4th Cir.: LaRosa v. IRS — Innocent Spouse Relief May Extend to Erroneous Refund Interest Claims

Summary:

In LaRosa v. Commissioner of Internal Revenue, the Fourth Circuit held that interest obligations arising from an erroneous IRS refund can constitute “unpaid tax” eligible for equitable innocent spouse relief under 26 U.S.C. § 6015(f).

After decades of disputes with the IRS over underpayment and overpayment interest calculations, the LaRosas received a substantial refund from the IRS in 1994. The IRS later reversed itself, claimed the refund was erroneous, and successfully sued to recover the funds. When the government later attempted to foreclose on the family home, Catherine LaRosa sought innocent spouse relief under § 6015(f). The IRS refused even to process her request, arguing that liabilities arising from erroneous refunds could never qualify as “unpaid tax.”

The Fourth Circuit rejected that argument. Relying heavily on 26 U.S.C. § 6601(e)(1), the Court explained that underpayment interest is statutorily treated as a tax obligation and therefore may qualify for equitable relief under § 6015(f). The Court vacated the Tax Court’s decision and remanded for further proceedings.

Commentary:

LaRosa may prove surprisingly important for taxpayers in bankruptcy cases. Consumer bankruptcy practitioners routinely encounter IRS claims that have evolved through decades of amended assessments, offsets, interest recalculations, erroneous refunds, and aggressive collection activity. The Fourth Circuit’s opinion pushes back against the IRS attempting to characterize obligations in ways that avoid statutory taxpayer protections.

Particularly useful is the Court’s recognition that tax liabilities arise from the Internal Revenue Code itself—not merely from IRS “bookkeeping notation[s]” or administrative labels. That reasoning may help debtors challenge IRS attempts to reframe liabilities in bankruptcy objections, discharge litigation, or innocent spouse disputes.

For married debtors in bankruptcy, innocent spouse relief can be a critical tool, especially where one spouse had limited involvement in tax preparation or financial decision-making. LaRosa broadens the possibility that even complicated interest-based liabilities tied to erroneous refunds may still fall within the scope of equitable relief.

The decision also reflects the post-Loper Bright Enterprises v. Raimondo environment, where courts are increasingly less willing to defer automatically to agency interpretations lacking clear statutory support. The Fourth Circuit emphasized that “no amount of policy-talk can overcome plain statutory text.”

For bankruptcy debtors facing old IRS liabilities that appear inscrutable or untouchable, LaRosa is another reminder that tax claims are often far more legally vulnerable—and negotiable—than the government prefers to admit.