Erroneous refund interest may support innocent spouse relief

A taxpayer may seek equitable innocent spouse relief for obligations arising from an erroneous refund of underpayment interest because those obligations can constitute “unpaid tax” under the Internal Revenue Code.
The 4th U.S. Circuit Court of Appeals vacated a Tax Court ruling that had barred the plaintiff’s request for relief at the threshold. The plaintiff had filed joint returns with her late husband and became involved in decades-long disputes with the IRS over tax liabilities from the early 1980s. After a settlement and later IRS recalculations, the agency issued a refund but soon concluded that the payment had been made in error. The government later obtained a judgment requiring repayment of the mistakenly refunded amounts with additional interest.
The dispute resurfaced years later when the government moved to foreclose on the plaintiff’s home. The plaintiff then sought equitable relief under 26 U.S.C. § 6015(f), which allows relief from certain joint tax liabilities when collection would be inequitable. The IRS refused to process the request, arguing that an erroneous refund did not create an “unpaid tax” obligation eligible for relief. The Tax Court agreed.
The 4th Circuit disagreed. It held that underpayment interest is assessed and collected in the same manner as tax, and Code provisions generally treat references to tax as including such interest. Because § 6015 refers broadly to “unpaid tax,” the court concluded that an obligation arising from erroneously refunded underpayment interest may be considered for equitable relief.
The court rejected the government’s arguments that earlier payments permanently extinguished the liability or that refund-category distinctions controlled the analysis. The decision did not decide whether the plaintiff ultimately qualified for relief, only that she was eligible to have the request considered.
The 11 page opinion is LaRosa v. Commissioner of Internal Revenue, Lawyers Weekly No. 001-175-26.