Section 6676 - frivolous tax refund penalty

A taxpayer filing a refund or credit claim for an "excessive amount" is subject to a penalty equal to 20 percent of such excessive amount ( Code Sec. 6676(a), added by the Small Business and Work Opportunity Tax Act of 2007 ( P.L. 110-28). For this purpose, an excessive amount is the amount by which the refund or credit claim exceeds the amount allowable under the Code for the tax year ( Code Sec. 6676(b), added by P.L. 110-28).

The penalty is not imposed if the taxpayer can show that there is a reasonable basis for claiming the excessive refund or credit amount. In addition, the penalty does not apply to claims for refunds or credits related to the earned income credit since such claims are governed by a separate set of rules under Code Sec. 32 ( Code Sec. 6676(a), added by P.L. 110-28). Nor does the penalty apply to any portion of the excessive amount of the claim that is subject to the accuracy-related penalty under Code Sec. 6662 or 6662A, or the fraud penalty imposed under Code Sec. 6663 ( Code Sec. 6676(c), added by P.L. 110-28).

The penalty applies to claims for refunds or credits filed or submitted after May 25, 2007 (Act Sec. 8247(c) of P.L. 110-28).

ERRONEOUS CLAIM FOR REFUND OR CREDIT

6676(a) CIVIL PENALTY. --If a claim for refund or credit with respect to income tax (other than a claim for a refund or credit relating to the earned income credit under section 32) is made for an excessive amount, unless it is shown that the claim for such excessive amount has a reasonable basis, the person making such claim shall be liable for a penalty in an amount equal to 20 percent of the excessive amount.

6676(b) EXCESSIVE AMOUNT. --For purposes of this section, the term "excessive amount" means in the case of any person the amount by which the amount of the claim for refund or credit for any taxable year exceeds the amount of such claim allowable under this title for such taxable year.

6676(c) COORDINATION WITH OTHER PENALTIES. --This section shall not apply to any portion of the excessive amount of a claim for refund or credit which is subject to a penalty imposed under part II of subchapter A of chapter 68.

.01 Added by P.L. 110-28.



Joint Committee Summary of P.L. 110-28 (Small Business and Work Opportunity Tax Act of 2007)


.99 Penalty for filing erroneous claims for refunds or credits. --
Present Law


Present law imposes accuracy-related penalties on a taxpayer in cases involving a substantial valuation misstatement or gross valuation misstatement relating to an underpayment of income tax. 40 For this purpose, a substantial valuation misstatement generally means a value claimed that is at least twice (200 percent or more) the amount determined to be the correct value, and a gross valuation misstatement generally means a value claimed that is at least four times (400 percent or more) the amount determined to be the correct value.

The penalty is 20 percent of the underpayment of tax resulting from a substantial valuation misstatement and rises to 40 percent for a gross valuation misstatement. No penalty is imposed unless the portion of the underpayment attributable to the valuation misstatement exceeds $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company). Under present law, no penalty is imposed with respect to any portion of the understatement attributable to any item if (1) the treatment of the item on the return is or was supported by substantial authority, or (2) facts relevant to the tax treatment of the item were adequately disclosed on the return or on a statement attached to the return and there is a reasonable basis for the tax treatment. Special rules apply to tax shelters.
Explanation of Provision


The provision imposes a penalty on any taxpayer filing an erroneous claim for refund or credit. The penalty is equal to 20 percent of the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claimed tax treatment. The penalty does not apply to any portion of the disallowed portion of the claim for refund or credit relating to the earned income credit or any portion of the disallowed portion of the claim for refund or credit that is subject to accuracy-related or fraud penalties.
Effective Date


The provision is effective for claims for refund or credit filed after the date of enactment. --Joint Committee on Taxation, Technical Explanation of the Small Business and Work Opportunity Tax Act of 2007 May 25, 2007 (JCX-29-07).

40 Sec. 6662(b)(3) and (h).