The Top Three IRS Defenses to Section 7508A Pandemic Postponement

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. However, there has not been much said about the defenses that the IRS will raise that federal tax filing and payment deadlines were not automatically postponed during the entire duration of the federally declared disaster period (January 20, 2020 through July 10, 2023). Anyone considering arguing that there was a postponement of tax deadlines, assessment of penalties and additions to tax, and the accrual of interest due to the COVID-19 disaster declaration through either an administrative claim for refund or before a federal court should understand the potential  IRS defenses to the recent Court of Claims decision. This article reviews these potential defenses without discussing the merits of these potential defenses.

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, the Federal Court of Claims 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. The Court of Claims held that Section 7508A postponed the applicable tax filing deadlines from January 20, 2020 through July 10, 2023. This may mean that certain taxpayers are entitled to mandatory relief for tax filing obligations, tax payments obligations, certain penalties, and the assessment of interest for the aforementioned period. As of this date, other federal courts have yet to weigh in on this matter and there will be appeals to resolve. Thus, anyone wanting to take advantage of the recent Court of Claims decision must understand defenses that the IRS and the Department of Justice will likely raise.

Positions the IRS (and the Department of Justice) Will Likely Take to Argue that the Court Claims Was Incorrect in its Determination of the Section 7508A Postonement Period Attributable to the COVID-19 Disaster Declaration

Although it appears that the IRS likely incorrectly interpreted the 2019 version of Section 7508A, this area of law remains unsettled and the IRS (and the Department of Justice) will argue that the Court of Claims determination of the postponement period attributable to the COVID-19 disaster declaration was incorrect. Below are the arguments we anticipate the IRS (and the Department of Justice) to make that the Court of Claims was incorrect in its determination of the postponement period attributable to the COVID-19 disaster declaration.

The Phrase “and Continuing” of Section 7508A(d) Does Not Denote a Date and Therefore it Cannot and Does Not Specify an Incident Date

In its disaster declaration, President Trump determined that emergency conditions to all residents across all 50 U.S. states, the District of Columbia, and five territories resulting from COVID-19 pandemic beginning on January 20, 2020 and continuing under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.” A subsequent amendment issued on May 11, 2023 stated that notice is hereby given that the incident period for all COVID-19 major disaster declaration and nationwide emergency declaration will close effective May 11, 2023. Section 7508A(d) references incident dates in its language. The declaration states that the emergency conditions from the COVID-19 pandemic began on January 20, 2023 and that it was continuing. The initial declaration specifies a beginning date for the emergency declaration (the earliest incident date). This brings us to the first IRS defense to Section 7508A pandemic postponement. We expect that the IRS will argue that the language following that date is the phrase “and continuing,” is a vague descriptor of the passage of time following the initial specified incident date. In other words, the IRS will argue that the phrase “and continuing” does not denote a date, therefore it cannot and does not specify an incident date.

The Postponement of Tax Deadlines under Section 7508A(d) Occurred 60 Days from January 20, 2020

As discussed above, the varying severity of the pandemic is the reason why the federal government extended the COVID-19 declaration to May 11, 2023 and as a rule, the Court of Claims held that the latest “incident date” for purposes of Section 7508A was May 11, 2023. This brings us to the second IRS defense to Section 7508A pandemic postponement. Expect the IRS to claim that May 11, 2023 is not necessarily an incident date for purposes of Section 7508A. Instead, the postponement of tax deadlines is limited to 60 days from January 20, 2020 which is March 20, 2020.

The Disregarded Period Pursuant  to Section 7508A(d) is Limited to One Year

Finally, we expect that the IRS will take the position that Section 7508A(a) disregarded period is limited to one year. The IRS will claim that Section 7508A(a) at most provides “the Secretary may specify a period of up to one year that may be disregarded. The Court of Claims determined that Section 7508A(a) was not a controlling provision and relied on Section 7508A(d) which acts as an automatic, mandatory extension that is linked to the entire length of a federally declared disaster. Because the COVID-19 pandemic disaster period lasted from January 20, 2020 through May 11, 2023, the mandatory extension ended in July of 2023, the mandatory extension lasted approximately 3.5 years. The Court of Claims invalidated Treasury Regulation Section 301.7508A-1(g)(3)(ii) that attempted to impose a one year limitation on the length of disaster relief. We believe that the IRS will argue that the 3.5 year postponement determined by the Court of Claims exceeds the time that is permitted to be disregarded under Section 7508A(d) and that the disregarded period is limited to one year. The IRS will likely further argue that the Court of Claims decision was incorrectly decided because it would mean that the administration of tax deadlines could potentially be upended through future FEMA declarations.

Conclusion

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 before July 10th should consider filing a refund claim with the IRS. In addition, 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. With that said, anyone arguing that under Section 7508A(d) there was a mandatory and self-executing postponement of tax deadlines and they they are entitled to mandatory relief for tax filing obligations, tax payment obligations, and assessment of interest for the 2019, 2020, 2021, 2022, 2023, or 2024 tax years should not prepare for IRS defenses discussed in this article. It should be noted that there could be additional IRS defenses that are not discussed in this article.

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.