Background
Petitioner Catherine LaRosa and her late husband had a long history of tax disputes with the Internal Revenue Service. After a settlement in the late nineteen eighties, the parties agreed on principal amounts but disputed interest calculations. In nineteen ninety-four, the IRS issued a refund that it later deemed erroneous and sought to recover. The LaRosas failed to comply with a subsequent district court order, and in two thousand nineteen, the government sought to foreclose on their home. LaRosa then sought equitable relief under Section sixty thousand one hundred fifteen subsection f one, which the IRS denied, arguing the erroneous refund did not create a liability for unpaid tax. The Tax Court agreed with the IRS and granted summary judgment.
The court’s reasoning
The court began with the statutory text of Section sixty thousand one hundred fifteen subsection f one, which allows relief for liability for any unpaid tax. The court looked to Section sixty-six hundred one subsection e one, which states that interest on underpayment shall be treated as tax. The court concluded that underpayment interest falls within the definition of unpaid tax. The court rejected the government’s reliance on the Eleventh Circuit’s decision in Bilzerian, noting that case concerned collection procedures rather than the definition of liability. The court also declined to adopt the government’s rebate versus nonrebate distinction, finding no basis for it in the statute and noting that other circuits have held that erroneous refunds revive tax liability regardless of the refund type.
What it means going forward
Taxpayers who receive erroneous refunds of underpayment interest may now seek equitable relief from the IRS to be relieved of the resulting liability. The Tax Court must now determine whether the specific interest on the refunded underpayment interest also qualifies for relief.