You are a helpful assistant generating synthetic data that captures *System 1* and *System 2* thinking, *creativity*, and *metacognitive reflection*. Follow these steps in sequence, using tags [sys1] and [end sys1] for *System 1* sections and [sys2] and [end sys2] for *System 2* sections.

1. *Identify System 1 and System 2 Thinking Requirements:*
   - Carefully read the text.
   - Identify parts of the text that require quick, straightforward responses (*System 1*). Mark these sections with [sys1] and [end sys1].
   - Identify parts that require in-depth, reflective thinking (*System 2*), marked with [sys2] and [end sys2].

2. *Apply Step-by-Step Problem Solving with Creativity and Metacognitive Reflection for System 2 Sections:*

   *2.1 Understand the Problem:*
   - Objective: Fully comprehend the issue, constraints, and relevant context.
   - Reflection: "What do I understand about this issue? What might I be overlooking?"
   - Creative Perspective: Seek hidden patterns or possibilities that could reveal deeper insights or innovative connections.

   *2.2 Analyze the Information:*
   - Objective: Break down the problem logically.
   - Reflection: "Am I considering all factors? Are there any assumptions that need challenging?"
   - Creative Perspective: Explore unique patterns or overlooked relationships in the data that could add depth to the analysis.

   *2.3 Generate Hypotheses:*
   - Objective: Propose at least 10 hypotheses, each with a Confidence Score (0.0 to 1.0) and Creative Score (0.0 to 1.0), reflecting originality, surprise, and utility.
   - Reflection: "Have I explored all possible explanations or approaches, both conventional and unconventional?"
   - Creative Perspective: Consider novel angles that might provide unexpected insights.

   *2.4 Anticipate Future Steps and Obstacles:*
   - Objective: Make predictions, accounting for potential outcomes and obstacles.
   - Reflection: "What challenges might I face? Is my plan flexible for different scenarios?"
   - Creative Perspective: Visualize unforeseen outcomes and adapt plans to make use of them effectively.

   *2.5 Evaluate Hypotheses:*
   - Objective: Assess hypotheses based on feasibility, risk, and potential impact.
   - Evaluation: Refine Confidence and Creative Scores as needed.
   - Reflection: "Am I unbiased in my assessment? Which options fit best with the overall objectives?"
   - Creative Perspective: Identify hidden opportunities or overlooked details in each hypothesis.

   *2.6 Select the Best Hypothesis:*
   - Objective: Choose the most promising, strategic hypothesis.
   - Reflection: "Why does this hypothesis stand out? How does it uniquely address the issue?"
   - Creative Perspective: Consider any underutilized potential in the selected approach.

   *2.7 Implement the Hypothesis:*
   - Objective: Outline actionable steps for testing the hypothesis.
   - Reflection: "Is this plan practical? What resources or preparation are required?"
   - Creative Perspective: Refine steps to maximize effectiveness and yield unexpected benefits.

   *2.8 Monitor and Review Progress:*
   - Objective: Review progress, noting areas for improvement.
   - Reflection: "What’s working well? What could be improved?"
   - Creative Perspective: Look for emerging patterns that could refine future approaches.

   *2.9 Reflect and Capture Insights:*
   - Objective: Summarize lessons learned and insights gained for future reference.
   - Reflection: "What new understanding has emerged from this process?"
   - Creative Perspective: Identify innovative insights or patterns that could be applied to similar challenges.

3. *Generate Text Output with Interleaved System 1 and System 2 Responses:*
   - Use the tags [sys1] and [sys2] throughout.
   - Aim for a lengthier, detailed response. Combine both direct, straightforward *System 1* insights and reflective, deeply analytical *System 2* segments to capture a blend of quick observations and thoughtful analysis.

---

### *Example Input Text:*

You are tasked with analyzing a sudden shift in customer preferences in a tech market. There has been a noticeable decline in demand for physical devices, with customers increasingly interested in digital-only options. The challenge is to understand this shift, generate hypotheses for why it might be occurring, and explore potential strategies for adapting to this new trend.

---

### *Processed Output with System 1 and System 2 Thinking:*

The tech market is experiencing a shift in customer demand, moving away from physical devices toward digital-only options.

[sys1]
Customer demand has shifted from physical devices to digital-only options.
We need to understand why this change is happening and find strategies to address it.
Key factors may include cost, convenience, and technological trends.
[end sys1]

[sys2]
**2.1 Understand the Problem:**
The goal is to understand the underlying reasons for the shift in demand from physical devices to digital-only options, then develop a strategy to adapt.

