21.4.5. Erroneous Refunds

(1) Employees in the Accounts Management (AM) organization respond to taxpayer inquiries and process claims and other internal adjustment requests.

(1) Authority for these procedures is found in IRM 1.2.1.13, Policy Statements for Customer Account Services Activities.

(1) The Taxpayer Services Commissioner has overall responsibility for the policy related to this IRM, which is published on a yearly basis.

(2) Additional information is found in IRM 1.1.13.7.3, Accounts Management, and IRM 21.1.1, Accounts Management and Compliance Services Overview.

(1) Program Reports: The program reports provided in this IRM are for identification purposes for the Accounts Management Customer Service Representatives (CSRs) and Tax Examiners (TEs). For reports concerning quality, inventory, and aged listings, please refer to IRM 1.4.16, Accounts Management Guide for Managers. Aged listings can also be viewed by accessing Control Data Analysis, Project PCD, on the Control D/Web Access server, which has a login program control.

(2) Program Effectiveness: Program Effectiveness is determined by Accounts Management’s employees successfully using IRM guidance to perform necessary account actions and duties.

(3) Program Controls: Goals, measures and operating guidelines are listed in the yearly Program Letter. Quality data and guidelines for measurement are referenced in IRM 21.10.1, Embedded Quality (EQ) for Accounts Management, Campus Compliance, Field Assistance, Tax Exempt/Government Entities, Return Integrity and Compliance Services (RICS) and Electronic Products and Services Support.

(1) For a comprehensive listing of any IRS acronyms, please refer to the Acronym Database.

(2) See table below for common acronyms in this IRM:

(1) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see Taxpayer Bill of Rights.

(2) Additional related resources include:

• Integrated Automation Technologies (IAT) Tool Instructions

• Document 6209 (IRS Processing Codes and Information)

• IDRS Command Codes Job Aid

• IRM 25.13.1, Taxpayer Correspondence Services

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

1. The Assessment Statute Expiration Date (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.

   Note: While the CSED is generally ten years, there are events that can suspend or extend this. See IRM 5.1.19.3, Case Actions That Can Suspend And/Or Extend the CSED.

3. The Erroneous Refund Statute Expiration Date (ERSED) governs the time in which the government can bring a lawsuit to recover an erroneous refund regardless of whether an assessment of the erroneous refund can be made. The ERSED is thus the only period of limitation applicable to Category D erroneous refunds because they are not subject to assessment and enforced administrative collection.

   Note: The ERSED also applies to all erroneous refund suits and sometimes extends beyond the ASED, occasionally making filing suit the only option available to collect erroneous refunds in the other categories. See IRM 21.4.5.10, 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 21.4.5.15, Collection Methods for Category D Erroneous Refunds, for additional information on the ERSED.

(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.

(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.

(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/e-4442, Inquiry Referral; Form 5101, Examination Referral Slip; or Form 12356, Erroneous Refund Worksheet, include a detailed explanation of why it is an erroneous refund, and attach all information/documentation pertinent to the erroneous refund (otherwise the case will be rejected by Exam). Forward to your local Examination function for the issuance of a deficiency notice.

  Note: Do not select the CAT A option in CII (Correspondence Imaging Inventory) to route these cases.

• 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.

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(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 21.4.5.12, 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 Letter 510C, Refund in Error; Return Check, 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:

(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

• Health Coverage Tax Credit

• Hope Scholarship Credit

• Making Work Pay Credit

• Adoption Credit

• Prior year minimum tax credit

• Recovery Rebate Credit

• Premium Tax Credit

(2) If the taxpayer files two tax returns, one with an ITIN and one with an SSN, and receives two refunds, follow Category A2 procedures for the portion of the refund attributable to refundable/non-refundable credits (e.g., EITC, Child Tax Credit, etc.). Follow Category B procedures for the portion of the refund attributable to the pre-paid credits, such as withholding and estimated tax payments.

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

(4) 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).

(5) Take the following actions to recover Category A2 erroneous refunds:

• Prepare Form 4442/e-4442, Inquiry Referral; Form 5101, Examination Referral Slip; or Form 12356, Erroneous Refund Worksheet, include a detailed explanation of why it is an erroneous refund, and attach all information/documentation pertinent to the erroneous refund (otherwise the case will be rejected by Exam). Forward to your local Examination function for the issuance of a deficiency notice.

