Did you know that when a mistaken tax calculation by the Internal Revenue Service is material the taxpayer must repaid the refund?
The Tax Court in Hough Beck & Baird, Inc. v. Comm’r, 167 T.C. No. 2 (2026) held that an architecture firm was liable for employment taxes which it had initially paid but which the IRS mistakenly treated as an overpayment and subsequently refunded to the firm. The court concluded that, when the IRS incorrectly calculates the amount of an original assessment and that mistaken calculation is material, the original assessment is imperfect in a material way, and the IRS can make a timely supplemental assessment to remedy the mistaken calculation.
Background
Hough Beck & Baird, Inc. (Baird), a landscape architecture firm, paid its employment tax for the first quarter of 2021 in three deposits and timely filed its Form 941, Employer’s Quarterly Federal Tax Return. Although Baird did not claim an employee retention credit, the IRS treated Baird as being entitled to one and mistakenly assessed Baird’s federal employment tax liability as zero. It then issued a tax refund of $121,003 to Baird along with interest of $89.
The IRS subsequently made a supplemental assessment under Code Section 6204 to remedy its mistake and to collect the amount paid to Baird. Baird neither responded nor paid the balance due. In April of 2024, the IRS issued Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Rights to a Hearing. In response, Baird filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, selecting “I am not liable for the tax the IRS is trying to collect” as the reason for requesting a collection due process (CDP) hearing with the IRS Independent Office of Appeals (Appeals).
In July of 2024, Baird had its CDP hearing, during which an IRS Appeals Officer Patricia Williams (AO Williams) and Baird’s attorney discussed Baird’s challenge to the tax liability underlying the proposed levy. Over the following weeks and months, AO Williams and Baird’s counsel discussed the caselaw over email and on phone calls. Ultimately in November of 2024 Appeals issued a Notice of Determination sustaining the proposed levy.
In December of 2024 Baird filed a petition with the Tax Court in which it argued that, because the original assessment was perfect and complete in all material respects, the IRS could recover only the amount incorrectly returned through a civil erroneous refund action under Code Section 7405. Baird claimed that because the IRS did not initiate such a suit, it was barred from collecting any amount under the proposed levy.
Generally, a tax is extinguished once it is correctly assessed and paid. However, when the original assessment is imperfect or incomplete in any material respect, Code Section 6204(a) allows the IRS to make a supplemental assessment within three years after the return was filed. Neither the Code nor the regulations define “imperfect” or “incomplete” as used in Code Section 6204(a).
Analysis
The Tax Court held that (1) because the IRS improperly calculated Baird’s federal employment tax liability as zero for the first quarter of 2021, the original assessment was imperfect in a material respect, and (2) because the original assessment was imperfect in a material respect, the IRS’s timely supplemental assessment under Code Section 6204 was proper. The court observed that three Courts of Appeals have found an assessment to be imperfect or incomplete in a material respect as the result of the IRS’s error, and all three courts have upheld the IRS’s supplemental assessment under Code Section 6204.
First, the court cited the Ninth Circuit decision in Brookhurst, Inc. v. U.S., 931 F.2d 554 (9th Cir. 1991), where the court held that because the IRS mistakenly assessed the taxpayer’s liability as less than $1,000 instead of almost $200,000, the initial assessment of the taxpayer’s liability was imperfect and the IRS could make a supplemental assessment. The court then cited the Second Circuit’s holding in Johnson v. U.S., 123 F.3d 700 (2d Cir. 1997), where the court concluded that, even when an original assessment was invalid, the IRS could make a supplemental assessment. Finally, the Tax Court noted the decision in U.S. v. Frontone, 383 F.3d 656 (7th Cir. 2004), where the Seventh Circuit held that because the IRS understated the taxpayers’ tax liability by more than $5,000, the initial assessment was imperfect or incomplete in a material respect and the IRS could make a supplemental assessment.
In the view of the Tax Court, the imperfect assessment in this case was strikingly similar to those in Frontone and Brookhurst. The court noted that in each case, the court concluded that the original assessment was imperfect or incomplete in a material aspect. The court found those two cases, and especially Brookhurst, to be almost directly on point and highly persuasive.
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