Then:
    The recipient will contact their bank to have the erroneous refund returned Advise the recipient to contact the Automated Clearing House (ACH) Department of their bank to have the deposit returned to the IRS.

    Note:

    Title 31 §210.8(d) of the Code of Federal Regulations requires financial institutions that become aware that an agency has directed a payment to an account not owned by the payee whose name appears in the ACH payment information to promptly notify the agency. The financial institution can either issue a Notification of Change with the correct account and/or Routing and Transit Number information, or return the credit to the agency to satisfy this requirement.

    The recipient will submit payment to repay the erroneous refund and the correct taxpayer is known (the correct taxpayer will sometimes be identified on the recipient's bank statement)

    1. Move the refund (TC 846) to the recipient's account. See IRM 21.5.2.4.23.10, Moving Refunds, for the actions required when moving refunds.

    2. Follow Category D erroneous refund procedures. See IRM 21.4.5.5, Account Actions for Category D Erroneous Refunds.

    3. Issue a manual refund to the correct taxpayer.
    The recipient will submit payment to repay the erroneous refund and the correct taxpayer is unknown

    1. Advise the recipient to submit payment within 21 days of the "date of demand" to the recipient's filing campus.

    2. Write on the check or money order: "Payment of erroneous direct deposit " , the tax period (if known), the account type (IMF or BMF) and the TIN (i.e. SSN, EIN or ITIN).

    3. Monitor the account for 28 days for the payment to post.

      1. If the payment posts to the erroneous taxpayer's (recipient's) account, see (3) below.

      2. If the payment does not post to the erroneous taxpayer's (recipient's) account, issue a 510C Letter.

  3. When an erroneous taxpayer will be submitting a payment, add a history item with Activity Code "TPMAILCK" , document all actions taken and conversations with taxpayer. Refer to IRM 25.13.1.3, Erroneous Correspondence Procedures - Red Button Process, if an erroneous correspondence was sent to the taxpayer.

  4. When the repayment of an erroneous direct deposit refund is received and the correct taxpayer cannot be identified, the credit must be transferred to the Unidentified Remittance File (4620 Account).

    • Complete Form 2424, Account Adjustment Voucher. Notate in the explanation box, "Repayment of an erroneous direct deposit refund, correct taxpayer unknown" .

    • Attach supporting documentation to the Form 2424.

    • Input a TC 971 AC 296.

21.4.5.12  (10-01-2010)
Field Offices Without IDRS

  1. An employee in a field office who identifies an erroneous refund but does not have access to IDRS, should obtain all the pertinent information and take the following actions:

    1. Immediately contact the appropriate A/ER Unit.

    2. Request establishment of an IDRS control base.

    3. Fax all information including signature documents to the A/ER Unit.

    4. Send hard copies of information, via overnight / express mail, including all original signatures and documents, to the A/ER Unit.

21.4.5.13  (10-01-2011)
Interest and Penalty Consideration for Category D Erroneous Refunds

  1. Failure to Pay Penalty (FTP) under IRC 6651(a)(2) and (a)(3), does not apply to Category D erroneous refunds.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. IRC 6404(e)(2) states interest is not charged from the date of the refund to the date of demand if:

    1. The erroneous refund is $50,000 or less and

    2. The taxpayer did not cause the Category D erroneous refund

  3. Interest on any unpaid amount is charged from the date of the refund to the date of repayment if:

    1. The erroneous refund is more than $50,000, (see IRM 20.2.7, Abatement and Suspension of Interest, for exceptions) or

    2. The taxpayer caused the erroneous refund

    If Then
    The amount of the refund is $50,000 or less and the taxpayer did not cause the erroneous refund Interest is owed from the date repayment is demanded. Taxpayers have 21 days ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to repay to avoid additional interest.

    • The amount of the erroneous refund is more than $50,000 but less than $100,000, or

    • The taxpayer or related party caused the erroneous refund, or

    • Taxpayer or related party cashed the erroneous refund check, or

    • Taxpayer or related party removed the erroneous direct deposit refund from the account

    		 Interest is owed from the refund date. Taxpayers have 21 days ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to repay to avoid additional interest.
    The amount of erroneous refund is $100,000 or more Interest is owed from the refund date. Taxpayers have 10 business days ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to repay to avoid additional interest.

    See IRM 20.2.7.5, Erroneous Refunds IRC 6404(e)(2).

  4. If the module is restricted, netting will not occur. Compute the interest amount and input when adjusting the account.

  5. If credit interest did not reverse or is incorrect, enter TC 772 to correct the amount. If debit interest is not correct, assess or abate as directed in IRM 20.2.7, Abatement and Suspension of Interest.

  6. Interest abatement is not required if the refund is greater than $50,000, but may be allowed on a case by case basis, see IRM 20.2.7.5, Erroneous Refunds IRC Section 6404(e)(2). Refer questions on interest abatement for erroneous refunds in excess of $50,000 to local interest specialists, or through managerial channels to local counsel.

21.4.5.13.1  (10-01-2006)
Interest Delegation Orders

  1. Except where the abatement of interest is required by statute, interest must be charged or permission to abate debit interest must be requested from the Director or Territory Manager. IRC 6404(e)(2) requires abatement of interest on erroneous refunds of $50,000 or less unless the taxpayer caused the erroneous refund. Reasonable cause does not apply.

