Mary Lundstedt
December 23, 2024
In the wake of a devastating hurricane season, tax practitioners can help those clients affected by a federally declared disaster avoid a potential Lookback Trap that may arise due to IRS authorized filing deadline postponements. This trap may spring years later preventing taxpayers from receiving refunds when the Lookback Period fails to sync with refund claim filing deadlines.
The Lookback Trap is a failure of the three-year lookback period to include the postponement period as a result of a Federally declared disaster. This failure can result in missed opportunities to timely file a refund claim and receive the full amount available should the taxpayer need to amend an originally filed return.
Disaster Postponements
When disaster strikes, the President may sign a major disaster or emergency declaration to trigger the provision of supplemental federal assistance. To do this, the President must determine that a natural event has caused damage severe enough to exceed the combined response capabilities of state and local governments. Any kind of natural event may rise to this level, including hurricanes, tornados, high waters, tsunamis, earthquakes, and more. Recently, President Biden approved major disaster declarations for multiple states to supplement recovery efforts in areas affected by Hurricane(s) Debby, Helene, and Milton.
Once the President signs a major disaster or emergency declaration, Internal Revenue Code (IRC) Sec. 7508A authorizes the IRS to “disregard” the time (up to one year) for performing certain acts required under the law for certain taxpayers who are affected by the Federally declared disaster. The “disregarded” time in this context is also referred to as a postponement (not to be confused with an extension, as discussed below). For instance, a disaster may prompt the IRS to postpone the due date for filing Federal tax returns and making tax payments in connection with those returns. Typically, the IRS will publish a notice or other guidance alerting taxpayers to the availability of the postponement [Reg. 301.7508A-1(e)].
Lookback Rules
Taxpayers who believe they overpaid their taxes may obtain a refund if (1) they file a timely claim for refund, and (2) overpayment falls within an applicable look-back period.
Under IRC Sec. 6511(a), taxpayers who believe they have overpaid their taxes, must file their refund or credit claim with the IRS by the later of either:
- Three years from the return filing date, or
- Two years from the tax payment date.
Besides time periods within which refund claims must be filed, there are two lookback periods which limit how much the IRS may refund a taxpayer (even if the taxpayer timely files a refund claim). Under IRC Sec. 6511(b):
- Taxpayers who file refund or credit claims within three years from the original return’s filing date will see their refunds or credits limited to the amounts paid within the three-year period before the filing of the claim plus the period of any extension of time for filing the original return [IRC Sec. 6511(b)(2)(A)].
- Taxpayers who do not file refund or credit claims within 3 years from the original return’s filing date will have their refunds or credits limited to the amounts paid within the two-year period before filing the claim [IRC Sec. 6511(b)(2)(B)].
For purposes of this discussion, only the three-year lookback period is relevant and defined as the Lookback Period.
Tax Deemed Paid.
For calendar year taxpayers who have tax withheld on wages or pay estimated taxes, IRC Sec. 6513(b) provides that withheld or deducted amounts are deemed paid on April 15 in the year following the close of the tax year to which the tax is allowable as a credit. So, in the case of tax year 2024 for Form 1040, the tax is deemed paid on April 15, 2025.
Is the IRS Conflicted? “Extension” Versus “Postponement”
As noted above, IRC Sec. 6511(b)(2)(A) references “the period of any extension.” So, if a taxpayer files a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, the three-year Lookback Period is lengthened by the period of the extension. However, in light of recent informal guidance, taxpayers may not be able to expect a corresponding increase to be made when a filing deadline is postponed under IRC Sec. 7508A, for Federally declared disasters.
During the COVID pandemic, the IRS indicated, in a Chief Counsel Advice Memorandum (Advice Memorandum), that the distinction between extension and postponement can lead to disparate results in the context of IRC Sec. 7508A. This means if tax payments were made more than three years before the postponed filing date, they could be lost. The Advice Memorandum presented an example similar to the following:
Example:
In 2024, income was withheld from John’s paycheck every two weeks. In 2025, John was affected by a Federally declared disaster and filed his 2024 return on the postponed filling deadline: July 15, 2025. John’s 2024 tax liability (remitted through withholding) is deemed to have been paid on April 15, 2025. Later John believes the 2024 withholdings were excessive. He files a claim for refund on July 15, 2028. The refund claim is timely under IRC Sec. 6511(a), since it was filed within three years from the original return’s filing date. Unfortunately, the Lookback Period will limit John’s refund amount to payments made on or after July 15, 2025 (i.e., payments made in the three years before filing the claim). The postponement period is not added to the Lookback Period. On the other hand, if John had requested a filing extension through October 15, 2025, he would have been eligible to receive a refund until October 15, 2028.
The IRS Chief Counsel’s Office concluded the memorandum by stating “We recognize this is a harsh result for many taxpayers, but section 7508A operates as a ‘postponement’ not an ‘extension.’” (AM 202053013.)
Note that the Advice Memorandum issued during the COVID pandemic is informal guidance and seems to conflict with an example in the regulations (Reg. 301.7508A-1(f), Example 5.). At the very least, we can say that it failed to provide a reason for deviating from the regulatory language in the context of COVID postponements.
Until a Fix Arrives . . .
Inconsistent IRS guidance is unhelpful and erodes taxpayer confidence in the system. It also makes the tax practitioner’s job much more difficult. But there are some things you can do to help your client avoid landing in that precarious spot where a refund would be granted but for the postponement period not being added to the Lookback Period-
- Familiarize yourself with the problem and stay up to date on developments.
- Identify clients that may be impacted and warn them as soon as possible.
- Ensure that you and/or your clients track both the filing due date and the dates of previous payments. Remember, these items implicate two separate deadlines that must be met for any refund claim to succeed.
Unfortunately, a taxpayer may arrive at your office already trapped. Unless Congress offers a permanent fix, or the IRS reconciles its internal conflict, tax practitioners may not feel confident about the outcome. However, a persuasive argument may include the fact that (1) long-standing regulations shouldn’t be trumped by an Advice Memorandum, and (2) victims of a Federally declared disaster shouldn’t later become victims of a nonsensical reading of the tax code.
Conclusion
It is easy to see how a postponement may allow impacted taxpayers to better allocate funds during a Federally declared emergency to provide for sustenance, shelter, or other essentials during a crisis. Taxpayers should remember that a welcome postponement may inadvertently transform into an unwelcome Lookback Trap which prevents them from recouping tax refunds later. The Taxpayer Advocate Service (TAS) is taking the matter seriously, urging Congress to provide a permanent fix. However, until a fix is secured, you may be the best chance your client has to avoid the trap.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as Tax Action Memo (TAM -2296), Issue 22, first published November 26, 2024, along with other valuable tax practitioner articles. to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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