Background

Why was this a problem?  Because of the COVID emergency declaration and IRS responses, most taxpayers had until July 15, 2020, to file their 2019 tax returns and until May 17, 2021, to file their 2020 tax returns.  And most taxpayers have been conditioned to assume, from multiple reminders over the years, a general rule that they must file refund claims (including filing an original return claiming a refund) within three years of the original filing due date to receive that refund.  Thus, some were likely to assume that they had until July 15, 2023, to file refund claims for the 2019 tax year.  Before Notice 2023-21 was issued, that was not a safe assumption, and still isn’t for some taxpayers.

This problem was identified more than a year ago.  The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  The Purple Book included a legislative recommendation (starting at page 30) to address problems with the interaction between section 7508A and refund claims.  Notice 2020-23 allowed taxpayers with 2019 tax returns due on April 15, 2020, to be filed as late as July 15, 2020.  As a result, refund claims for 2019 would satisfy the section 6511(a) deadline if filed within three years after the return was filed, potentially (I’ll come back to this adverb later) as late as July 15, 2023. 

Unfortunately, even when a refund claim is filed by the section 6511(a) deadline, section 6511(b)(2)(A) limits the amount of the recovery to the amounts paid within “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.  Thus, a refund claim for 2019 filed on July 15, 2023, could only recover amounts paid by the taxpayer (including refundable credits) by July 15, 2020. Most payments (including income tax withholding and estimated tax payments) and refund credits for the 2019 tax year are deemed to have been paid as of April 15, 2020.  As a result, that timely filed refund claim might result in no recovery.  In effect, we would be forcing taxpayers to file the refund claim earlier than the section 6511(a) deadline and most taxpayers wouldn’t realize that.

I looked at the Purple Book suggestion back in January 2022 and concluded that there were some arguments, even before Notice 2023-21, to protect the unwary taxpayer.  TL;DR summary: section 7508A(a)(3) arguably provided the IRS the authority to provide relief regarding the lookback rule, and Regulation § 301.7508A-1(f), Example 5 provided an example where the suspension period was disregarded in determining the lookback period.  But that example was of a situation in which the section 7508A suspension period included the section 6511(a) deadline; it didn’t address situations in which the suspension period under section 7508A included the deadline for filing the original return.  Could you make an argument for the latter even without legislative or regulatory change?  Sure, but it might not succeed and taxpayers without representation wouldn’t even know to make that argument if their refund claim were denied.

Notice 2023-21 – details

The new Notice takes a straightforward approach to solving the problem.  As with the previous COVID questions, it defines Affected Taxpayers and then specifies the relief.  Affected Taxpayers are:

• “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2020-23 to July 15, 2020”
• “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2021-21 to May 17, 2021”

Notice 2020-23 applied to filing and payment obligations due, including as a result of a valid extension, on or after April 1, 2020, and before July 15, 2020; Notice 2021-21 was more narrowly focused on filing and payment obligations normally due on April 15, 2021, or June 1, 2021, but didn’t take into account extensions.  (This is a vast over-simplification; it’s always best to carefully parse any such notices.)

Essentially, under Notice 2023-21, all individual taxpayers for both years are Affected Taxpayers and some entities are Affected Taxpayers with respect to the 2019 tax returns.  The relief granted was to disregard the two different suspension periods in determining the beginning of the lookback period.  But the two different suspension periods were stated in separate sentences and the relief granted was qualified as “relating to the tax for which the return filing or payment due date was postponed.”

That last phrase, I assume, was because the lookback period for individual taxpayers filing a refund claim for the 2019 tax year included both suspension periods.  The IRS apparently decided that they should be allowed to disregard the first suspension period (4/1/2020 – 7/15/2020) but not the second suspension period (4/15/2021 – 5/17/2021).

I was particularly interested in how this relief affected a couple of our clients who had not yet filed their original 2019 tax returns, which would show overpayments.  The only example in Notice 2023-21 wasn’t very helpful, as it involved a taxpayer who filed the 2019 tax return on June 22, 2020.  The notice doesn’t specify anywhere that relief was not available who had not filed their original returns by the postponed due date, but the absence of “no” doesn’t always mean “yes.”  But the description on the IRS website did say “yes” to this question.

Some observations

I began looking at this with a vague impression that the interaction of Notice 2020-23 (suspending the period for filing and payment obligations for the 2019 tax year) and Notice 2023-21 (disregarding the suspension period for purposes of determining the lookback period for refund claims) might lead to some strange results.  After close reading of Notice 2023-21, it seems to have been very well drafted.  I think it achieves the IRS’s immediate goals, in terms of resolving issues of a specific, nationwide emergency that affects imminent (normal) deadlines for refund claims.  The NTA is still advocating for a solution that is statutory, permanent, and inclusive of all section 7508A relief.  Tax professionals would like the same thing.  But Notice 2023-21, if nothing more, has been a useful exercise in starting to work through the complexity.

