National Taxpayer Advocate Service Warns of 2019 and 2020 Tax Trap for Refunds

To help taxpayers during the COVID-19 pandemic, the IRS postponed the 2019 tax return filing deadline from April 15 to July 15, 2020 and postponed the 2020 deadline from April 15 to May 17, 2021.  While such postponements may seem insignificant, due to the Internal Revenue Code (Code) and IRS rules, the National Taxpayer Advocate Service (NTA) warns that these deadline postponements could substantially impact a taxpayer’s tax refund for the 2019 and 2020 tax years in the coming years.

Before illustrating the potential refund problem taxpayers may face, it is important to understand rules surrounding claims for refund under the Code.  The Code provides that a claim for a refund must be filed either 3 years from the date the return was filed, or 2 years from the date the tax was paid, whichever of such periods expires later.

Additionally, the Code places limits on the amount of the refund by using two lookback periods.  First, taxpayers who file a claim for a refund within 3 years of the original return being filed will have their refund limited to the amounts paid within the period prior to the filing of the claim, equal to 3 years plus the period of any extension of time for filing the original return.  Second, taxpayers who do not file a claim for refund within 3 years of the original return will have their refund limited to the amounts paid within the 2 years prior to the filing of the claim.

While these limitations may appear straightforward, applying them to 2020 and 2021 filing seasons reveals potential problems for taxpayers.  As in other years, taxpayers who filed a return on or before April 15 will have 3 full years from the April 15 due date to file their claim for refund and obtain a refund of any amount paid.  Early returns are treated as filed on the April 15 due date.  The 2020 filing season deadline was automatically postponed for all taxpayers until July 15, 2020.  Therefore, for taxpayers whose 2019 returns were filed after April 15, 2020, but before July 15, 2020, a timely claim for refund will need to be filed 3 years from the date of filing.

However, even if a taxpayer filed timely claim for refund, the IRS will still apply the 3-year lookback period from the filing date.  To illustrate why that is potentially problematic, assume that in 2019, the taxpayer was a W-2 employee and had income tax withheld from his paychecks, which are remitted to the IRS and deemed “paid” on April 15 of the filing year.  But in 2020, suppose the taxpayer filed his 2019 return on June 25.  Three years later, in June 2023, the taxpayer files a claim for a refund, which would technically be a “timely filed claim” as discussed above.  If payments remitted by the taxpayer’s employer are deemed paid on April 15, 2020, then those payments are only available for refund until April 18, 2023 (April 15, 2023 is a Saturday, and April 17, 2023 is a national holiday). If the taxpayer files a timely claim for a refund in June 2023, a refund cannot be issued from the withholdings remitted to the IRS because they were deemed paid on April 15, 2020.  That date falls outside the 3-year lookback period in this scenario by about 2 months, because a postponement period by the IRS does not also act as an extension of the 3-year lookback rule.

Therefore, postponing the tax return deadline is not the same as extending the tax return deadline.  In other words, if a taxpayer requested a filing extension from the IRS for her 2019 return in order to submit the return by October 15, 2020, the lookback period will include payments made or deemed made on April 15, 2020 under the 3-year lookback rule, as long as the taxpayer files a claim for a refund within 3 years of the date the taxpayer filed a timely original return on extension.

The NTA has cautioned that taxpayers who file a claim for a refund after April 15 for tax years 2019 or 2020 may have a timely filed claim, but the amount of the refund may be unexpectedly limited to $0 (effectively denied) in 2023 or 2024 because the IRS postponed the deadlines, rather than extend them.  The NTA office notes that it is attempting to resolve this discrepancy with the IRS.  Taxpayers are recommended to set reminders to file refund claims with respect to 2019 returns for which no extension was filed by April 18, 2023, and with respect to 2020 returns by April 15, 2024.  Fortunately, the 3-year lookback period for refund claims for the 2019 tax year is still almost two years away, so it is possible this discrepancy will be resolved by the IRS before any harm is caused.

Kyle Graham is an attorney at the Cleveland, OH-based law firm McCarthy, Lebit, Crystal & Liffman Co., LPA.

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Contributing Advisors