Is Regulation 301.7508A-1(f) Example 5 the Next Chapter in Section 7508A Tax Litigation?

There has been a lot of discussion lately regarding Section 7508A in the context of the COVID-19 pandemic and Internal Revenue Code Section 7508A(d) mandatory extension of tax deadlines. This is not the only controversy regarding Section 7508A. The Internal Revenue Service (“IRS”) has faced significant criticism for not following its own regulations under Section 7508A – specifically Treasury Regulation Section 301.7508A-1(f), Example 5, which deals with how disaster-related postponements affect the lookback period for refunds. This article discusses why Treasury Regulation 301.7508A-1(f), Example 5 will become the next chapter in Section 7508A litigation.

Section 6511 and Period of Limitations for Filing a Refund Claim

Section 6511 of the Internal Revenue Code establishes the basic rule for refund or credit of an overpaid tax. Section 6511(b)(1) states, “no credit or refund shall be allowed or made after the expiration of the period of limitations prescribed … for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by an individual within such period.” Thus, the first basic rule is that no refund is permitted to be made at all unless a timely claim for refund is filed with the IRS. Under a second rule, to be timely for refund litigation purposes, a claim for the refund or credit of an overpayment must be filed within (1) three years from the date the return in question was filed or (2) two years from the date the claimed tax was paid, whichever is later. Finally, Section 6532 of the Internal Revenue Code provides a two-year statute of limitations for the filing of a refund suit in a federal court from the date the IRS rejects or disallows a claim for refund.

Treasury Regulation Section 301.7508A-1(b)(4) and the IRS’s Ability to Postpone Filing Deadlines

The time limitations discussed above is not the end of the story. Section 7508A of the Internal Revenue Code postpones the deadlines discussed above in cases of a federally declared disaster, a significant fire, or terrorist or military action. Treasury Regulation Section 301.7508A-1(b)(4) provides that the period of postponement does not extend the due date for the act postponed. Instead, according to Treasury Regulation Section 301.7508A-1(b)(4), the IRS is permitted to disregard a period of up to one year for the performance of the act. Treasury Regulation Section 301.7508A-1(b)(4) further provides that if a statute relies on the due date of a return, the postponement period does not change the due date of the return.

However, Treasury Regulation Section 301.7508A-1(f), Example (5) clarifies that disaster-related postponements under Section 7508A extend the time to file a refund claim and subsequently extend the Section 6511(b)(2)(A) lookback period, allowing taxpayers to claim refunds for overpayment of taxes for previous years.

In the example provided in Treasury Regulation Section 301.7508A-1(f), Example (5), a lookback period in Section 6511(b)(2)(A) is applied for the 2012 calendar year to the 2008 calendar year.

According to the example, (i) H and W, residents of County D in State G, intend to file an amended return to request a refund of 2008 taxes. H and W timely filed their 2008 income tax return on April 15, 2009. Under Section 6511(a), H and W-s amended 2008 tax return must be filed on or before April 16, 2012 (because April 15, 2012 falls on a Sunday, H and W’s amended return was due to be filed on April 16, 2012). (ii) On April 2, 2012, an earthquake strikes County D. On April 6, 2012, certain counties in State G (including County D) are determined to be duster areas within the meaning of Section 1033(h)(3) that are eligible for assistance by the Federal government under the Strafford Act. Also on April 6, 2012, the IRS determines that County D in State G is a covered disaster area and publishes guidance announcing that the time period for affected taxpayers to file returns, pay taxes, and perform other time-sensitive acts falling on or after April 2, 2012, and on or before October 2, 2012, has been postponed to October 2, 2012. (iii) Under paragraph (c) of this section, filing a claim for refund of tax is one of the taxpayer acts for which the IRS may disregard a period of up to one year. The postponement period for this disaster begins on April 2, 2012, and ends on October 2. 2012. Accordingly, H and W’s claim for refund for 2008 taxes will be timely if filed on or before October 2, 2012. 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. Thus, if a claim is filed on or before October 2, 2012, amounts deemed paid on April 15, 2009, under Section 6513(b), such as estimated tax and tax withheld from wages, will have been paid within the lookback period of Section 6511(b)(2)(A). In applying the lookback period in Section 6511(b)(2)(A), Treasury Regulation Section 301.7508A-1(f),

Example (5) provides the period from October 2, 2012, back to April 2, 2012 [the Section 7508A postponement period in the example], is disregarded. Thus, if a refund claim is filed on or before October 2012, taxes deemed paid on April 15, 2009 will be deemed to have been paid within the lookback period of Section 6511(b)(2)(A).