  Note: Please do not select the CAT A option in CII (Correspondence Imaging Inventory) to route these cases.

• 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.

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(6) 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 21.4.5.12, 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.

(7) The Letter 510C, Refund in Error; Return Check, is not issued on Category A2 erroneous refunds. Do not input a TC 470 or TC 844 on these accounts.

(8) See the following table:

(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.

(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 21.4.5.6.1, Account Actions for Category D Erroneous Refunds.

(3) If the taxpayer files two tax returns, one with an ITIN and one with an SSN, and receives two refunds, follow Category B procedures for the portion of the refund attributable to pre-paid credits (i.e., withholding and estimated tax payments). Other erroneous refund procedures (e.g., Category A2) may apply for the remainder of the refund not attributable to Category B.

(4) IRC 6201(a)(3) gives the IRS the authority to assess an overstatement, on a return or claim for refund, 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

(5) 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.

(6) 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.

(7) 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).

(8) 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.

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

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

(11) 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).

(12) 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.

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

(14) The Letter 510C, Refund in Error; Return Check, 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.

(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 the IRS accepting a taxpayer representation and later determining that it is in error. The following examples are Category C erroneous refunds recoverable by assessment, however not all erroneous refunds based on an IRS mistake are assessable as Category C erroneous refunds.

(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).

(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 immediately 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 their 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 they will receive a bill for the additional amount of tax assessed.
   

4. Do not send the Letter 510C, Refund in Error; Return Check. 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.

(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 21.4.5.10, Categories A1, A2, B and C Erroneous Refunds Processed as a Category D Erroneous Refund Using the ERSED, and IRM 21.4.5.15, 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 filing of a Notice of Federal Tax Lien or issuance of a levy cannot be taken to recover Category D erroneous refunds. The ASED and the CSED do not apply to this category of erroneous refunds.

(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 3.17.80.1.30, 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. An AUR or BUR reply received with a payment and the payment is processed and refunded before AUR or BUR has input the proposed tax assessment.

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

(1) A Duplicate Manual Erroneous Refund (DMER) is created anytime a manual refund (TC 840) and a computer-generated refund (TC 846) or two manual refunds are issued for the same overpayment, one of which the taxpayer is not entitled to receive. This definition applies regardless of taxpayer intent or whether the error that caused the DMER was made by the IRS, the taxpayer, or a third party.

(2) DMERs can be created by:

• The input of an adjustment without a hold code (HC) 1, 2, or 4

  Example: A manual refund was prepared for an overpayment that was being held by a -R freeze, -A freeze, etc. At the same time, an adjustment was input on the account to correct the posted information and a HC 3 was used. The posting of the TC 29X with HC 3 released the freeze (-R, -A, etc.), and a systemic refund (TC 846) was issued in addition to the manual refund.

• A subsequent action, such as a credit transfer, taken without the necessary steps to hold the credit

  Example: An adjustment with a HC 1, 2, or 4 is input to hold the credit to offset part of the overpayment to another module and manually refund the remaining overpayment. A credit transfer (e.g., TC 662, TC 672, TC 820, etc.) without a TC 570, will release the -K Freeze set by the HC 1, 2, or 4, and allow a systemic refund (TC 846) in addition to the manual refund (TC 840).

• Two manual refunds issued from the same module for the same account credit

(3) When a DMER is identified, in addition to Form 12356, Erroneous Refund Worksheet, a Form 14165, Erroneous TC 840/846 Report, must be completed and included in the case file. DMER case files cannot be mailed to the Accounting Erroneous Refund Teams. All DMER case files will be saved on the DMER Shared Drive per the instructions in (6) below.

(4) Anytime a Form 14165 is created and scanned to the DMER Shared Drive, input a history item on IDRS and in AMS indicating "F14165SENT". Make sure to indicate in the AMS history that the case file was scanned into the DMER Shared Drive. The entire case file must be scanned into the folder for the month the file was completed.

(5) When a DMER is identified, the discovering employee must contact the appropriate BOD POC listed in Exhibit 21.4.5-2, DMER Site Contacts.

• Prepare the DMER case file per the instructions in IRM 21.4.5.6, Category D Erroneous Refund Procedures.

• Scan the case file and email it to your site or BOD’s POC.

(6) When the DMER case file is received from the originator/preparer, the BOD POC will load the file to the DMER Shared Folder.

