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Refund Claims and Section 7508A

Posted on Jan. 19, 2022

Bob Probasco, a regular guest poster, has joined Procedurally Taxing as a contributor. In today’s post, Bob unravels the intersection of the suspension rules of Section 7508A and the refund lookback limits in Section 6511. Les

In normal years, the President may make multiple regional disaster declarations; in 2020, we had a nationwide disaster declaration related to the COVID pandemic.  Our work environments and financial security were affected dramatically, as were IRS operations.  The IRS generally provides taxpayers broad-based relief under section 7508A after such disaster declarations.  That has resulted in more than a few PT blog posts on the complexities of those provisions (see here, here,here, here, and here for just the tip of the iceberg; you can find several more if you go to the top of the blog webpage and type “7508A” or “7508A(d)” into the Search box).  

The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  As Les noted, it really is required reading for those interested in tax administration.  Alas, I’ve fallen behind in my reading, but someone brought one particular legislative recommendation in the 2022 Purple Book to my attention.  The #10 legislative recommendation (starting at page 30) proposes an amendment to avoid problems arising from the interaction between section 7508A and refund claims.

The problem and the proposed fix

As we all remember, there are two different statutes of limitations with respect to refund claims in section 6511.  Section 6511(a) describes how soon a refund claim must be filed – three years after the return was filed.  (If the refund claim is not filed by then, it will still be timely if paid within two years of a payment by the taxpayer.  That option is not relevant to this discussion.)  That deadline is clearly one that the IRS has discretion to suspend.   § 301.7508A-1(c)(1)(iv).  For the pandemic, the IRS exercised that discretion in Notice 2020-23.

But there is the second limitation.  Section 6511(b)(2) limits how much the taxpayer can recover, even from a timely filed refund claim.  When the claim is timely filed within three years after the return was filed section 6511(a), section 6511(b)(2)(A) limits the amount of the recovery:

If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.

 

If you filed your tax return for 2018 (without an extension) late on June 10, 2019, a refund claim will be timely if filed by June 10, 2022.  A refund claim timely filed on June 10, 2022, can only recover amounts paid by June 10, 2019: three years preceding the date the refund claim was filed and without adjustment because there was no extension of time to file.  For many taxpayers, most if not all payments (withholding, estimated taxes, or payment with return or extension request) will have been made on or before April 15, 2019, and are deemed to be paid on that date.  Thus, the taxpayer has very limited if any recovery on that timely filed refund claim.

Ah, but for 2019 tax returns, we had until July 15, 2020, to file returns, as a result of a determination by the Secretary of the Treasury pursuant to section 7508A.  If we filed our return on July 15, 2020, it was timely because of section 7508A.  If we later file a refund claim on July 15, 2023, the refund claim would satisfy the first limitations requirement, in section 6511(a).  Thus, both the return and the refund claim were filed timely.  Oops!  The “lookback” period is “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  And it doesn’t change the fact that most payments were deemed paid on April 15, 2020.  A suspension is not an extension.  So the lookback period only goes back to July 15, 2020, but payments of withholding or estimated taxes were deemed paid on April 15, 2020.  Result – limited or no recovery after a timely-filed return and a timely-filed refund claim.  Of course, that’s probably not what Congress had in mind – maybe Congress didn’t consider it at all – but Chief Counsel Advise 2020-53013 concluded that’s exactly what would happen.  

Thus, the Taxpayer Advocate Service recommended that Congress amend section 6511(b)(2)(A) to increase the lookback period by the period of any postponement of the filing deadline under section 7508A.  The legislative recommendation makes perfect sense and I whole-heartedly agree with it.  Unfortunately, that leaves us dependent on Congress.  Even if the proposed fix is enacted, it may take a while.  In the meantime, taxpayers may be losing legitimate refund claims because they didn’t understand the Service’s interpretation of the rules.  The deadline for refund claims associated with 2019 tax returns is still more than a year away, but some taxpayers received section 7508A relief for their 2018 tax returns and the deadline for refund claims for those returns is only three months away.

Non-legislative fix?

While we wait to see if Congress will enact the NTA proposal, is there anything that the IRS could do in the meantime to solve the problem?  I think perhaps there is, although TAS may have already discussed non-legislative fixes with the IRS and been rebuffed.  And we still want the statutory fix as much more certain.