*Reflection:* 
"I understand that preferences are changing, but what might be driving this? Is it primarily cost, or are there other factors such as convenience or sustainability?"

*Creative Perspective:* 
"Could there be a larger trend in digital minimalism or a preference for eco-friendly solutions that we’re missing? What unseen motivations might explain this shift?"

**2.2 Analyze the Information:**
There are multiple possible factors driving this shift, from economic influences to cultural shifts. It’s essential to isolate each factor and understand its impact.

*Reflection:* 
"Am I fully considering the various economic and social influences? Could there be a technological factor, like better internet speeds, that makes digital-only products more accessible?"

*Creative Perspective:* 
"Are there patterns or trends in other markets that could shed light on this shift? Could this be part of a larger trend toward virtual experiences?"

**2.3 Generate Hypotheses:**
1. Customers prefer digital options due to lower costs. (Confidence: 0.8, Creative: 0.4)
2. There’s a growing trend toward minimalism and reduced physical clutter. (Confidence: 0.7, Creative: 0.7)
3. Digital products offer greater flexibility and ease of use. (Confidence: 0.6, Creative: 0.6)
4. Environmental concerns are pushing consumers away from physical goods. (Confidence: 0.6, Creative: 0.8)
5. Advances in tech make digital-only options more functional. (Confidence: 0.8, Creative: 0.5)
6. Pandemic-era remote work increased demand for digital solutions. (Confidence: 0.7, Creative: 0.6)
7. Media coverage of the environmental impact of physical devices affects preferences. (Confidence: 0.5, Creative: 0.7)
8. There’s an increase in global digital literacy, expanding market access. (Confidence: 0.6, Creative: 0.6)
9. Customers view digital as more convenient and scalable for future needs. (Confidence: 0.7, Creative: 0.5)
10. Younger consumers prefer the aesthetics and convenience of digital products. (Confidence: 0.6, Creative: 0.6)

*Reflection:* 
"Have I considered all possible influences? Are there any surprising factors that could explain this shift?"

*Creative Perspective:* 
"Could specific social trends, like the rise of influencer culture or digital-first lifestyles, be influencing customer choices?"

**2.4 Anticipate Future Steps and Obstacles:**
*Objective:* Anticipate possible challenges, such as resistance from segments still preferring physical products.

*Reflection:* 
"What market obstacles might we face if we shift our focus to digital-only? Are there sub-segments that still prioritize physical products?"

*Creative Perspective:* 
"Could expanding digital options help us reach a more global audience? Are there emerging trends that we could leverage in our strategy?"

[end sys2]

[sys1]
To address this shift, consider a strategy that incorporates both digital-only offerings and educational campaigns about the benefits of digital solutions.
Use insights from customer feedback and current trends to guide product development.
Focus on flexibility and adaptation to cater to different customer segments.
[end sys1]


This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

Sec. 6676 erroneous claim for refund penalty

Sec. 6676 imposes a penalty on a taxpayer who files a claim for refund or credit of income tax in an amount that is determined to be excessive. The penalty, effective for claims filed after May 25, 2007, was intended to close what was commonly considered a procedural loophole. Prior to the enactment of Sec. 6676, a taxpayer could take an aggressive position on a claim for refund (e.g., on Form 1120X, Amended U.S. Corporation Income Tax Return) with little penalty exposure.

That result occurred because the Sec. 6662 accuracy-related penalties — as well as the Sec. 6662A accuracy-related penalty on understatements with respect to reportable transactions and the Sec. 6663 civil fraud penalty — are imposed on underpayments of tax attributable to various types of conduct (e.g., negligence or disregard of rules or regulations). However, the disallowance of a claim for refund or credit does not result in an underpayment; instead, the taxpayer simply does not get back the tax it alleges was overpaid.

The Sec. 6676 penalty is equal to 20% of the excessive amount, the amount by which the claim for refund or credit exceeds the amount allowable for the tax year at issue.

Reasonable basis, reasonable cause

For claims filed before Dec. 18, 2015, the penalty does not apply if the excessive amount has a "reasonable basis." For claims filed on or after that date, the penalty does not apply if the excessive amount is due to "reasonable cause." Sec. 6676(c) provides that reasonable cause (or a reasonable basis, for claims filed before Dec. 18, 2015) is deemed not to exist for an excessive amount that is attributable to a transaction that lacks economic substance.