IRS Chief Counsel Issued Conflicting Guidance to its Own Regulations

The IRS Chief Counsel issued advice in CCA 202053013 which stated that Section 7508A postponements are not “extensions” and therefore did not extend the 3-year lookback period for refunds under Section 6511(b)(2)(A). This has resulted in many taxpayers refund claims being wrongfully denied by the IRS. For example, in 2023, President Biden approved CA-2023-2 for California due to severe winter storms, flooding, landslides, and mudslides occurring from late December 2022 through April 2023. A disaster declaration provides automatic extensions for filing tax returns and other time-sensitive actions to qualified taxpayers that reside in disaster declaration zones. On October 16, 2023, the IRS issued a news release in connection with the federally declared disaster areas of CA-2023. According to the news release, the filing and payment deadlines for the 2022 tax year were extended from October 26, 2023 to November 16, 2023 by the IRS. The news release also provided taxpayers a postponement of time to file returns, pay taxes and perform other time-sensitive acts listed in Treasury Regulation Section 301.7508A-1(d)(1). Treasury Regulation Section 301.7508A-1(d)(1)(vi) lists the filing of a claim for credit or refund of any tax as an act for which a period that may be disregarded or extended for purposes of Treasury Regulation Section 301.7508A-1(d)(1).

Let’s assume that Sue lived in Alameda County. Alameda County is one of the California counties in the federally declared disaster areas of CA-2023. Since Sue was a resident of Alameda County between December 2022 through 2023, Sue is a qualified taxpayer and is eligible for automatic tax filing extensions not only for filing her individual income tax returns, but also for purposes of filing a credit or refund of any tax. Let’s also assume that Sue filed an amended tax return for the 2019 requesting a refund of an overpayment of tax. As a result of CA-2023, Treasury Regulation Section 301.7508A-1, Treasury Regulation Section 301.7508A-1, Example 5 and publicized IRS postponements, Sue had until at least November 16, 2023 to timely request for a refund of a credit or overpayment of tax for the 2019 tax year. Although in this case Sue’s 2019 claim for refund was timely filed, the IRS rejected Sue’s timely filed refund claim. In its denial, the IRS stated “[y]ou filed your claim more than 3 years after you filed your tax return.”

We will next discuss how Sue may litigate her case in federal court.

Refund Litigation

As discussed above, Sue followed Treasury Regulation Section 301.7508A-1, Example 5 and publicized IRS postponements and yet the IRS rejected her 2019 claim for refund. Since the IRS rejected Sue’s 2019 claim for refund, she can file a complaint demanding a refund in federal district court. Under 5 U.S.C. Section 706(2)(D), Sue can ask the federal district court to compel the IRS to follow its own regulations. Section 706(2)(D) provides that courts may set aside agency actions (such as the IRS) that are “without observance of procedure required by law.” There generally is a presumption of regularity that applies when agency procedures are challenged. Nevertheless, agency failure to abide by the procedural requirements of the APA, its own enabling act or its own regulations may authorize judicial reversal. (for examples of agency failure to abide by its own regulations, see Dorais-wanny v. Secretary of Labor, 555 F.2d 832 (D.C.Cir.1976)(NRC’s order invalid since it did not comply with its own regulations); Morton v. Ruiz, 415 U.S. 199, 94 S.Ct. 1055, 39 L.Ed.2d 270 (1974)(“Where the rights of individuals are affected, it is incumbent upon agencies to follow their own procedures.”)

In this case, the IRS have promulgated Treasury Regulation Section 301.7508A-1, Treasury Regulation Section 301.7508A-1, Example 5 and publicized IRS postponements. In rejecting Sue’s refund request, the IRS has refused to follow its own rules and regulations. The IRS failure to follow its own rules and regulations is “without observance of procedure required by law.”

Conclusion

Taxpayers who have been victims of disasters deserve clarity and certainty regarding deadlines to file refund claims with the IRS. For some reason, the IRS has been less than clear regarding postponement dates that involve Section 7508A filings. Not only has the IRS been less than clear regarding postponement dates for filing refund claims, the IRS has refused to file its own regulations and guidance. This will undoubtedly result in more Section 7508A tax litigation. Any taxpayer that is either considering filing a Section 7508A type refund claim or has filed a Section 7508A type refund claim such consult with a qualified tax attorney as soon as possible.

Anthony Diosdi represents individual and corporate clients, both domestic and international, before the Internal Revenue Service, United States Tax Court, Federal District Court, United States Court of Claims, and Federal, and United States Courts of Appeals.

Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.