We’ve mostly focused on declarations under section 7508A as postponing filing and payment deadlines.  The actual language of Section 7508A(a) states that the Secretary “may specify a period of up to 1 year that may be disregarded in determining” three things:

(1) whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed therefor (determined without regard to extension under any other provision of this subtitle for periods after the date (determined by the Secretary) of such disaster or action),

(2) the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and

 

(3) the amount of any credit or refund.

 

The first two are fairly obvious, but how does disregarding a period of time change the determination of the amount of a credit or refund, instead of just whether the refund claim was timely??  The only thing I can think of offhand – other than overpayment interest, for which that period specified by Treasury is explicitly not disregarded – is the lookback limitation for refund claims.

 

The regulations include an example where section 7508A relief was granted to disregard a period including the refund claim deadline.  See § 301.7508A-1(f), Example 5.  A timely refund claim for 2008 would normally have to be filed no later than April 16, 2012.  Due to an earthquake, the IRS determined that deadlines from April 2, 2012, through October 2, 2012, were postponed to October 2, 2012.  That included the section 6511(a) deadline for filing a refund claim.  The example concluded that the lookback provision was effectively changed by section 7508A(a)(3).  The specified period was disregarded for purposes of the lookback provision.

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

It’s notable that the regulation just states that the specified period is disregarded, rather than any distinction between “suspension” or “extension” that the CCA relied on.  Although they were not dealing with the same fact pattern, the regulation and the CCA seem fundamentally at odds.  (There’s no discussion of the regulation in the CCA, so perhaps the author didn’t check it.  That’s easy to understand; email advice by its very nature cannot require the same depth of careful analysis and review.)  Before concluding that we have a regulation that we can rely on, though, there are a few questions to address.

First, does the suspension of the lookback period determined in the regulation depend on it being explicitly stated by the IRS in its determination under section 7508A, or is it an automatic result of the determination of that specified period? The example doesn’t mention an explicit statement in the determination; it only references the regulation language that duplicates the statutory language.  There was no mention of the lookback period in Notice 2020-23, which perhaps suggests that the IRS normally doesn’t make such an explicit statement about the lookback period.  That in turn perhaps suggests that the IRS considers the result as automatic and need not be stated in the determination.  It’s not entirely clear, but before having researched it further I think the better answer is that it’s automatic.

Second, does the result in the regulation only apply if a disregarded period includes the deadline for the refund claim (fact pattern in the regulation) or also if a disregarded period includes the deadline for filing the original return (fact pattern in the CCA)?  The CCA didn’t try to distinguish the regulation, but perhaps it could/would have.  

The rationale for a longer lookback period in the former situation is that, absent the disaster, the taxpayer could have filed the refund claim within three years of timely filing the return and satisfied the lookback rule.  The rationale for a longer lookback period in the latter situation presumably would be different.  A disaster in the year that the return was filed wouldn’t make it more difficult for the taxpayer to file the refund claim three years later.  I think the rationale rests on the disadvantage to taxpayers who are familiar with the basic 3-year statute of limitations for refund claims (often widely publicized by the IRS and tax practitioners each year) but unaware of the lookback rule.

So, there’s some uncertainty.  I would certainly be willing to argue in court for the result proposed by the NTA, even without a fix.  The regulation ties the language of section 7508A(a)(3) to the lookback limitation for refunds.  The “amount of any credit or refund” in the statute is not explicitly limited to a refund claim filed during that disregarded period.  Section 6511(b)(2)(A) is structured so that the taxpayer’s refund is not limited if she files her return timely and files the refund claim timely.  Why should that principle be invalidated because the taxpayer was in a disaster area when the return was filed?    

But I would feel more comfortable with at least a regulatory fix, while we’re waiting for a legislative fix.  The IRS could amend the regulation to provide an example reaching the result described by the NTA, and perhaps state explicitly the effect on the lookback rule in any determinations pursuant to section 7508A.  Perhaps the IRS could reconsider that CCA from 2020.  

In determining the language for the legislative and/or regulatory fix, Congress and/or the IRS will also have to answer a third question.  For the 2019 tax year, for which the return is due in 2020 and a refund claim would have to be filed in 2023, which determinations by the IRS disregarding a period pursuant to section 7508A will have that same effect on the lookback period?  A determination with respect to a disaster in 2023 that includes the deadline for filing a refund claim?  Yes, per the existing regulation.  A determination with respect to a disaster in 2020 that includes the deadline for filing the return?  Yes, per the NTA’s recommendation.  What about disasters in 2021 and 2022?  Draft carefully if you want to exclude those.

 

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