Taxation – Mistaken refunds are eligible for IRS discretionary relief

Where the Internal Revenue Service mistakenly refunds interest payments a taxpayer made on previously underpaid taxes, those mistaken payments are eligible for discretionary relief under a provision of the tax code.

Background

A provision of the tax code gives the Internal Revenue Service, or IRS, discretion to “relieve” a taxpayer of “liability” for “any unpaid tax or any deficiency.” Sometimes, the IRS refunds money to a taxpayer but later concludes it erred in doing so. The sole question in this appeal is when the IRS mistakenly refunds interest payments a taxpayer made on previously underpaid taxes, does the taxpayer have a “liability” for “unpaid tax” that is eligible for discretionary relief under § 6015(f)(1)?

Analysis

Section 6015(f )(1) authorizes the IRS to “relieve” a taxpayer of “liability” “for any unpaid tax or any deficiency (or any portion of either).” Petitioner does not assert this case involves a “deficiency.” The only question is thus whether the money petitioner currently owes the IRS as interest on her previously underpaid tax—that is, underpayment interest—is a “liability” for “unpaid tax” within the meaning of that provision.

Although § 6015 neither defines “unpaid tax” nor expressly references interest, other provisions fill that gap. Most relevant here is 26 U.S.C. § 6601, whose caption references “[i]nterest on underpayment.” That provision begins by stating that taxpayers (like petitioner) who fail to pay the full “amount of tax” owed for a given year also must pay “interest on such amount” at a statutorily prescribed rate. A later subsection— § 6601, captioned “Interest treated as tax”—instructs how such interest-payment obligations are treated under the tax code’s other provisions.

The government asserts that § 6601(e)(1)’s general rule that tax includes interest does not apply here. As support for that view, the government cites that provision’s carve-out for uses of the word tax in “subchapter B of chapter 63, relating to deficiency procedures.” But the provision at issue here—§ 6015(f )(1)—is not part of chapter 63, much less of subchapter B.

The government next asserts that the LaRosas’ previous payment “extinguished” petitioner’s tax liability for the relevant years and the government’s later refund could not “revive” it as unpaid tax. As support for this argument, the government relies primarily on Bilzerian v. USA, 86 F.3d 1067 (11th Cir. 1996) (per curiam). But Bilzerian was not a case about § 6015(f )(1) or the meaning of the words “unpaid tax.”

Beyond overreading Bilzerian, the government’s argument is wrong on its own terms. The issue is whether petitioner has “liability” for “any unpaid tax.” Although the IRS makes assessments—that is, “recording[s] of the amount [a] taxpayer owes”—such assessments are “essentially a bookkeeping notation.” In contrast, the underlying tax “liabilit[ies]” are directly “‘imposed by’” the Internal Revenue Code itself. Whether petitioner has any “liability” for “unpaid tax” under § 6015(f )(1) thus turns only on whether her obligations under the tax code are currently satisfied rather than what the IRS may or may not have done in the past to collect on such obligations.

The government’s final (and primary) argument has a more big-picture flavor. Echoing the tax court, the government insists that whether a taxpayer’s obligation to pay money following an erroneous refund is eligible for § 6015(f)(1) relief turns on whether the refund was a “rebate” or a “nonrebate” refund. In the government’s view: (1) only rebate refunds can revive a previous tax liability for § 6015(f )(1) purposes and (2) petitioner does not qualify because she and her husband received a nonrebate refund.

This court is not persuaded that the rebate/nonrebate distinction matters here. For one thing, this court sees no basis for it in § 6015(f)(1)’s text. And, contrary to the government’s suggestion, neither this court nor any other circuits have embraced the rebate/nonrebate distinction in the § 6015(f)(1) context.

Conclusion

The government insists Congress did not intend to make debts taxpayers owe after receiving erroneous refunds of underpayment interest eligible for § 6015(f)(1) relief. But “no amount of policy-talk can overcome plain statutory text.”

“The question here is not whether [petitioner] should be granted [equitable relief] as a matter of executive discretion—it is whether Congress has forbidden [such relief] via legislative command.” Because the answer is no, the tax court’s judgment is vacated and remanded for further proceedings consistent with this opinion.

So ordered.

LaRosa v. Commissioner of Internal Revenue Service, Case No. 24-2034, May 18, 2026. 4th Cir. (Heytens), from United States Tax Court. Andrew Michael Weiner for Appellant. Robert Joel Branman for Appellee. VLW 026-2-180. 11 pp.

Full-Text Opinion
VLW 026-2-180