On June 21, 2021 the IRS recorded a Seattle landscape architecture firm as owing no payroll tax for the first quarter of that year. The firm had reported $121,003 on that return and paid every dollar of it in three deposits. With the tax now recorded as zero, those payments looked like an overpayment, so the money went back out with $89 of interest. The accountant called to ask what the deposit was. An IRS representative told him it was COVID Employee Retention Credits. The firm had not claimed any credit on that return.
On July 8 of this year the Tax Court upheld the levy the IRS had proposed to collect that same $121,003. The firm paid that amount when it first filed, the court acknowledged, "but the money was returned by mistake and the firm must 'pay it again.'"
Money the IRS pays out by error does not remove the tax behind it. That is worth knowing before an unexplained deposit turns up in your own account.
Section 6204(a) is what let the IRS undo its own mistake. The Secretary "may, at any time within the period prescribed for assessment, make a supplemental assessment whenever it is ascertained that any assessment is imperfect or incomplete in any material respect." Two conditions do the work there: the error has to matter, and the fix has to come while the window for assessing the tax is still open. Neither the Tax Code nor the regulation defines "imperfect," and the Tax Court had not decided whether the IRS's own error counts. Here it did, on size: recording this tax as zero understated it "by the entire amount."
Those windows run longer than most owners assume. Section 6501 gives the IRS three years from the day the return is filed, and for a payroll return covering early 2021 the Code treats that day as April 15, 2022. The window stayed open into April 2025. The corrected assessment landed on July 17, 2023, inside it. Section 6502(a)(1) then gives the IRS ten years from that assessment to collect.
The firm argued the IRS had reached for the wrong tool: money already refunded comes back only through a civil suit under section 7405, and none was ever filed. That argument does win on the right facts. In O'Bryant the IRS posted a payment twice and refunded the duplicate. The assessment was correct, so there was nothing for section 6204 to fix. The dividing line is whether the IRS got the tax figure wrong, or only the bookkeeping.
There is a two-year deadline people quote about mistaken refunds, and it is the wrong one here. Section 6532(b) allows a section 7405 suit only if it is begun within two years after the refund is made. That deadline governs lawsuits. The IRS did not bring one, and the route it did use runs on the assessment clock instead.
The firm's account transcript showed $12,582 of late-payment interest as of July 17, 2023. Under section 6601(a) interest keeps building until the balance is paid, compounded daily, at a rate the IRS resets each quarter: 7% for most underpayments this quarter, and higher for large corporate ones under section 6621(c). Whatever the firm believed it was doing with that money, it was borrowing.
This is a reported opinion, so it counts as precedent. It is dated July 8, and the ninety days to appeal to the Ninth Circuit have not run.
All of it was visible from the start, in one place. A business account transcript shows "refunds, federal tax deposits, payments, penalties and interest, balance due with accruals," and there are three ways to get one: a Business Tax Account, a mailed Form 4506-T, or the IRS business and specialty tax line. Check an unexplained deposit against that record before anyone spends it.
A check from the IRS proves that the IRS sent a check. Whether the money is yours is a separate question, and it can be answered years after the money is gone.
Sources: Hough Beck & Baird, Inc. v. Commissioner, 167 T.C. No. 2 (filed July 8, 2026) (Arbeit, J.), Docket No. 19128-24L - https://dawson.ustaxcourt.gov/case-detail/19128-24L · IRC 6204(a) - https://www.law.cornell.edu/uscode/text/26/6204 · IRC 6501(a), (b)(2) - https://www.law.cornell.edu/uscode/text/26/6501 · IRC 6502(a)(1) - https://www.law.cornell.edu/uscode/text/26/6502 · IRC 6532(b) - https://www.law.cornell.edu/uscode/text/26/6532 · IRC 7405 - https://www.law.cornell.edu/uscode/text/26/7405 · IRC 6601(a), 6621(a)(2), 6622 - https://www.law.cornell.edu/uscode/text/26/6601 · IRC 7483 (90 days to appeal a Tax Court decision) - https://www.law.cornell.edu/uscode/text/26/7483 · Rev. Rul. 2026-10, 2026-22 I.R.B. 1515 (Q3 2026 rates) - https://www.irs.gov/irb/2026-22_IRB · IRS, "Get a business tax transcript" - https://www.irs.gov/businesses/get-a-business-tax-transcript