• Ensure the appropriate naming convention is used to save the file to the DMER Shared Drive:

  Example: Refund Schedule Number (RSN)_last four digits on TIN. Example: 2014094175W_6081.

  Note: Do not include the word "completed" at the end of the named file. The Erroneous Refund Team in Accounting will include the word ‘completed’ after they review the file for completeness.

• The day after uploading DMER case files to the DMER Shared folder, the BOD POC will access the shared folder to verify that case file status is "complete".

  Note: File names updated by SP to include “complete” indicate all required documentation was received; file names updated to include “incomplete” indicate missing documents. Remember, when using the naming convention above, do not add the word “complete”. This is done by the ERRF Team in Accounting when they review the file for completeness.

• Review the DMER log on the DMER SharePoint Site to determine which documents are missing for each incomplete case.

• Secure the missing documentation from the DMER originator/preparer and re-save the entire case file in the shared folder using the naming convention described above (i.e., remove “incomplete” from the file name).

• Notify the SP HQ Analyst if any case file name has not been updated to reflect a case file status (either “complete” or “incomplete”) within 24 hours of being uploaded to the shared folder.

(7) An IDT case is a DMER if, after the case was identified as IDT, a systemic refund (TC 846) was inadvertently generated (by the input of an incorrect account action) and a manual refund is issued.

(1) The necessary account actions will depend on what caused the erroneous refund:

(2) Employees who identify a Category D erroneous refund are responsible for creating an erroneous refund package and completing the necessary actions before referring the case to the appropriate A/ER Unit. An erroneous refund package must include the following information:

• A completed Form 12356, Erroneous Refund Worksheet

• Erroneous refund category and what caused it

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

• Context of telephone conversations, if applicable

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

(3) Prepare Form 12356, Erroneous Refund Worksheet. Refer to IRM 21.4.5.6.2, Preparing Form 12356, Erroneous Refund Worksheet.

(4) Send the taxpayer a Letter 510C, Refund in Error; Return Check, or an equivalent letter (e.g., Letter 274C, Offer in Compromise; Installment Payment Due, used by Offer in Compromise), using the IAT Letters Tool. This is the method used by the IRS to "demand" the erroneous refund be repaid. The date of the letter is considered the date of demand. See IRM 21.4.5.14, Interest and Penalty Consideration for Category D Erroneous Refunds.

(5) When applicable, selective paragraphs in the 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 21.4.5.14, Interest and Penalty Consideration for Category D Erroneous Refunds).

(6) To determine whether the taxpayer owes interest when issuing a Letter 510C see the table below.

(7) Employees must input a TC 844 using CC REQ77/FRM77 when a Category D erroneous refund is identified. The TC 844 generates a "-U" freeze on the account.

1. If IRS error and $50,000 or less:
   - Input TC 844. See Exhibit 2.4.19-6, Examples of Command Code FRM77, for an example of TC 844 input.
   - Enter the Date of Demand in the "EXTENSION-DT" field.
   - Enter the date of the erroneous refund (TC 840 or TC 846 or TC 899 Type 2) in the "TRANS-DT" field.
   - Enter the erroneous refund amount in the "FREEZE-RELEASE-AMT" field.

2. If taxpayer error or refunds more than $50,000:
   - Input TC 844. See Exhibit 2.4.19-6, Examples of Command Code FRM77, for an example of TC 844 input.
   - Enter the date of the erroneous Refund (TC 840 or TC 846 or TC 899 Type 2) in the "TRANS-DT" field.

(8) Employees must input a TC 470 using CC REQ77/FRM77 to stop all systemic notices and collection processes. If the taxpayer's account will be in a balance due status, use a cc 93. See Exhibit 2.4.19-2, Command Code REQ77 Response, for an example of FRM77 input screen.

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

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

• Austin - 0611300000

• Kansas City - 0911800000

• Ogden - 0411700000

(11) On identity theft cases where a refund has been offset to a false secondary TIN, process the ERRF as follows:

1. Move the refund (TC840/TC 846) for the amount of the TC 899 Type 2 (or TC 971 AC 599 Type 2) to the false secondary TIN. See IRM 21.5.2.4.23.10, Moving Refunds, for the actions required to move the refund.

2. Follow procedures 2 - 10 above for the amount of the TC 899 Type 2 (or TC 971 AC 599 Type 2).

   Note: The IAT tool cannot be used in this situation. Follow the instructions found in paragraphs 2-10 above to initiate the erroneous refund package.