21.4.5.14  (10-01-2007)
Collection Methods for Category D Erroneous Refunds

  1. The IRC provides recovery methods and statute of limitations for Category D erroneous refunds that differ from those used for tax liabilities.

  2. The IRS may recover Category D erroneous refunds only by voluntary repayment, by filing an Erroneous Refund Suit against the taxpayer (unintended recipient) under IRC 7405, and by offsets.

  3. An Erroneous Refund Suit must be initiated within the 2 or 5 year time limit. See IRC 6532(b).

  4. The IRS possesses a "Common Law Right to Offset" against a refund due the taxpayer, to recover the full amount of an erroneous refund. If the erroneous refund and the refund to be offset do not arise within the same tax account and the same tax year, the offset must be made within the applicable ERSED.

  5. There is no time limitation for the IRS' right to offset any refund due the taxpayer for the:

    • Same year, and

    • The same tax to which the erroneous refund relates

  6. The Erroneous Refund Suit is limited to amounts that exceed the litigating threshold established by the Department of Justice. Refer case to Area Counsel, using local established procedures, requesting information on whether or not to pursue the Erroneous Refund Suit.

  7. Refer to IRM 25.6, Statute of Limitations, for additional information concerning the time that governs the Service's ability to collect the erroneous refund.

21.4.5.14.1  (10-01-2010)
Collection Statute Expiration Date for Category D Erroneous Refunds

  1. Before referring an erroneous refund case to the appropriate A/ER function, ensure the applicable Statute of Limitation is not about to expire. Two common occurrences in which the CSED expires before the ERSED are:

    1. The taxpayer received the erroneous refund before satisfying his/her tax obligation.

    2. The erroneous refund is caused by a credit reversal.

21.4.5.14.1.1  (01-17-2012)
Statutes of Limitations Category D Erroneous Refunds
IRC 6532 (b) ERSED

  1. The ERSED for recovering Category D erroneous refunds is two or five years from the date the refund check or direct deposit clears (the date the bank or the ACH hold period expires) the bank. As a general rule, you should normally rely on the two year statute.

  2. You can obtain a copy of the cancelled check to determine the date the check cleared the bank. If the erroneous refund was a direct deposit, the ERSED is two or five years from the date the ACH hold is released on the direct deposit. This date can be obtained through FMS. However, as a safe practice, just use the date of the refund.

  3. If it appears the five year statute may apply, prepare Form 4442 and seek advice of local Counsel. Refer to IRC 6532 (b).

    Note:

    Counsel has provided the opinion that erroneous refunds caused by payment over cancellation and taxpayer's checks returned as insufficient funds meet the five year statute. You may use the five year statute in these cases without seeking confirmation from Counsel.

  4. The five year statute applies only if it is proven that the taxpayer deliberately caused IRS to generate an erroneous refund for his/her benefit. If the two year statute is running out, contact your local Counsel for a determination as to whether the 5 year statute applies.

  5. If the ERSED has expired, take the following actions:

    1. Prepare Form 12356, Erroneous Refund Worksheet, listing pertinent information and forward to A/ER. Refer to IRM 3.17.80.2.4.2, Non-Receipt Claim (CC CHKCL) Recertified Check, Figure 3.17.80-40, for instructions on completing the Form 12356.

    2. Do not input a TC 844.

    3. Do not input a TC 470.

    4. Do not send the 510C Letter.

Exhibit 21.4.5-1 
TC 971 AC 663 - Identifying Erroneous Refunds

TC 971 action code (AC) 663 must be input on each erroneous refund module, regardless of the category. AC 663 is used for reporting purposes.

Input TC 971 AC 663 using CC REQ77 as follows:

  1. In the TC field, enter 971.

  2. In the TC971/151-CD field, enter 663.

  3. In the FREEZE-RELEASE-AMT field, enter the erroneous refund amount.

  4. In the MISC field, identify the erroneous refund category, responsible function and type of error. Each entry must be followed by a space. The appropriate entries are:

    Erroneous Refund Categories
    Valid Entry Description
    A1 Category A1 Erroneous Refund
    A2 Category A2 Erroneous Refund
    B Category B Erroneous Refund
    C Category C Erroneous Refund
    D Category D Erroneous Refund
    A1/D Category A1 processed as a Category D
    A2/D Category A2 processed as a Category D
    B/D Category B processed as a Category D
    C/D Category C processed as a Category D
     
    Responsible Functions
    Valid Entry Description
    ACS Automated Collection System
    AM Accounts Management
    CI Criminal Investigation
    CSCO Compliance Services Collection Operations
    Exam SB/SE and W&I Exam
    FA Field Assistance
    SP Submission Processing
    TAS Taxpayer Advocate Service
    Oth Other
     
    Type of Error
    Valid Entry Description
    01 Taxpayer error
    02 IRS error

    Example:

    A Category D erroneous refund caused by Taxpayer Advocate would be reported in the "MISC" field as "D TAS 02" .

  5. In the remarks field, enter the reason for the erroneous refund (e.g., payment over cancellation, misapplied payment, encoding error, hold code error, etc.)


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