Sec. 6676: There's a New Penalty in Town

By Rochelle L. Hodes, Washington, DC

Editor: John L. Miller, CPA

The Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28, §8247(a), added a new taxpayer penalty under Sec. 6676 for erroneous refund claims, effective for claims filed or submitted after May 25, 2007. Under this provision, if a taxpayer makes a claim for refund or credit with respect to income tax for an excessive amount, the IRS may impose a 20% penalty on that amount unless the taxpayer shows that the claim for such excessive amount has a reasonable basis. Sec. 6676(b) defines “excessive amount” as the amount of the claim or refund for any tax year that exceeds the amount of the claim allowable under the Code for the tax year. There is no statutory reasonable cause exception to the Sec. 6676 penalty.

The Sec. 6676 penalty does not apply to the portion of the excessive amount subject to a penalty under Sec. 6662 (accuracy-related penalty on underpayments), Sec. 6662A (reportable transaction understatement penalty), or Sec. 6663 (fraud penalty). In addition, unlike the penalties under Secs. 6662, 6662A, and 6663, which are subject to deficiency procedures, the Sec. 6676 penalty is immediately assessable and must be paid upon notice and demand. This means that the taxpayer’s ability to challenge the penalty before paying it may be severely limited unless the IRS provides an administrative process to do so.

Need for Guidance

The IRS has not provided guidance on the Sec. 6676 penalty, despite the fact that the penalty has been included in its Priority Guidance Plan every year since the penalty’s enactment in 2007. Thus, the application of the Sec. 6676 penalty is fraught with uncertainty. Taxpayers and IRS personnel need guidance to ensure that the IRS is fairly, correctly, and consistently applying the penalty, particularly given that it is an assessable penalty.

If proposed regulations are not possible at this time, the government has other options. When needed, the IRS and Treasury have provided useful interim guidance that the public can rely on. The IRS has also provided immediate guidance by providing instructions to IRS personnel and making these instructions public. In whatever form, there are four Sec. 6676 issues that are in need of immediate guidance.

Definition of reasonable basis: Sec. 6676 is not applicable if the claim for the excessive amount has a reasonable basis. The statute is silent as to what “reasonable basis” means. However, Regs. Sec. 1.6662-3(b)(3) defines the term for purposes of Sec. 6662. Although on first blush it may appear that wholesale adoption of the Sec. 6662 definition of reasonable basis for purposes of Sec. 6676 is the correct approach, on reflection it may be better to tailor the definition to the role it plays with respect to each penalty.

Unlike reasonable basis in Sec. 6662, which is merely a prerequisite for disclosure to operate as penalty protection, under Sec. 6676 reasonable basis is the sole means by which the taxpayer can establish that the amount claimed for a refund was appropriate and by which the IRS has the flexibility to fairly and effectively administer the penalty. Given this difference, it would be more appropriate in Sec. 6676 to begin with the definition of reasonable basis in Sec. 6662 and then tailor the definition to correspond with the role it plays in the context of the Sec. 6676 penalty.

Preassessment procedures: The Sec. 6676 penalty is immediately assessable, and payment is due upon notice and demand. In light of the fact that the penalty does not apply to an excessive amount that has a reasonable basis, it is important that the taxpayer’s rights to challenge the penalty are protected by providing procedures for a full administrative review, including consideration by Appeals. Therefore, the IRS should develop procedures allowing for notice and opportunity to meet with the IRS before assessing the penalty.

Coordination of penalties: Coordination between an assessable penalty, such as Sec. 6676, and penalties subject to deficiency procedures, such as Sec. 6662, can be complex. This is particularly true if the taxpayer makes the claim for refund that is subject to the Sec. 6676 penalty on an original return that is being examined. IRS personnel need guidance to help them understand the nuances regarding which portion of the amount being disallowed is subject to the Sec. 6676 penalty and which portion is subject to deficiency procedures. In addition, guidance is needed to ensure that the protections afforded by deficiency procedures are not undermined by premature assertion of the Sec. 6676 penalty.

Application in settlements: It is not unusual for the IRS and the taxpayer to reach an agreement so that the amount refunded to a taxpayer for a particular item is less than the full amount requested in the refund claim. The reasons for such concessions vary depending on any number of factors, including the parties’ consideration of the costs and hazards of litigation.

The fact that the IRS could apply the Sec. 6676 penalty to the portion of the refund claim conceded by the taxpayer in order to obtain a settlement adds a detrimental new calculus to the settlement process that may deter compromise, encourage taxpayers to seek all-or-nothing settlements, and increase the likelihood of litigation. On the other hand, agents may also use the mere specter of the Sec. 6676 penalty as leverage to obtain concessions the taxpayer might not otherwise have made. Guidance preventing IRS personnel from asserting the Sec. 6676 penalty absent an affirmative finding that the entire claim for refund for a particular item has no reasonable basis would go far toward eliminating these issues.


Application of the Sec. 6676 penalty is fraught with uncertainty. Taxpayers and IRS personnel need guidance to ensure that the penalty is being fairly, correctly, and consistently applied. After three years, it is not unreasonable to expect guidance on this penalty, given the uncertainty surrounding it. When needed, the IRS and Treasury have provided useful immediate guidance that is available to both the IRS and the public. Hopefully, such guidance will come soon for the Sec. 6676 penalty.



John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Rochelle Hodes is with PricewaterhouseCoopers LLP in Washington, DC, and is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at

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