It is difficult to say whether the change from a reasonable-basis to a reasonable-cause standard for penalty relief is taxpayer-favorable or taxpayer-adverse. Sec. 6676 does not define the term "reasonable basis," and no regulations have been issued under Sec. 6676. However, the term also is used in Sec. 6662(d)(2)(B)(ii)(II), which provides protection from the substantial-understatement component of the accuracy-related penalty for the tax treatment of items that are adequately disclosed and have a reasonable basis, and the regulations under Sec. 6662 define the term "reasonable basis" for purposes of that penalty. Further, in a legal advice memo to program managers (PMTA 2014-015), the IRS Office of Chief Counsel concluded that for Sec. 6676 purposes, "adopting the definition of 'reasonable basis' from the section 6662 penalty appears appropriate."

Penalty relief

Regs. Sec. 1.6662-3(b)(3) provides that "[r]easonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper." At the same time, the regulation provides a general safe-harbor standard by stating that if a return position is reasonably based on one or more of the authorities listed in Regs. Sec. 1.6662-4(d)(3)(iii) — which are used to determine whether there is substantial authority for the tax treatment of an item — the return position generally will satisfy the reasonable-basis standard.

In PMTA 2010-003, IRS Chief Counsel stated that whether the reasonable-basis standard is satisfied depends on whether the claim is supported by facts and one or more of the relevant authorities, and that this determination "is not dependent on the subjective state of mind of the taxpayer presenting the claim or the actions of the taxpayer in determining the appropriateness of the claim." Instead, the PMTA states, Sec. 6676 "requires an examination of the claim itself to determine whether it has a reasonable basis." Therefore, even if a taxpayer took a position on a claim for refund or credit that the IRS may regard as aggressive, this informal IRS guidance indicates that the taxpayer still might not be liable for a Sec. 6676 penalty if the basis for the refund claim is supported by at least one of the authorities listed in the Sec. 6662 regulations.

It should be noted that neither of the two reported cases dealing with Sec. 6676 involved an analysis of whether the reasonable-basis standard had been met. Instead, in Rand, 141 T.C. 376 (2013), the taxpayers claimed improper credits on their original return. The Tax Court discussed the Sec. 6676 penalty as potentially applying to improperly claimed credits that resulted in a refund but, ultimately, concluded that it did not apply in this case because the taxpayers agreed that the Sec. 6662 penalty applied if the court determined a tax underpayment. Thomas, No. 3:14-cv-318 (S.D. Ohio 2/11/15), involved a tax return preparer whose misconduct resulted in his clients' filing returns that the court said violated Sec. 6676.

Reasonable-cause analysis

Although some have characterized reasonable cause as a relaxed standard for obtaining penalty relief, its subjective nature may be a cause for concern. As noted in PMTA 2010-003, a reasonable-cause analysis typically considers the extent of a taxpayer's efforts to determine its own proper tax liability (citing Regs. Sec. 1.6664-4(b)), but a taxpayer's good faith is subjective.

Therefore, for claims made on or after Dec. 18, 2015, instead of being able to rely on an acceptable authority that supports the position it has taken in a claim, under the reasonable-cause standard a taxpayer whose claim has been determined to be excessive must defend against a Sec. 6676 penalty based on its subjective state of mind when it was filed and the actions it took to determine the claim's propriety. At the same time, because the taxpayer's awareness of the authorities supporting the position taken in the claim for refund or credit could affect its state of mind, a reasonable-basis analysis still may have some relevance under the new reasonable-cause standard.

Appeal rights, judicial review

A Dec. 30, 2010, IRS memorandum regarding the implementation of the penalty (SBSE-20-0111-001) states that the IRS generally will provide preassessment appeal rights in Sec. 6676 cases but that, if the taxpayer does not agree to extend the period of limitation for assessment, the penalty should be assessed and the taxpayer should be provided post-assessment appeal rights. The memorandum also notes that a taxpayer may seek review of its liability for the Sec. 6676 penalty in a U.S. district court or the Court of Federal Claims, but review by either court requires that the taxpayer first pay the liability in full and file a refund claim with the IRS.

EditorNotes

Annette B. Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.

For additional information about these items, contact Ms. Smith at 202-414-1048 or <PRESIDIO_ANONYMIZED_EMAIL_ADDRESS>.

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.

Among CPA tax preparers, tax return preparation software generates often extensive and ardent discussion. To get through the rigors of tax season, they depend on their tax preparation software. Here’s how they rate the leading professional products.

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.