The Fourth Circuit holds that the plain language of the innocent spouse statute (IRC § 6015(f)(1)) means that underpayment interest the IRS erroneously refunded is a liability for unpaid tax contemplated by the statute
May 22, 2026. This week in LaRosa v. Commissioner, No. 24-2034 (4th Cir. May 18, 2026), the U.S. Court of Appeals for the Fourth Circuit reversed the U.S. Tax Court’s opinion at 163 T.C. 32 (2024). The Tax Court held that the erroneous refund paid to the taxpayers was not a rebate and was not an unpaid tax or a deficiency. The appellate court disagreed and held that when the IRS erroneously refunds interest payments made on previously underpaid taxes, the erroneous refund created a “liability” for “unpaid tax” eligible for the IRS to consider granting discretionary equitable relief under IRC § 6015(f)(1).
Just the Facts, Ma’am.
For the facts, think “Back to the Future,” “Ronald Reagan,” and “New Coke” and transport yourself back to the early 1980s.
From 1981 through 1985, Mrs. LaRosa filed joint tax returns with her now-deceased husband, Dominick LaRosa. In 1985, the IRS assessed underpayments for 1981, 1982, and 1983. The LaRosas settled with the IRS: the parties agreed that the LaRosas underpaid their taxes for 1981 through 1983, but that they overpaid their taxes for 1984 and 1985. The parties agreed about the tax amounts, but not the interest amounts. The LaRosas paid the interest, then sought a refund, which the IRS denied, but later paid. On behalf of the IRS, the Department of Justice brought (and prevailed in) an erroneous refund suit to recover the interest. In 2019, the IRS initiated proceedings to foreclose on the LaRosa’s home. For the colorful facts of the case and a sense of the protracted disputes between the parties, see Judge Buch’s Tax Court opinion and Judge Chasanow’s U.S. Federal District Court memorandum opinion.
The key facts are that Mrs. LaRosa requested equitable relief under IRC § 6015(f)(1) from joint and several liability. Section 6105(f)(1) gives the IRS discretion to relieve a requesting spouse of liability if it is inequitable to hold him or her “liable for any unpaid tax or any deficiency.” The IRS’s position was that because the amount at issue was interest and not “tax,” that no amount of “unpaid tax” was owed. Therefore, the IRS maintained that section 6015(f)(1) did not authorize “relief for erroneous refunds.” The Tax Court agreed, granting the IRS’s motion for summary judgment, holding that the erroneous refund of interest did not give rise to an “unpaid tax or any deficiency” under section 6015(f).
Fourth Circuit Reverses the Tax Court’s Holding that Erroneously Refunded Interest Is Not an Unpaid Tax or Any Deficiency
The Fourth Circuit reversed the Tax Court, holding that erroneous refunds of underpayment interest give rise to a “liability” for “unpaid tax” eligible for equitable relief under section 6105(f)(1). The appellate court examined the statutory text (“liability” “for any unpaid tax or deficiency”) and recognized that the statute neither defined “unpaid tax” nor expressly referenced interest, but noted that other provisions “fill[ed] that gap”. The statute governing underpayment interest, section 6601, states in subsection (e) that, generally, references to “tax” are deemed to include the interest on the tax. Thus, the court concluded that the reference to “tax” in section 6015(f)(1) “shall be deemed also to refer” to underpayment interest under section 6601.
Fourth Circuit: “No Amount of Policy-Talk” Overcomes the Statutory Text
The government made textual arguments that the court rejected. The court refocused the issue on whether Mrs. LaRosa had a “liability” for “any unpaid tax”, which the court said turns “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 such obligations.” The IRS’s primary argument was that the refund was a nonrebate refund (meaning a refund that was not based on substantive recalculations of a taxpayer’s liability) and only a rebate refund could revive a previous tax liability for purposes of section 6105(f)(1). The court said that the distinction between rebate and nonrebate refunds did not matter because the text of section 6105(f)(1) did not make such a distinction and “no amount of policy-talk can overcome plain statutory text.”
What’s Next for Mrs. LaRosa?
The saga continues. Now that the 4th Circuit says Mrs. LaRosa’s case falls within section 6105(f)(1), that court will remand the case back to the Tax Court, which will remand it back to the IRS to evaluate whether, in the IRS’s discretion, equitable relief should be granted. If the answer is “yes,” then Mrs. LaRosa’s 40-year saga concludes. If the answer is “no,” then Mrs. LaRosa can bring that determination back to the Tax Court for review and the saga continues….
Written by Kim Tyson.