Magento – Initiate paypal refund online in magento

We ended up coding a module to rewrite the core IPN Model which suppresses the automatic creation of Credit Memos when a Paypal Refund is issued. Instead, it adds an Order Comment with the Paypal Transaction ID (for reconciliation) and raises an Admin Notification that the administrator should manually create an Offline Credit Memo to correlate with the monies refunded at Paypal. This allows the administrator to mark the appropriate Order Items as Refunded, apply alterations to the amount (Adjustment Fees, etc). This is now working happily in production and can be reviewed in our Github repo.

PayPal Direct and PayPal Express Checkout has this feature, as you can see in the payment models:

protected $_canRefund                   = true;
protected $_canRefundInvoicePartial     = true;

Whereas PayPal Standard doesn't have these settings.

You should be able to use the online refund from the invoice view in the backend.