An Unexpected $121,000 Refund Landed in a Landscaping Firm's Bank Account. Two Years Later, the IRS Wanted It Back.
In 2021, a Seattle landscape architecture firm did everything right. It filed its Form 941, Employer's Quarterly Federal Tax Return, on time. It paid its $121,003 in employment taxes across three deposits, on schedule, without claiming any credit. By any normal reading of the rules, the matter was closed.
Then the IRS's own system decided otherwise. It assessed the firm's liability as zero — as if the company were entitled to a credit it never claimed — and mailed back a refund of $121,003, plus $89 in interest. When the firm's accountant called to ask what was going on, an IRS representative told him the money was tied to "COVID Employee Retention Credits."
It wasn't. Two years later, in May 2023, the IRS sent a letter saying the firm might have received a refund it wasn't entitled to. The company didn't respond. The IRS reversed the credit, re-assessed the full $121,003 (plus a $12,582 late-payment interest charge), and eventually moved to collect by levy. The company fought back in Tax Court, arguing the IRS had missed its chance — and lost.
The case, Hough Beck & Baird, Inc. v. Commissioner, 167 T.C. No. 2 (July 8, 2026), is a clean, first-of-its-kind ruling on a question that has been quietly hanging over thousands of small businesses since the Employee Retention Credit era: when the IRS sends you a refund by mistake, exactly how much time — and how much legal firepower — does it need to take it back?
What Actually Happened
The mechanics matter, because they're the whole case.
The mistaken assessment. On June 21, 2021, the IRS assessed Hough Beck & Baird's first-quarter 2021 employment tax liability as $0, treating the firm as though it had claimed a credit it never claimed on its return. Because the firm had already made $121,003 in deposits against a liability the IRS now said was zero, the IRS's system read that as an overpayment — and refunded it.
The two-year gap. Nothing happened for two years. The firm kept the money. Then in May 2023, the IRS sent Letter 6552, flagging that the refund might have been issued in error and proposing to adjust the liability back to what the firm had actually reported. The firm didn't respond and didn't pay.
The supplemental assessment. In July 2023, the IRS reversed the credit and made what the tax code calls a "supplemental assessment" under Internal Revenue Code § 6204(a) — essentially, a do-over of the original assessment, correcting it to reflect the $121,003 the firm actually owed, plus accrued interest.
The levy fight. When the firm still didn't pay, the IRS issued a Final Notice of Intent to Levy. The firm requested a Collection Due Process hearing, lost at the IRS Independent Office of Appeals, and took the case to Tax Court — where its central argument was a clever one: the original assessment was correct (zero was what the IRS's records said at the time), so the only way to recover money already paid out is a formal lawsuit for "erroneous refund" under § 7405, which the IRS never filed.
The Legal Question: Two Very Different Roads Back to the Same Money
The IRS has more than one tool for recovering money it never should have sent you, and they work on completely different timelines.
Section 7405 — sue to get it back. If the IRS wants to treat the refund as valid-but-mistaken and sue to recover it, it has to file an actual civil lawsuit. Under § 6532(b), that suit must be filed within two years of the refund (five years if fraud or misrepresentation was involved). Miss that window, and the money is gone for good — no do-overs.
Section 6204 — fix the assessment and reassess. If instead the IRS treats the original assessment itself as defective — "imperfect or incomplete in any material respect," in the statute's words — it can issue a "supplemental assessment" that corrects the error, subject to the normal three-year assessment statute of limitations under § 6501(a). Once that corrected assessment is on the books, the IRS gets a full ten years to collect it by levy under § 6502(a)(1).
Ten years versus two. That's not a small difference, and it's exactly why Hough Beck & Baird fought so hard to characterize its situation as a "clean" erroneous refund rather than a "defective assessment." If the firm was right, the IRS's two-year window under § 7405 had already closed by the time Letter 6552 went out, and the whole collection effort should have been dead on arrival.
