The IRS has the authority in certain situations to postpone filing deadlines, such as for disaster relief, to provide taxpayers who are dealing with difficult circumstances some much-needed additional time to prepare and file their tax returns. However, these postponements can also create a trap for some taxpayers several years down the road, preventing them from receiving a refund even if they could otherwise file a meritorious, timely claim. While this trap is known to some, it catches most people off guard.
Bottom line: If you are filing a refund claim you need to be aware of both the filing due date AND the date of your prior payments, which creates a separate, additional deadline for your claim. You must meet BOTH deadlines for the IRS to pay your refund.
The trap arises because filing deadline postponements can cause something known as the “lookback period” to fall out of sync with refund claim filing deadlines. I’ll describe how this happens below but, first, some good news: This trap would be easy to fix through a simple change to the tax code that I believe members of Congress would agree is the right answer.
How the Lookback Trap Happens
The reason that deadline postponements can stymie future refund claims relates to how several tax code provisions work – or don’t work – together and the legal distinction between a “postponement” and an “extension” (something that even many tax professionals may not understand or have reason to understand until their claim is disallowed). You can find a technical discussion of this in prior blogs (if you don’t mind the risk of your eyes glazing over). For purposes of this discussion, I’ll just describe the issue as a hypothetical taxpayer, Bob, might experience it.
Bob works as an employee and has tax withheld from his paycheck throughout the year, which his employer sends to the IRS. Under the tax code, withholding (and any estimated tax payments) for Bob’s 2023 tax year are considered paid on the date the tax return is due: April 15, 2024. Due to a natural disaster where Bob lives, the IRS provided relief that gave Bob and other affected taxpayers an additional two months to file. Bob took full advantage and timely filed his 2023 return on June 15, 2024. So, Bob’s payments are all considered paid April 15 and the return was timely filed on June 15. You might already see how this is going to be a problem.
Fast forward – it’s now 2027. Bob realizes that he overpaid his 2023 taxes and decides to file a refund claim. The tax code gives him until June 15, 2027 to timely file a refund claim based on his June 15, 2024 return (three years from the time he filed his return). Unfortunately, and unbeknownst to Bob, a separate timing rule known as the “lookback period” prevents the IRS from refunding tax amounts that Bob paid to the IRS more than three years before the date of his refund claim. While the IRS disaster relief postponed the date that Bob’s tax return was due, it did not change the date that his withheld taxes were considered paid: April 15, 2024. Thus, even though Bob technically has until June 15, 2027 to timely file his refund claim, the IRS can’t refund any of Bob’s tax amounts that he paid before June 15, 2024, which for Bob was his entire tax payment.
Sorry, Bob. Refund denied.
- Different Rule for Extensions: The tax code automatically adjusts the lookback period when a filing deadline is “extended,” as opposed to disregarded or postponed. Thus, if Bob had requested and received an extension to file his 2023 return, that extension would have kept the lookback period aligned with the filing deadline for a later refund claim. My legislative recommendation would provide the same outcome for disregarded or postponed periods. Taxpayers should not be worse off when the IRS tries to help them by postponing filing deadlines on their behalf.
Why Amending the Tax Code Is the Best Approach
Although there are legitimate grounds to have a lookback period in addition to a filing deadline for refund claims, it is unfair for the timing of those two periods to fall out of sync for reasons like disaster relief because of the technical difference between postponing and extending the due date of the return. Taxpayers face unexpected technical traps that cost them money and undermine trust in the tax system.
The IRS has the authority to fix the lookback period misalignment problem in the disaster relief context and has granted such relief in the past. In fact, that authority is the same tax code provision that allows the IRS to postpone filing deadlines: IRC § 7508A(a). Thus, the IRS could – at least theoretically – preempt the lookback trap by adding lookback period relief to the initial guidance it issues to postpone filing deadlines in disaster areas.
In practice, there are difficulties with that approach. First, under the IRS’s interpretation of IRC § 7508A, although the IRS can issue guidance quickly to postpone filing deadlines, often through a news release, the IRS can only lengthen the lookback period for later refund claims by issuing formal guidance, like an IRS notice, which involves a slower, more complicated process – one disaster at a time.
Even if the IRS could proactively fix the lookback trap in its disaster relief guidance postponing deadlines, this approach may not help when the lookback trap comes up in other contexts or when automatic deadline postponements take effect without IRS guidance. Rather than asking the IRS to anticipate the lookback trap and manually step in to fix it with formal guidance and manual programming one disaster at a time, the better, cleaner, and more taxpayer-favorable solution to the problem would be to amend the lookback period statute in the Internal Revenue Code for all postponements. This would automatically keep the lookback period in sync with taxpayer expectations of the refund claim filing deadline. It would also apply consistency and prevent scenarios where taxpayers in one filing deadline postponement situation get the benefit of a manually implemented lookback period relief but taxpayers in another similar situation do not.
Tax Court Allows for Automatic Disaster Relief Without IRS Guidance
A recent decision in the Tax Court underscores the need for a systemic legislative fix to this problem. In Abdo v. Commissioner, 162 T.C. No. 7 (Apr. 2, 2024), the Tax Court found that IRC § 7508A(d) automatically postpones certain filing deadlines for 60 days after specified disasters even when the IRS does not issue guidance authorizing the relief. Note that this is a separate relief provision from IRC § 7508A(a), discussed above. Before Abdo, Treasury regulations stated that relief under IRC § 7508A(d) took effect only when the IRS authorized it, similar to IRC § 7508A(a), but the Tax Court in Abdo invalidated that regulatory rule. The Abdo case is ongoing, and the opinion remains subject to appeal.
Although the court in Abdo did not address the issue, automatic relief under IRC § 7508A(d) could lead to the same lookback trap described above. Thus, absent a legislative fix, even though taxpayers might receive automatic relief under IRC § 7508A(d) without any implementing IRS guidance, taxpayers would still have to rely on the IRS to issue formal guidance under IRC § 7508A(a) to fix the potential timing trap for later refund claims. My legislative proposal would resolve this issue for all taxpayers by automatically keeping the lookback period in sync with the refund claim filing deadline in situations like this.
Conclusion
Unintentional technical glitches in the tax code, like timing misalignments, erode confidence in the tax system. When taxpayers submit a meritorious refund claim by the filing deadline, they should receive a refund, not a denial due to the arcane distinction between “postponements” and “extensions.” Taxpayers may perceive such traps as the government inventing excuses to avoid paying what’s properly owed. I do not believe Members of Congress intended to cause a trap for unwary taxpayers.
A legislative change could eliminate the issue systemically and move us one step closer toward a fairer tax code. For exactly how to make this happen, read my legislative recommendation.
Resources
- Legislative Recommendation: Amend the Lookback Period for Allowing Tax Credits or Refunds to Include the Period of Any Postponement or Additional or Disregarded Time for Timely Filing a Tax Return
- Refund Statutes and the Lookback Rule Make Taxpayer and Tax Professionals’ Eyes Glaze Over
- Lookback Rule: The IRS Fixes the Refund Trap for the Unwary
- Claims for Refunds: 2019 and 2020 Tax Year Trap for the Unwary
- Tax Assistance for Disaster Situations
- Disaster Assistance and Emergency Relief for Individuals and Businesses
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.