The IRS should extend the window for taxpayers to claim refunds, as well as waive the time limit for filing refund suits, in light of administrative issues caused by the COVID-19 pandemic, according to National Taxpayer Advocate Erin Collins.
Generally, a taxpayer can file a claim for a credit or refund within three years of when the applicable return was filed, or two years from the date the tax was paid. Collins explained May 5 in a District of Columbia Bar conference panel that the timeliness of the filing is part of a two-part test. She described the second part as the “lookback rule,” which governs whether the IRS can pay out a time-barred claim.
“The challenge is that when the IRS postponed the filing date for the [2019] returns and the [2020] returns … they didn’t extend it,” Collins said. Consequently, under the Taxpayer Advocate Service’s (TAS) interpretation, the lookback period for claims affecting the first two tax seasons of the pandemic is still through April 15. Returns for 2019 were due July 15, 2020, and 2020 returns were due May 17, 2021. Collins estimated that “tens of millions” of returns were filed after April 15.
The TAS is cautiously optimistic it can coordinate with the IRS to provide a remedy for taxpayers who have a shortened lookback period so they aren’t punished for taking advantage of federal COVID-19 relief. Collins said this fix should come in the form of a notice or revenue ruling. A matter that would need to be addressed, however, is if the guidance would apply only to those two tax years, or anytime there was a federally declared disaster.
In an April 15, NTA blog post, Collins said the IRS should also do away with the Code Sec. 6532 time frame for challenging denials of credit or refund claims. Notices of claim disallowances are usually mailed in letters 105C or 106C. Taxpayers who choose to dispute a denial have until two years from the date on the notice to bring the matter before a federal court.
The problem is that the IRS must process these disputes to begin the appeal process. At a time when the IRS is still buried by a backlog of taxpayer returns and correspondence, administrative delays can eat into the two years. Under Code Sec. 6514(a)(2), the IRS is prohibited from issuing refunds or allowing a credit if this period lapses.
Taxpayers can request an extension by submitting a Form 907, Agreement to Extend the Time to Bring Suit, but this also contributes to the backlog. Moreover, Form 907 doesn’t account for when an IRS agent or Appeals officer hasn’t been assigned. Collins suggested taxpayers file an extension upwards of six months in advance.
The IRS can use its authority under Code Sec. 7508A to postpone the two-year window, which Collins recommends in order to protect taxpayers and alleviate pressure on the judicial system. “Taxpayers should not be penalized for the delays caused by the pandemic or lack of adequate IRS staffing to timely address taxpayer responses to the disallowance of the refund claim,” she wrote.
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