The Tax Court didn't buy it. Following the Ninth, Second, and Seventh Circuits — including Brookhurst, Inc. v. United States, 931 F.2d 554 (9th Cir. 1991), a case the court called "almost directly on point" — Judge Arbeit held that when the IRS's own calculation error understates a taxpayer's liability by a material amount, the original assessment itself is "imperfect," full stop. It doesn't matter that the assessment was internally consistent with the (wrong) numbers the IRS entered; what matters is that it materially misstated what the taxpayer actually owed. That opened the door to the far more generous ten-year supplemental-assessment track.
The court did draw one important line, distinguishing O'Bryant v. United States, 49 F.3d 340 (7th Cir. 1995) — a case where the IRS simply double-posted a payment the taxpayer had already made in full. There, the original assessment was correct; the taxpayer just got paid twice by accident, which the Seventh Circuit treated as a fundamentally different kind of money than a miscalculated tax debt. Hough Beck & Baird's situation, by contrast, involved an assessment that was wrong on its face — zero, when the firm had reported and paid $121,003 — which is what triggered § 6204 instead.
Why This Should Worry Any Business That Touched ERC-Adjacent Paperwork
The IRS employee who told the firm's accountant the refund was related to "COVID Employee Retention Credits" wasn't just guessing at an explanation — that confusion is the whole backstory here. Millions of Form 941s and 941-Xs moved through IRS systems during 2020–2023 carrying ERC claims, credit reconciliations, and manual corrections, often under intense processing backlogs. A mismatched credit code, a misapplied adjustment, or a processing error on the IRS's end can produce exactly the kind of scenario in this case: a refund that looks legitimate, arrives with no obvious red flag, and gets spent or absorbed into normal cash flow — only to resurface as a demand letter one, two, or nearly three years later.
The practical lesson from Hough Beck & Baird isn't "don't cash IRS refund checks." It's this:
- An unexpected refund is not free money until you've confirmed why you got it. If a refund doesn't match a credit you actually claimed on a filed return, get it in writing from the IRS before you rely on it — a phone rep's verbal explanation, as this case shows, can be flatly wrong.
- The clock on IRS clawbacks is longer than most people assume. Two years feels safe. It isn't. If the IRS can characterize the original assessment as defective rather than treating the refund as a standalone erroneous payment, it effectively gets a ten-year runway, not two.
- Silence doesn't help you. The firm didn't respond to Letter 6552 or pay the proposed balance. Nothing in the opinion suggests a response would have changed the outcome, but it also didn't buy any protection — the supplemental assessment happened on its own timeline regardless.
- Reserve for it. If your business received a payroll tax refund during the ERC years that you can't tie to a specific, documented credit claim, don't assume it's settled just because the calendar has moved on.
The Bookkeeping Habit That Would Have Made This a Non-Event
Notice what's conspicuously absent from the opinion: any dispute about the underlying numbers. The parties agreed, without argument, that the firm had correctly reported and paid $121,003 in employment tax for that quarter. The entire two-year, multi-hearing, Tax-Court-litigated fight was about legal mechanism — which statute governs the IRS's recovery route — not about what actually happened financially.
That's only possible because the firm's own books were clean and unambiguous. If your payroll tax deposits, credits claimed, and refunds received are all recorded as plain, auditable transactions rather than reconstructed after the fact from bank statements, a letter like IRS Letter 6552 becomes a five-minute lookup instead of a scramble. You pull up exactly what you reported, exactly what you paid, and exactly what came back — and you know immediately whether a "refund you might not be entitled to" notice is a mistake on your end or a mistake on theirs.
Beancount.io provides plain-text accounting that keeps this kind of history transparent and permanent — every payroll tax deposit, every credit, every refund is a version-controlled entry you can trace years later, not a PDF buried in an old email. Get started for free and see why developers and finance-minded business owners are switching to plain-text accounting.