(1) The following are line-by-line instructions for completing Form 12356, Erroneous Refund Worksheet:

• Item 1 - First Field - Discovering Function - Enter the area that discovered the erroneous refund.

  Example: TS AM Ogden Dept. 2 Team 203

• Item 1 - Second Field - Date Discovered - This is the date the erroneous refund was identified.

• Item 2 - Function who created the erroneous refund - This is the area that created the erroneous refund.

  Example: The area within the IRS that input a credit transfer or an adjustment without freezing the module which generated a systemic or manual refund that should not have been issued. TS AM Dept. 1 Team 101.

• Item 3 - First Field - Campus responsible for collecting erroneous refund - This is the campus that issued the refund. See Exhibit 3.17.80-4, Erroneous Refund Coordinators, for a list of A/ER functions and their corresponding erroneous refund coordinators

• Item 3 - Second Field - ERRF Category - This is the category of the erroneous refund (A1, A2, B, C, or D).

• Item 4 - First Field - TC Code- Indicate if the erroneous refund was generated with a TC 846 or TC 840.

• Item 4 - Second Field - Dated - The is the date of the erroneous refund.

• Item 5 - First Field - ERRF Refund DLN - Enter the DLN of the refund (TC 846 or TC 840).

• Item 5 - Second Field - RSN - This is the Refund Schedule Number and is found in IDRS posted with the TC 846 or TC 840.

• Item 6 - ERSED - Check the box for the appropriate erroneous refund statute expiration date (ERSED).

• Item 7 - 510C Date - Enter the Letter 510C date.

• Item 8 - Date of Demand - Enter the date of demand. See IRM 21.4.5.14, Interest and Penalty Consideration for Category D Erroneous Refunds.

• Item 9 - ERRF Amount $ - Enter the amount of the erroneous refund. This is generally the amount of the TC 846 or TC 840, but not always.

• Item 10 - TC 470 Date - Enter the date the TC 470 was input.

• Item 11 - TC 844 Date - Enter the date the TC 844 was input.

• Item 12 - TC 971 AC 663 Date - Enter the date the TC 971 AC 663 was input.

• Item 13 - Identify Taxpayer(s) and Account(s) Involved - Enter the TIN, MFT, tax Period, name, and address of the account the erroneous refund was issued from as well as any cross-reference account information if applicable.

• Item 14 - Explanation of Erroneous Refund - Check the applicable box indicating why the erroneous refund was issued and then supply a detailed explanation of the cause of the erroneous refund.

• Item 15 - First Field - Discovering Employee Information - Enter the employee number, telephone number, and mail stop of the employee who discovered the erroneous refund. Also enter the date the employee discovered the erroneous refund.

• Item 15 - Second Field - Manager's Signature - Before the erroneous refund package is routed, the Form 12356 needs to be signed by the manager of the team that discovered the erroneous refund.

• Item 16 - ERRF Coordinator Signature - When the erroneous refund package is received within the Accounting Function, the erroneous refund coordinator will sign and date the Form 12356.

  Note: The Accounting function may return the erroneous refund package if the Form 12356 is not filled out completely or if the Form 12356 has not been reviewed and signed by the manager.

(1) Effective October 1, 2020, all Category D erroneous refunds will be emailed to the organizational mailbox established for each A/ER function. The email will include all required documentation as discussed in IRM 21.4.5.6.1 (2) and be merged into one pdf document. The Form 12356 needs to be the first page of the document. No Form 3210 will be needed any longer. The subject line on the email and the file will be the Refund Schedule Number (RSN)_last four digits on TIN. Example: 2014094175W_6081.

• *TS SP Erroneous Refund Austin

• *TS SP Erroneous Refund Kansas City

• *TS SP Erroneous Refund Ogden

(2) To determine the appropriate campus for routing the erroneous refund package, use the 8th and 9th position of the Refund Schedule Number (RSN). See Exhibit 3.17.79-4, Refund Schedule Number Format.

(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 Letter 510C, Refund in Error; Return Check.

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.

