Lookback period fix should apply to all disaster relief

Editor: Howard Wagner, CPA

Taxpayers generally have three years from the date they file their return or two years from the date tax is paid, whichever is later, to file a claim for refund. However, filing a timely claim for refund is not the end of the story. The amount that can be refunded is limited to the tax paid during the applicable lookback period. Based on IRS informal email advice, a postponement of the filing deadline under Sec. 7508A for a federally declared disaster does not lengthen the lookback period. Under this interpretation, a taxpayer who is already suffering from a disaster may face a limitation on an allowable refund. Notably, however, this informal advice is contrary to an example in the current regulations.

In February 2023, the IRS clarified the issue for some, but not all, taxpayers eligible for disaster deadline postponement by issuing Notice 2023-21. The notice provides lookback period relief to taxpayers who were eligible to take advantage of postponed filing deadlines for 2020 and 2021 under Sec. 7508A due to COVID-19.

This item looks more closely at the IRS’s inconsistent guidance on application of the lookback period in Sec. 6511(b)(2)(A) in the case of postponed filing deadlines under Sec. 7508A and recommends steps that could be taken to provide much-needed clarification on this lookback issue.

Period of limitation for refunds under Sec. 6511

Generally, under Sec. 6511(a), a claim for refund or credit must be filed by the later of either three years from the date a return was filed or two years from when the tax was paid. In the case of a timely refund claim filed within three years of the date the return is filed, Sec. 6511(b)(2)(A) limits the amount allowable as a refund to the amount of tax paid within three years of the date the claim is filed, plus the period of any extension of time to file the return.

Under ordinary conditions, the three-year lookback period under Sec. 6511(b)(2)(A) is aligned with the three-year period to claim a refund or credit under Sec. 6511(a). However, under certain conditions, including situations where returns are filed late, a mismatch can occur between the Sec. 6511(a) period to file a timely refund claim and the Sec. 6511(b)(2)(A) lookback period.

The primary reason for this mismatch is the date upon which certain payments made prior to the filing deadline are deemed to be paid. Generally, under Sec. 6513, amounts paid as estimated tax and income tax withheld on wages are deemed to have been paid on April 15 of the year following the tax year to which the prepaid amounts relate.

For example, an individual taxpayer filing her 2020 Form 1040, U.S. Individual Income Tax Return, on April 15, 2021, will have until April 15, 2024, to file a claim for refund for her 2020 tax year under Sec. 6511(a). If she files a claim for refund for the 2020 tax year during this three-year period, the amount of refund she can claim under the Sec. 6511(b)(2)(A) lookback period is limited to the amount of tax paid in the three years prior to her refund claim. As such, the amount allowed by the lookback period with respect to a timely refund claim filed by this taxpayer on or before April 15, 2024, will include estimated tax and withheld tax deemed to have been paid on April 15, 2021.

A similar result occurs if the individual timely files her 2020 Form 1040 on extension on Oct. 15, 2021. In that case, a timely refund claim must be filed by Oct. 15, 2024, pursuant to Sec. 6511(a). Under the lookback period in Sec. 6511(b)(2)(A), the allowable refund is limited to the amount of tax paid in the three years prior to the date she filed her refund claim plus the period of the extension of time to file her Form 1040. As such, the amount allowed by the lookback period with respect to a timely refund claim on or before Oct. 15, 2024, will include payments made three years prior to the date of the refund claim plus the extension period, which includes estimated tax and withheld tax deemed to have been paid on April 15, 2021.

However, if this same taxpayer filed her original return late on Aug. 15, 2021, without having filed a timely request for an extension of time to file her return, the deemed payment date under Sec. 6513 could cause a mismatch between the period for filing a timely refund claim for the 2020 tax year and the allowable refund amount under the lookback period. For example, if this taxpayer filed a timely refund claim on Aug. 15, 2024, her refund would be limited to amounts paid within the three years prior to the date of her claim. Estimated tax and withheld wages are deemed to have been paid on the original April 15, 2021, due date of her return, which would be outside the Sec. 6511(b)(2)(A) three-year lookback period and, therefore, could not be refunded.

Lookback period and disaster relief

Sec. 7508A provides discretion to Treasury to postpone certain tax-related deadlines for up to one year due to a federally declared disaster, a significant fire, or a terroristic or military action. As explained in Regs. Sec. 301.7508A-1(b) (4), this period of postponement does not extend the due date for the act postponed but merely allows the IRS to disregard a period of up to one year for the performance of the act. The regulation further provides that if a statute relies on the due date of a return, the postponement period does not change the due date of the return.

Nonetheless, Regs. Sec. 301.7508A-1(f), Example (5), illustrates that a postponement under Sec. 7508A for a federally declared disaster does lengthen the taxpayer’s lookback period on a refund claim:

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 [the Sec. 7508A postponement period in the example], is disregarded under paragraph (b)(1) (iii) of this section. Thus, if the claim is filed on or before October 2, 2012, amounts deemed paid on April 15, 2009, under section 6513(b), such as estimated tax and tax withheld from wages, will have been paid within the lookback period of section 6511(b) (2)(A).

