Hale was serving time in an Alabama prison for perjury and securities fraud. He and a friend on the outside immediately started spending the money and hiding the rest.

When the IRS descended, it charged them with theft. The couple said they didn't steal it because the IRS gave it to Hale. The court disagreed. This was embezzlement. They received something lawfully, but unlawfully spent it.

Every year the IRS issues thousands of erroneous refunds. Errors happen. Eventually and inevitably the agency demands repayment. And the taxpayer better be ready to pay.

By the time the IRS caught up with Floridian Brenda Reagan, she had spent the refund and more. She was broke. The agency had misapplied another taxpayer's payment. The court said being penniless is no excuse, so Reagan wasn't let off the hook.

The IRS had the authority to use its sometimes harsh and uncompassionate collection tactics to confiscate -- without judicial restraint -- her future assets and earnings.

After it acknowledges its mistake, the IRS sometimes becomes impatient and punitive toward the taxpayer. One company tried to return a refund and was rebuffed -- for a while. Brookhurst Inc. had sent $194,875, the amount due on its enclosed return. An agent erroneously recomputed the tax at $972, and the IRS refunded the difference. The company wrote saying it wanted to return the money.

For two years, the agency did nothing. Finally, the IRS decided it expected the money, plus interest. When the company wouldn't cough it up, the agency added a penalty and attached liens to company property.

In court, the judge reversed the penalty. But, he said, the company had to pay interest because it had use of the money during the two years the IRS did nothing.

The courts almost consistently require taxpayers to pay interest. This seems grossly unfair when the IRS causes the error.

But sometimes the IRS is too slow correcting its mistakes. The IRS erroneously posted a check from Grenville Clark III to an earlier year creating an overpayment, then later refunded the overpayment. Because its records showed no payment for the later year, it seized his car and bank account.

Clark went to court. The court said the IRS blew it. He had paid his taxes for both years. As to the later year, the IRS must return the value of the seized assets. As to the earlier year, he could keep the erroneous refund because the agency was too late. The time for assessing the tax for the earlier year had expired. The court acknowledged that Clark received a windfall, but he should not be penalized for the IRS' tardiness. Hooray!

THE PLANNING TIP: If you receive an erroneous refund, the IRS advises you return it immediately. But that raises a question. Suppose the agency loses the returned check or fails to give your account credit for returning it. It made one mistake. It could make another. You might be wise to create a paper trail. Deposit the refund in your bank account and send them your check with a full explanation. (More at Dealing With IRS)

Released 11-13-95