Granted, the taxpayers were technically in the wrong under the law - a "rebate refund" can be reclaimed by the IRS through examination procedures. Also, "easy come, easy go" should prevail here.
But the real losers here are the American taxpayers. Someone in the IRS decided it would be worthwhile to take this thing all the way, over a few measly dollars, and issue a notice of deficiency, giving appeal rights - a ticket to the Tax Court - to these taxpayers. Hours of some IRS auditor's time dealing with these taxpayers, hours of time spent by paralegals, secretaries, and attorneys at the IRS Office of Chief Counsel to prepare and try the case, and hours spent by the judge, his/her staff, and the judicial clerk to arrive at this opinion. (And don't forget the cost of gas to Tax Court for the IRS Attorney, mailing costs for pleadings, and the cost of flying the judge to Texas and setting him/her up in a hotel to try the case.) Chances this cost the government and, by extension, the American people, far more than its worth are pretty high. The full opinion can be found here.
Posted by our Newport Coast Tax Attorney at wilsontaxlaw.com.