Erroneous refund of underpayment interest eligible for Sec. 6015(f)(1) relief

The Tax Court held that an erroneous refund of underpayment interest gives rise to an unpaid tax liability that is eligible for equitable innocent–spouse relief.

Background

Catherine LaRosa filed joint tax returns for decades with her husband, who died before the trial. During that time, the LaRosas were frequently at odds with the IRS.

In 1985, the IRS issued the LaRosas an assessment for 1981, 1982, and 1983 for underpayment of taxes. In a settlement reached about five years later, the IRS and the LaRosas agreed that the couple owed the IRS the amounts they underpaid for tax years 1981, 1982, and 1983 plus Sec. 6601 underpayment interest and penalties and that the IRS owed them for amounts they overpaid for tax years 1984 and 1985 plus Sec. 6611 overpayment interest. Although the IRS and the LaRosas continued to agree about how much the LaRosas’ principal amounts were underpaid or overpaid for each of the five tax years, they continued to dispute the corresponding interest amounts.

Initially, the IRS calculated an amount that (according to the Tax Court) helped generate a net liability for the LaRosas of just over $3.6 million. The LaRosas paid the full amount but requested a refund, claiming that the IRS had overcalculated the interest they owed. The IRS at first denied the refund request, but after hearing from the LaRosas’ congressional representative, in 1994, the IRS recalculated the overpayment and underpayment refund interest, which reduced the amount the LaRosas owed. Accordingly, the IRS issued them a refund.

Soon after, the IRS determined that the 1994 refund to the LaRosas was a mistake and its initial interest calculations had been correct. As a result, in 1996, it filed a refund suit under Sec. 7405 against the LaRosas in federal district court. The district court granted summary judgment in the case to the IRS and ordered the LaRosas to repay the 1994 refund plus additional interest accrued on the erroneously refunded amount (LaRosa, 993 F. Supp. 907, 918 (D. Md. 1997)). The Fourth Circuit affirmed that decision in 1998 (LaRosa, 155 F.3d 562 (4th Cir. 1998)).

For over two decades, the LaRosas failed to comply with the district court’s judgment, and the IRS did not enforce it. In 2019, however, the IRS took action, seeking to foreclose on the LaRosas’ house.

This led Catherine LaRosa to seek equitable innocent–spouse relief under Sec. 6015(f)(1). This provision provides that in certain situations when “it is inequitable to hold” an individual taxpayer who has made a joint return “liable for any unpaid tax or any deficiency (or any portion of either)” (and is ineligible for relief under Sec. 6015(b) or (c)), the IRS “may relieve such individual of such liability.” The IRS refused to process LaRosa’s request, stating that no amount was currently owed and that Sec. 6015(f)(1) does not authorize relief for erroneous refunds.

LaRosa challenged the IRS’s determination in Tax Court, arguing that the IRS erred in deciding that she was ineligible for Sec. 6015(f)(1) innocent–spouse relief. The Tax Court granted summary judgment to the IRS, concluding that the erroneous refund paid to the LaRosas did not give rise to an unpaid tax or a deficiency under Sec. 6015(f). LaRosa appealed the Tax Court’s decision to the Fourth Circuit.

The Fourth Circuit’s decision

The Fourth Circuit vacated and remanded the Tax Court’s decision, holding that an erroneous refund of underpayment interest gives rise to a liability for unpaid tax that is eligible for equitable relief from joint–and–several liability under Sec. 6015(f)(1).

The Fourth Circuit began by analyzing the statutory text. Sec. 6015(f)(1) authorizes the IRS to “relieve” a taxpayer of “liability” “for any unpaid tax or any deficiency (or any portion of either).” LaRosa did not assert that her case involved a deficiency, and thus the court found that the only question before it was whether the underpayment interest LaRosa owed the IRS on her previously underpaid tax was a “liability” for “unpaid tax” within the meaning of Sec. 6015(f).

The Fourth Circuit noted that although Sec. 6015 does not define “unpaid tax” or expressly reference interest, Sec. 6601, whose caption references “Interest on underpayment,” fills that gap. That provision begins by stating that taxpayers (like LaRosa) 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. Sec. 6601(e)(1) — captioned “Interest treated as tax” — instructs how such interest–payment obligations are treated under the Code’s other provisions. It states:

Interest prescribed under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. Any reference to this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax.[emphasis added]

The Fourth Circuit found that Sec. 6601(e)(1) answered the question before it. The court observed that Sec. 6015(f)(1)(A) makes “[a]ny unpaid tax or any deficiency (or any portion of either)” eligible for relief. Sec. 6601(e)(1), in turn, supplies a general rule for interpreting “[a]ny reference … to any tax imposed by this title” — that is, any tax imposed by the Code as a whole (emphases added). Accordingly, the court concluded that under that rule, Sec. 6015(f)(1)’s use of “tax” “shall be deemed also to refer” to any underpayment interest imposed by Sec. 6601(a).

