Fourth Circuit Holds that § 6015(f)(1) Innocent Spouse Equitable Relief Can Apply to Erroneous Refund Interest (5/22/26)

I write what I call a notice blog today on a case involving the innocent spouse equitable relief provision, § 6015(f)(1), as applicable to erroneous refund interest. The case reverses and remands a Tax Court "T.C." decision on an issue that is, I think, not commonly encountered. So most practitioners should just know the bottom-line holding and then can pursue it further if they ever encounter it. I do think students should be concerned with the case.

In LaRosa v. Commissioner, ___ F.4th ___ (4th Cir. 2026), 4^th Cir. here and GS here, the Court provides this good summary at the beginning:

A provision of the tax code gives the Internal Revenue Service discretion to “relieve” a taxpayer of “liability” for “any unpaid tax or any deficiency.” 26 U.S.C. § 6015(f)(1). Sometimes, the IRS refunds money to a taxpayer but later concludes it erred in doing so. Our sole question in this appeal: When the IRS mistakenly refunds interest payments a taxpayer made on previously underpaid taxes, does the taxpayer have a “liability” for “unpaid tax” that is eligible for discretionary relief under Section 6015(f)(1)? Because we conclude the answer is yes, we vacate the tax court’s judgment and remand for further proceedings.

I have summarized the holding of the case in a footnote in my working draft for the 2026 Federal Tax Procedure (Practitioner Edition) as follows:

In LaRosa v. Commissioner, ___ F.4th ___ (4th Cir. 2026), the Court held in an esoteric application of § 6015(f) that the IRS could grant equitable relief for interest (as opposed to tax) erroneously refunded to the taxpayer. I won’t discuss LaRosa further because I don’t see it as a situation that will be encountered often.

The Court rejects (Slip Op. 8-10) the Government’s claim about rebate and nonrebate refunds. The distinction is important in the law of refunds, but I don’t think the Fourth Circuit’s decision adds anything new or exciting (if that is the right word for an esoteric tax issue). The Court also left to the Tax Court to decide on remand (Slip Op. 10 n. 3) "whether since-accumulated interest on the erroneously refunded underpayment interest also qualifies as Section 6015(f)(1) “unpaid tax” liability." 

The Tax Court (Judge Buch) thought that distinction between rebate and nonrebate refunds was relevant and important and offers a good discussion. LaRosa v. Commissioner, 163 T.C. 32, 33 & 40-45 (2024) (TC opinion here); see also Federal Tax Procedure 268-271 (Practitioner Edition 2025).

Musing on the rebate/nonrebate distinction and the Government's claims of its importance to supporting the Tax Court decision, I am reminded of perhaps a similar type of technical argument in a taxpayer appeal from the Tax Court in a case I handled while with DOJ Tax Appellate in the misty and distant past. Morris Est. v. Commissioner, 454 F.2d 208 (4th Cir. 1972), here. That case involved a situation, as here, where for the Government I made technical arguments as to possible horrors but facial equities were with the taxpayer (an estate). I lost that case (technically, I represented the party that lost). I discuss that case in On Win-Loss Records on Appeal (with War Stories) (Federal Tax Procedure Blog 5/5/25; 5/6/25), here.