(a) For purposes of paragraph (5) of subsection (c) of section 1083 and subsection (m) of section 1084 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 the return. However, a refund in the amount requested by the taxpayer on the return, including a refund of such amount issued after verification of such return for 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:

Taxpayer A claims a New York investment tax credit of $4,500 on A's 1986 New York State corporation tax return. Upon processing, the investment tax credit claimed is entered on the department's computer as $5,400 and the department increases the refund requested by A. At a later date, within the statute of limitations pursuant to section 1083 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 subsection (m) of section 1084 of the Tax Law.

Taxpayer C files a timely 1986 New York corporation tax return requesting a refund. C receives a refund in the amount requested. Upon audit, within the statute of limitations pursuant to section 1083 of the Tax Law, an item claimed on such return is disallowed and a deficiency for the tax due is issued. Since the department relied entirely on the claims made by C on the 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 tax due pursuant to subsection (a) of section 1084 of the Tax Law.