However, I still have a few concerns.

Policy choice leading to (somewhat) strange results?

A suspension of the section 6511(a) deadline for filing refund claims – such as was included in Notice 2020-23 for the 2016 tax year, normally due 4/15/2020 – automatically results in disregarding the suspension period when determining the lookback period.  That’s in the regulation above, which relies on language that mirrors section 7508A(a)(3).  That keeps the two deadlines in sync, so that a timely filed return followed by a timely filed refund claim will always be able to recover the maximum amount.

A suspension of the deadline for filing the tax return would – once the principles of Notice 2023-21 are implemented more broadly by regulation or legislation – automatically result in disregarding the suspension period when determining the lookback period.  A suspension of the deadline for filing the tax return, however, would not change the section 6511(a) deadline.  The two deadlines would not be in sync. 

You can see that in looking at the effect on three different hypothetical taxpayers.  Consider A, B, and C, all of whom are Affected Taxpayers for purposes of Notice 2023-21.  A filed his 2019 return on 4/15/2020; B filed her 2019 return on 6/1/2020; and C filed his 2019 return on 7/15/2020.  All three returns were filed timely because of Notice 2020-23.  For all three returns, the lookback rule allows a refund claim filed by 7/15/2023 to reach all payments and refundable credits.  Yet section 6511(a) requires that A must file his refund claim by 4/15/2023; B must file her refund claim by 6/1/2023; and C can file his refund claim as late as 7/15/2023.  In effect, C is rewarded for filing his return later than A and B filed theirs.

The Code includes several provisions to ensure that a timely filed refund claim, following a timely filed return, can recover all payments and refundable credits:

• Amounts paid before the filing due date are deemed to have been paid as of the filing due date.
• An extension of the filing due date results in an extension of the deadline for filing a refund claim and of the lookback period.
• The lookback period is also adjusted for several special circumstances leading to a later deadline for filing a refund claim – e.g., section 6511(d)(1)(B), (2)(A), (3)(B), and (4)(A).

Notice 2023-21 does not do the same thing, because it disregards the suspension period with respect to section 6511(b) but not with respect to section 6511(a).  This leads to a relatively rare situation in which section 6511(b) would not limit the amount of a refund, but section 6511(a) would preclude any refund at all.

I assume this was a deliberate choice; the example in Notice 2023-21, as well as the description on the IRS website, both state that refund claims must be filed within three years of the date they filed the original return, with an outer limit of July 15, 2023.  The argument for the IRS choice here may be that, in the example above, taxpayers A and B evidently didn’t need the postponed due date.  The counter-argument might be that we don’t apply the same principle with respect to the original due date.  For the 2022 tax year, for example, taxpayers could file returns as early as January 23, 2023, but would still have until April 15, 2026, to file refund claims.

I perhaps would have preferred a different policy choice here.  In part to treat taxpayers equally with respect to COVID relief that was made available to everyone, not just those who needed extra time.  In part because of the potential for misunderstanding.  Let’s turn to that topic.

Communicating to taxpayers

I commend the IRS for their efforts to publicize the effects of Notice 2023-21, as well as many others who have been spreading the word.  But I still have some concerns about whether that message will be received by taxpayers, particularly since most of them do not read the IRS website, let alone Notice 2023-21.  They get their information (condensed and simplified) from other sources and don’t always read closely for the details.

For example, one of our clients – with a more sophisticated understanding than most taxpayers – heard about the postponement of the filing date for 2019 tax returns to July 15, 2020.  Unfortunately, he did not catch the qualification, that the postponement was for acts due between Apri1 1, 2020, and July 15, 2020.  That took care of his personal tax return but he and his wife also had a small partnership.  The partnership return was still due March 15, 2020, and he filed late.  There was no partnership activity or taxable income to pass through to their Form 1040 but the partnership was hit with a $1,640 penalty under section 6698(a)(1).  (The IRS refused to abate the penalty but there was still a happy ending when the IRS eventually issued Notice 2022-36, a general abatement of penalties for late filing.)

We will almost certainly have similar misunderstandings with some aspects of this relief that may not be intuitively clear for some taxpayers, despite all of our best efforts.  If they reach out to tax professionals, we can explain in the context of their particular facts, but some won’t until it’s too late.

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.