This is a longstanding regulatory position. Final regulations under Sec. 7508A published on Dec. 15, 2000, were the first to include Example (5). See 65 Fed. Reg. 78409, 78412. Treatment of the lookback period similar to the treatment in Example (5) was included in Regs. Sec. 301.7508A-1(f), Example (8), which was published on Jan. 15, 2009 (74 Fed. Reg. 2370 (Jan. 15, 2009)). Example (8) was removed from Regs. Sec. 301.7508A-1(f) (and Example (9) was renumbered as Example (8)) by a correction to final regulations published in the Federal Register later that year (see 74 Fed. Reg. 66915 (Dec. 17, 2009)).

COVID-19 disaster relief and dueling IRS guidance about the lookback period

In response to the COVID-19 federally declared disaster, the IRS exercised its authority under Sec. 7508A and postponed certain deadlines for 2019 and 2020. Specifically, relying on Sec. 7508A, Notice 2020-23 postponed certain filing and payment deadlines for 2019 until July 15, 2020, and Notice 2021-21 postponed the payment and filing deadline with respect to 2020 returns in the Form 1040 series until May 17, 2021.

Chief Counsel Advice (CCA) 202053013, emailed on Sept. 25, 2020, and released to the public on Dec. 31, 2020, provides that because a postponement of deadlines under Sec. 7508A is not an extension, and an extension is specifically referred to in Sec. 6511(b) (2)(A), the Sec. 7508A postponement period is not added to the three-year lookback period under Sec. 6511(b) (2)(A). Therefore, according to CCA 202053013, while these postponements provide relief to many taxpayers, because the Sec. 7508A postponement is not treated as an extension, it inadvertently creates a mismatch between the period for filing a timely refund claim under Sec. 6511(a) and the lookback period under Sec. 6511(b)(2)(A). But see CCA 202053015, emailed on Oct. 15, 2020, and released to the public on Dec. 31, 2020, relying on Regs. Sec. 301.7508A-1(f), Example (5), to conclude that the Sec. 7508A postponement period is disregarded for purposes of determining the lookback period.

Based on the guidance in CCA 202053013, if a taxpayer timely filed their 2019 return by the postponed deadline of July 15, 2020, (and did not timely file a request for an extension of time to file) and then later filed a timely claim for refund with respect to that year on or before July 15, 2023, but after April 15, 2023 (for simplicity’s sake ignoring that July 15, 2023, fell on a Saturday), the lookback period under Sec. 6511(b)(2)(A) would limit the refund to amounts paid within three years prior to the claim for refund. This would mean that 2019 wage withholding and estimated taxes, which were deemed paid on April 15, 2020, would be outside the lookback period and could not be refunded. A similar lookback period limitation would result under the rationale in CCA 202053013 if a claim for refund for a 2020 Form 1040 series return were filed (without the taxpayer’s also filing a timely request for an extension) on or before May 17, 2021, and a claim for refund for that return was filed on or before May 17, 2024, but after April 15, 2024.

However, to prevent this lookback period limitation from occurring, the IRS issued Notice 2023-21 in February 2023. The notice provides relief from a potential mismatch between the time for filing a timely claim for refund and the lookback period by disregarding the Sec. 7508A period of postponement for both 2019 (April 15, 2020, through July 15, 2020) and 2020 (April 15, 2021, through May 17, 2021) in determining the beginning of the lookback period. The notice specifically provides that its relief is limited to taxpayers who were eligible for postponed filing and payment due dates under Notice 2020-23 and Notice 2021-21 and that this relief is automatic.

Treasury and the IRS should issue clarifying rules

The relief provided by Notice 2023-21, disregarding the Sec. 7508A postponement period for purposes of determining the Sec. 6511(b)(2)(A) lookback period, was a logical step to clarify the confusion created by the CCAs released in December 2020 and remove a potential trap for the unwary. However, as discussed above, the relief in Notice 2023-21 is limited solely to taxpayers who were eligible to take advantage of the COVID-19–related Sec. 7508A postponement for 2019 and 2020. Taxpayers eligible for Sec. 7508A relief for other disasters also need clarity regarding the interaction between Sec. 6511(b)(2)(A) and Sec. 7508A.

Given that IRS informal guidance created the confusion, it is incumbent upon Treasury and the IRS to immediately issue clarifying guidance explaining that the IRS will continue to follow the longstanding position in its own regulations under Regs. Sec. 301.7508A-1(f), Example (5), that the postponement period is disregarded for purposes of determining the lookback period under Sec. 6511(b)(2)(A).

If Treasury and the IRS intend to change this longstanding regulatory position, they are required by law and policy to do so by notice-and-comment rulemaking (see Treasury’s Policy Statement on the Tax Regulatory Process (March 5, 2019)). As part of that rulemaking process, Treasury and the IRS would need to explain to taxpayers and Congress why they believe the appropriate tax policy is to deny taxpayers, who have already suffered as a result of disaster through no fault of their own, money that economically belongs to them (and not the government) because they overpaid their tax, even though Congress provided Treasury and the IRS authority to grant relief.

(Editor’s note: One of the authors of this item, Hodes, is the chair of the AICPA’s IRS Advocacy & Relations Committee. The AICPA sent a comment letter to the IRS in March requesting that the lookback period relief in Notice 2023-21 be automatically extended to all disasters going forward.)

Editor Notes

Howard Wagner, CPA, is a partner with Crowe LLP in Louisville, Ky. For additional information about these items, contact Wagner at howard.wagner@crowe.com. Unless otherwise noted, contributors are members of or associated with Crowe LLP.