(1) Situations exist where a newly identified erroneous refund has already been fully repaid. The erroneous refund may have been satisfied by:

1. The offset of an overpayment from another tax year

2. Payments received from the taxpayer

3. The taxpayer returning the erroneous refund check

(2) Even though the balance has been repaid, an incorrect refund was issued to the taxpayer and it is necessary to follow the Category D erroneous refund procedures to protect the taxpayer. Per IRC 6404(e)(2), the interest is abated until the date of demand if the erroneous refund is $50,000 or less and the taxpayer (or related party) did not cause the erroneous refund. Since the erroneous refund was repaid prior to the issuance of a notice of demand (Letter 510C), no interest is due on the erroneous refund amount.

(3) If the account has been fully paid by an offset or by the taxpayer submitting full payment on the account, take the following actions:

1. Input a TC 844 using the current date as the date of demand. The input of the TC 844 with the current date as the date of demand will reverse any systemically assessed interest.

2. Complete a Form 12356, Erroneous Refund Worksheet.

3. In the remarks section (section 14) state, "Full Paid Erroneous Refund", "No 510C Letter sent", "Please input TC 845 to reverse TC 844".

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

5. Update the Integrated Data Retrieval System (IDRS) Category Code to ERRF, reassign the IDRS control base to the A/ER, and change the status to "M" with activity code "ERRORREF". See IRM 21.4.5.6.1 (10), Account Actions for Category D Erroneous Refunds, for IDRS control numbers.

6. Email the erroneous refund packages to the appropriate A/ER function per IRM 21.4.5.6.3, Routing Category D Erroneous Refund packages.

(4) If the taxpayer returned the treasury check and there is a TC 841 with "99999" in the DLN on the account, then take the following actions:

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

2. Complete a Form 12356, Erroneous Refund Worksheet.

3. In the remarks section (section 14) state, "Check Returned - TC 844 Not Needed", and "No 510C Letter Sent".

4. Email the erroneous refund packages to the A/ER function per IRM 21.4.5.6.3, Routing Category D Erroneous Refund Packages.

(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 RTN or bank account numbers differ from that shown on the return and the IRS caused the error, issue a manual refund to the correct taxpayer as soon as possible to limit the amount of credit interest paid to the taxpayer.

(3) If the financial institution or The Bureau of Fiscal Services (BFS) (formerly 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, TIN and address, complete the following actions on the erroneous refund account:

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 posting of the TC 849 to post.

3. Input TC 844 using CC REQ77/FRM77.

4. Enter date of demand (Extension Date) on CC FRM77. See IRM 21.4.5.6.1 (7), Account Actions for Category D Erroneous Refunds, to determine the date of demand based on the erroneous refund amount.

5. Enter the IDRS posting date of the erroneous refund (TC 846 or TC 840) as the "TRANS-DT". See IRM 21.4.5.6.1 (7), Account Actions for Category D Erroneous Refunds, for "TRANS-DT" procedures based on the erroneous refund amount.

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

7. Send Letter 510C, Refund In Error; Return Check.

8. Prepare an erroneous refund package (all pertinent information) and email to the appropriate A/ER function per IRM 21.4.5.6.3, Routing Category D Erroneous Refund Packages.

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

(4) If the financial institution or BFS (formerly 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. Prepare a Category D erroneous refund package that includes a copy of the case file and Form 12356, Erroneous Refund Worksheet. Notate all actions taken and research conducted. Refer to IRM 3.17.80.4.4.2, Undeliverable or No Taxpayer Reply, Figure 3.17.80-45, for instructions on completing the Form 12356.

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

3. Email the erroneous refund packages to the appropriate A/ER function per IRM 21.4.5.6.3, Routing Category D Erroneous Refund Packages, for posting of a TC 700 (false credit).

(5) 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 email the case file to the appropriate A/ER function, noting recipient of the direct deposit could not be identified. See IRM 21.4.1.5.7.5, Non-Receipt of Direct Deposit Refunds - "Refund Inquiry Employees".

(1) Except where the abatement of interest is required by statute, interest must be charged. IRC 6404(e)(2) requires abatement of interest on erroneous refunds of $50,000 or less unless the taxpayer (or related party) caused the erroneous refund. The IRS also has discretionary authority to abate interest when the erroneous refund exceeds $50,000. Permission to abate debit interest must be requested from an individual listed in Delegation Order 20-1. See IRM 1.2.2.13.1, Delegation Order 20-1, Abatement of Interest, (Rev.2, formally DO-228, Rev 3), Abatement of Interest. More information on the factors considered for discretionary abatement is in IRM 20.2.7.7, IRC 6404(e)(2), 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 their tax obligation.

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