The IRS made several arguments to the contrary, but the Fourth Circuit found that its “efforts to resist this straightforward conclusion are unavailing.” The IRS first argued that Sec. 6601(e)(1)’s general rule that tax includes interest did not apply in LaRosa’s case. As support for that view, the IRS pointed to the subsection’s carve–out for uses of the word “tax” in Subchapter B of Chapter 63, relating to deficiency procedures. The court found, though, that the carve–out did not apply in interpreting the meaning of “tax” in Sec. 6015(f)(1) because that provision is contained in Subchapter A of Chapter 61, not in Subchapter B of Chapter 63.

The IRS also argued that the LaRosas’ previous payment “extinguished” Catherine LaRosa’s tax liability for the relevant years, and the IRS’s later refund could not “revive” it as unpaid tax. As support for this argument, it relied primarily on the Eleventh Circuit’s decision in Bilzerian, 86 F.3d 1067 (11th Cir. 1996) (per curiam).

However, according to the Fourth Circuit, Bilzerian was not about Sec. 6015(f)(1) or the meaning of “unpaid tax.” The court stated that the issue in LaRosa’s case turned on how to characterize the money she owed the government. In contrast, the dispute in Bilzerian involved the procedures the IRS must follow when collecting money from a taxpayer. The Eleventh Circuit held in Bilzerian that when the IRS issues an assessment so that it may collect on a particular tax liability and the taxpayer then fully satisfies that liability, that assessment “is extinguished and … the proper procedure for the IRS to collect an erroneous refund is a refund suit under section 7405 or a new assessment, including a new notice of deficiency” (Bilzerian, 86 F.3d at 1069). The Fourth Circuit also determined that, to the extent a stray sentence in Bilzerian could be read to sweep more broadly, it agreed with the Sixth Circuit that the language was dicta (a statement in a court opinion that is not essential to the resolution of the case) (Greer, 557 F.3d 688, 691 (6th Cir. 2009)).

In addition, beyond overreading Bilzerian, the Fourth Circuit concluded, the IRS’s argument was wrong on its own terms. The issue before the court was whether LaRosa had “liability” for “any unpaid tax.” As the court explained, although the IRS makes assessments, as the Supreme Court stated in Hibbs v. Winn, 542 U.S. 88, 100 (2004), they are “essentially a bookkeeping notation.” In contrast, under Sec. 6201(a), the underlying tax “liabilit[ies]” are directly “imposed by” the Code itself. Thus, whether LaRosa had any liability for unpaid tax under Sec. 6015(f)(1) turned 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 IRS’s final (and primary) argument was that whether a taxpayer’s obligation to pay money following an erroneous refund is eligible for Sec. 6015(f)(1) relief turns on whether the refund was a “rebate” or a “nonrebate” refund. A rebate refund is one based on substantive recalculations of a taxpayer’s liability. In the IRS’s view: (1) only rebate refunds can revive a previous tax liability for Sec. 6015(f)(1) purposes, and (2) LaRosa did not qualify because she and her husband received a nonrebate refund.

The Fourth Circuit was not persuaded that the rebate/nonrebate distinction mattered in LaRosa’s case. It found no basis for it in Sec. 6015(f)(1)’s text, and, contrary to the IRS’s suggestion, neither the Fourth Circuit nor any other circuit has embraced the distinction in the Sec. 6015(f)(1) context.

In conclusion, the Fourth Circuit noted that the IRS insisted that Congress did not intend to make debts taxpayers owe after receiving erroneous refunds of underpayment interest eligible for Sec. 6015(f)(1) relief. But the court found, as it had previously stated, that “no amount of policy–talk can overcome plain statutory text” (Julmice v. Garland, 29 F.4th 206, 210 (4th Cir. 2022) (alterations and quotation marks removed)). Thus, the question was whether Congress had forbidden the equitable relief requested by LaRosa “via legislative command.” Because the answer to this question was no, the Fourth Circuit vacated the Tax Court’s judgment and remanded the case to the Tax Court for further proceedings consistent with its opinion.

Reflections

The Fourth Circuit in a footnote stated that LaRosa and the IRS also disputed whether interest that had accumulated on the erroneously refunded underpayment interest since the refund was paid also qualified as a Sec. 6015(f)(1) “unpaid tax” liability. However, this question had not been litigated in Tax Court because the IRS argued for, and the Tax Court granted, dismissal of LaRosa’s entire petition on the ground that no part of the erroneous refund gave rise to any unpaid tax. Noting that it is a court of review, not of first view, the Fourth Circuit left it to the Tax Court to decide in the first instance whether interest on erroneously refunded underpayment interest is also eligible for equitable innocent–spouse relief under Sec. 6015(f)(1).

LaRosa, No. 24–2034 (4th Cir. 5/18/2026)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.