Juliet R. El, T. C. Memo. 2026-17, filed 2/10/26, got her year-at-issue 1040 right, thanks to her trusty electronic preparer. She claimed an Additional Child Tax Credit of $4K, to which she was indisputably entitled. Whereupon IRS’  creaky hardware gave her a $15K refund because it transposed her earnings as reported on her Schedule 8812 to the credit due line. IRS woke up before the SOL and gave Juliet a $15K deficiency.

Juliet’s trusty attorney claims this is a nonrefundable rebate because IRS didn’t recalculate Juliet’s tax due, hence Section 6212 is out and IRS must sue in USDC per Section 7405. IRS says yes we did recalculate.

Judge Nega says that’s not the issue.

“Respondent and petitioner both make a fundamental error in analyzing whether a ‘substantive recalculation’ occurred in this case. Both incorrectly direct their attention to whether the error (substituting $17,164 for the ACTC) was a ‘substantive recalculation’ instead of whether the error led to a substantive recalculation of petitioner’s tax imposed. Petitioner argues that a simple substitution error does not involve calculation at all and cannot be a ‘substantive recalculation.’ Respondent defends his mistake as a recalculation without offering any explanation more plausible than its being a mistaken transposition of numbers on the return (the $17,164 being listed elsewhere by petitioner as her earned income).

“Without reaching the question of whether a transposition or substitution error is a ‘substantive recalculation,’ the record amply supports the position that respondent substantively recalculated petitioner’s overall tax imposed. And this is the only correct place to direct the analysis: whether the taxpayer’s tax imposed was recalculated.  A refund is a rebate refund if it is based on a ‘substantive recalculation’ of the tax imposed that shows the taxpayer owes less tax than the amount shown on the taxpayer’s return. In this case, the refund is a rebate refund because the rebate was based on a substantive recalculation of petitioner’s tax imposed.” T. C. Memo. 2026-17, at p. 7. (Citations and footnote omitted).

The issue isn’t how the mistake occurred, it’s what impact the error had on tax due. Now Juliet admittedly owed nothing on her return. But Section 6211(b)(4) was amended in 1988 to deal with refundable credits when tax due was zero, so taxpayers could challenge erroneous disallowances in Tax Court. Hence this is a deficiency case, and Juliet owes the incorrect overpayment.

If this sounds familiar, see my blogpost “The Rebate Debate – Innocent Spousery,” 7/17/24.