When you ask the IRS for money back, whether on an amended return or another type of claim, the IRS can penalize the part of the claim that you were not entitled to. The erroneous claim for refund or credit penalty is meant to discourage inflated claims. This page explains how it works, how it differs from other accuracy penalties, and what to do if the IRS proposes it.
What triggers the penalty
The trigger is a claim for refund or credit that turns out to be too large. Common ways this happens include:
- an amended individual return on Form 1040-X that claims credits or deductions the taxpayer cannot support
- a business claim for refund of employment tax, such as an adjustment on Form 941-X
- a refund claim based on a position that does not hold up under the law
The IRS says the penalty provision was amended by the 2025 legislation that its pages call the Working Families Tax Cuts Act, a law also widely known as the One Big Beautiful Bill Act. The IRS says the penalty will also apply to erroneous claims for refund or credit of employment taxes filed after July 4, 2025. If you file or are planning to file a payroll tax claim, treat that as a reason to keep documentation in the file at the time you submit it. Our payroll guide to Form 941 explains the basics of correcting those returns.
How the penalty is calculated
The IRS defines the excessive amount as the amount of the claim that exceeds the amount allowable for the tax year. The penalty is 20% of that excess.
Example (hypothetical). You file an amended return claiming a $10,000 refund. The IRS reviews the supporting documents and allows only $4,000. The excessive amount is $6,000. The penalty is 20% of $6,000, or $1,200. You would receive the allowed $4,000 (less anything you already owe), you would owe the $1,200 penalty, and interest may apply to the penalty.
A claim that is disallowed in full is penalized on the full amount of the excess. A refund the IRS has not yet paid can still produce the penalty. The IRS says a refund held during an audit can be penalized if there is no reasonable cause.
How it differs from the accuracy-related penalty
The accuracy-related penalty applies when a return underreports tax. This penalty applies to a claim for money back. The two are not meant to overlap: this penalty does not apply to any portion of a disallowed claim that is subject to an accuracy-related penalty or the civil fraud penalty. If your amended return both underreports tax and claims too much refund, the IRS applies only one of the penalties to any given dollars. Our pages on the accuracy-related penalty and civil fraud penalty explain those.
How long it runs
The penalty is a one-time charge on the excessive amount, not a monthly one. Interest on the penalty continues until it is paid. The IRS interest rules are on our IRS interest page.
How to avoid it
- Gather the documents before filing the claim, not after. Keep copies of what you filed.
- Do not claim credits or deductions only because a promoter, social media post or preparer said you qualify. Ask what rule supports it and which records prove it.
- For payroll claims, reconcile the claim to your payroll records for each quarter.
- If you realize a claim is too high after you file, ask a professional about correcting it. Timing matters, and the options are different if the IRS has already contacted you.
- Choose a preparer carefully. The IRS can penalize preparers too, but you remain responsible for what you sign.
See our guide to amended returns for when a claim is the right tool.
Disputing the penalty
Read the notice or letter and follow its instructions and deadlines. If you did not receive a notice, call IRS telephone assistance. Prepare a signed explanation of why the penalty should be removed, along with supporting documents.
The reasonable cause question is central here, because the statute turns on it. The IRS considers your effort to be accurate, the complexity of the issue and the advice you received. The IRS decides on all the facts. See reasonable cause penalty relief.
If the IRS denies your request, the denial letter should explain your appeal rights. The IRS website says to use Form 843, Claim for Refund and Request for Abatement, for a written request when a phone request cannot be approved. See how to request penalty abatement.
How we can help
We can review a claim before you file it, check that each credit or deduction is supported by records, and tell you when the facts are too thin to rely on. If the IRS has proposed the penalty, we prepare the response and reasonable-cause statement. We do not promise a result, because the IRS evaluates every claim on its own facts.
Learn about our business tax preparation and payroll services, or contact us.
Frequently asked questions
Does the penalty apply if the IRS only partly denies my refund?
Yes, the penalty applies to the part that exceeds the allowable amount, unless reasonable cause applies.
Can I be penalized if I have not been paid the refund yet?
Yes. The IRS says a refund held during an audit can still be penalized if there is no reasonable cause.
Is this penalty the same as the 20% accuracy-related penalty?
It has the same rate but a different trigger. This one applies to refund or credit claims and does not stack on dollars already subject to an accuracy or fraud penalty.
Can first-time abatement remove it?
First-time abatement covers failure-to-file, failure-to-pay and failure-to-deposit penalties. For this penalty, the main route is reasonable cause and the facts of the claim.
Official sources
- IRS: Erroneous claim for refund or credit
- IRS: Penalty relief for reasonable cause
- IRS: Internal Revenue Manual 20.1.5, Return related penalties
- IRS: About Form 843
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.