Is Section 7508A the Ultimate Defense to IRS Interest and Penalties?

There has been a lot of talk about how the Internal Revenue Service (“IRS”) tax deadlines accidentally got turned off for three years and as a result taxpayers assessed interest and penalties during this period are entitled to refunds. This article discusses how Section 7508A may potentially be used as a defense against IRS interest and penalties.

Internal Revenue Code Section 7508A

In 2019, Congress enacted Section 7508A of the Internal Revenue Code. The 2019 version of Section 7508A provides a mandatory 60 day extension (of filing tax returns and court filings for tax controversies) in the case of any qualified taxpayer (A) beginning on the earliest incident date specified in the declaration to which the disaster area relates, and (B) ending on the date which is 60 days after the latest incident date so specified. It should be noted that Congress amended Section 7508A in November of 2021 to state “where the period of postponement began on the earliest date” and ending “on the date which is 60 days after the latest date.” However, the 2021 version of Section 7508A does not apply retroactively.

Section 7508A introduces equity into the Internal Revenue Code by providing for relief for people in federally declared disasters such as a hurricane in Florida that makes it difficult to satisfy statutory requirements such as the filing of a tax return or petitioning a court for a limited period of time. For example, in 2022, a federal disaster was declared in California for severe winter storms, flooding, landslides, and mudslides. This disaster declaration allowed the IRS to postpone a number of deadlines for individuals and businesses. The reason why the IRS postponed these deadlines was because it’s fair to do and equitable. Section 7508A of the Internal Revenue Code not only suspends tax filing deadlines and court filing deadlines, Section 7508A generally also means that a taxpayer is eligible for relief from interest and delinquency penalties such as failure to timely pay and failure to timely file penalties.

Section 7508A and COVID-19

By March of 2020, the global sweep of COVID-19 had reached the United States. One year later the pandemic had infected close to 30 million people. Studies estimate that more than 8 million Americans fell below the poverty line during the pandemic. Just six months after COVID-19 reached the United States, business review platform Yelp reported that over 160,000 businesses listed on its website had closed, with approximately 60 percent of those closures being permanent. The United States also saw a historic unprecedented increase in unemployment to approximately 23.1 million persons. Almost a year into the pandemic, while countries like China and New Zealand reached low case levels, American infection rates experienced a second surge.

On January 20, 2020, the federal government declared a federal disaster as a result of the COVID-19 pandemic. Since the disaster declaration on January 20, 2020 was before the 2021 Congressional amendment to Section 7508A, the 2019 version of Section 7508A applied to the COVID-19 disaster. Qualified taxpayers could seek relief from under the 2019 version of Section 7508A and relief would begin to run on January 20, 2020. This is the earliest incident date for purposes of Section 7508A.

Only qualified taxpayers are eligible to seek relief under Section 7508A. A qualified taxpayer for COVID-19 disaster relief generally includes individuals and businesses, and self-employed individuals affected by the pandemic, which was designated a federal disaster. Because COVID-19 was a nationwide emergency declaration, taxpayers across the United States were generally considered “qualified taxpayers” for purposes of Section 7508A.

The term “latest incident date” in Section 7508A defines the end point of the postponement date. Disasters are not always single-day events. The “latest incident date” is used to provide relief for events that unfold over several days, weeks, or even years. By using the latest end date, the IRS is supposed to ensure that the automatic extension period fully covers the entire span of the disaster. COVID-19 was not one outbreak. COVID-19 hit the United States in waves. The COVID-19 waves were distinct periods of increased infection rates, often driven by new variants. As a result of the sustained rise in infection rates that lasted for years, COVID-19 cannot be described as a single-day event or “one incident date declarations”, but rather an event that unfolded over a period that lasted a number of years or a “continuing” incident. The varying severity of the pandemic is the reason why the federal government extended the COVID-19 declaration to May 11, 2023. Thus, the latest “incident date” for purposes of Section 7508A is May 11, 2023. The 2019 version of Section 7508A adds an additional 60 days to the latest incident date which in this case would be July 10, 2023.

Despite the unambiguous language of the 2019 version of Section 7508A, the IRS chose to ignore Congress’s mandate in connection with the COVID-19 pandemic. This should have triggered mandatory tax filing relief for the period beginning January 20, 2020 and continuing until July 10, 2023. Instead, the IRS refused to provide such relief to all taxpayers and granted limited relief to certain taxpayers in 2020. To justify its refusal to recognize mandatory relief required by the 2019 version of Section 7508A, the Treasury promulgated a regulation on June 11, 2021 that essentially nullified the 2019 version of Section 7508A.

Recently, a couple of federal court decisions determined that the 2019 version of Section 7508A is clear and that the IRS misinterpreted the statute and the regulation issued by the Department of Treasury is invalid. These court decisions held that Section 7508A postponed the applicable tax filing deadlines from January 20, 2020 through July 10, 2023. This may also mean that the IRS did not have authority to assess interest and delinquency penalties between January 20, 2020 and July 10, 2023. Although it appears that the IRS incorrectly interpreted the 2019 version of Section 7508A, this area of law remains unsettled. As it stands today, taxpayers that were assessed interest and delinquency penalties between January 20, 2020 and July 10, 2023 should consider filing a protective claim for refund with the IRS. In many cases, the deadline to file such a refund claim is July 10, 2026. On the other hand any taxpayer involved in a controversy with the IRS in an audit or Tax Court that involves the proposed assessed of interest or delinquency penalties for the period between January 20, 2020 and July 10, 2023 should immediately raise a Section 7508A defense to these proposed assessments.

Anthony Diosdi is a tax attorney at Diosdi & Liu, LLP. Anthony frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. Anthony Diosdi 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.