June 17, 2015 The Tax Lawyer

Penalizing Tax Petitions: Why the Erroneous Refund Penalty in Section 6676 Violates Taxpayers’ First Amendment Rights

Vol. 72, No. 2 - Winter 2019

Derek Ho & Christopher A. Klimmek

Abstract

    In 2007, Congress enacted the so-called “erroneous refund penalty,” which imposes a 20% penalty on any taxpayer who submits a claim for tax refund that the IRS deems “inaccurate,” even if the taxpayer’s position is legally non-frivolous and asserted in good faith.  In part because the IRS has rarely imposed the penalty since its enactment, the statute has thus far not been analyzed extensively by legal scholars or policymakers. However, the penalty continues to impose a significant chilling effect on tax refund claims, and the Treasury Department has now signaled the possibility of more aggressive application in the future.  This Article argues that the erroneous refund penalty is unconstitutional under the Petition Clause of the First Amendment.  Penalizing taxpayers financially for asking their government to return money they believe is legally theirs strikes at the heart of the Petition Clause’s protections.  Indeed, protecting citizens’ right to complain about abusive taxation by the national Government was one of the Framers’ core motivations for enacting the First Amendment.  The Article draws on the history of the First Amendment, the Supreme Court’s Petition Clause jurisprudence, and recent lower court decisions in exposing the constitutional infirmity of the penalty.  The Article also explains that the erroneous refund penalty is unjustified as a matter of tax policy because it fails to promote voluntary compliance, is irrationally harsh and unfair to taxpayers, and is not necessary to solve the narrow, targeted problems that Congress intended to address in enacting the statute.  Finally, the Article suggests ways in which the penalty could be amended, if it is not repealed altogether, to avoid infringing on taxpayers’ First Amendment rights and ensure that refund claims are treated fairly. 

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