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(a) For purposes of section 683(c)(5) and section 684(j) of the Tax Law, the term erroneous refund means a refund which is issued as a result of an error made by an employee of the Department of Taxation and Finance, including an error made in an audit of a New York State income tax return. However, a refund in the amount requested by a taxpayer on a New York State income tax return, including a refund of such amount issued after verification of such return for a mathematical error by an employee of the department, is not an erroneous refund as defined in this subdivision, up to or in any part of the amount claimed, since such refund is issued relying entirely on the claims made therein by the taxpayer.
(b) Examples of the application of the erroneous refund concept under subdivision (a) of this section include, but are not limited to, the following: Example 1: Taxpayer A claims a New York itemized deduction of $6,900 on A's 1987 New York State personal income tax return. Upon processing, the itemized deduction claimed is entered on the Department's computer as $9,600 and the Department increases the refund requested by A. At a later date, within the statute of limitations under section 683 of the Tax Law, the Department discovers its error and issues a deficiency for the portion of the refund issued in error. Since such portion of the refund previously issued occurred as a result of an error made by an employee of the Department, such portion is an erroneous refund and interest will not be imposed on the deficiency pursuant to section 684(m) of the Tax Law where such deficiency is paid within the time prescribed. Example 2: Taxpayer C files a timely 1987 New York State personal income tax return requesting a refund. C receives a refund in the amount requested. Upon audit, within the statute of limitations under section 683 of the Tax Law, an item claimed on such return is disallowed and a deficiency for additional New York State personal income tax due is issued. Since the Department relied entirely on the claims made by C on the New York State personal income tax return in issuing the refund in the amount requested by C, such refund is not an erroneous refund and interest will be computed on the additional New York State personal income tax due pursuant to section 684(a) of the Tax Law.