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May 11, 2021

NTA Blog: Claims for Refunds: 2019 and 2020 Tax Year Trap for the Unwary

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As most of you recall, to assist 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 tax return filing deadline for individuals from April 15 to May 17, 2021. See Notice 2020-23 and Notice 2021-21. These modifications to the 2020 and 2021 filing seasons were much needed and appreciated by taxpayers, but as is all too often the case, good intentions can lead to unintended consequences. Taxpayers who file a claim for refund after April 15 for tax years 2019 or 2020 may have a timely filed claim, but the amount may be unexpectedly rejected in 2023 or 2024 because the IRS postponed the filing deadlines in 2020 and 2021 rather than extended them.

Spoiler Alert: The IRS has the ability to fix and prevent this unintended disastrous trap for the unwary.

Before exploring how this seemingly harmless distinction may cause serious headaches for taxpayers by causing denial of refunds, let’s first revisit the laws governing claims for refund.

When to claim a refund, and are there limits on how much I can claim?
Before we dive into the specific issues surrounding the 2020 filing season (2019 tax returns) and the 2021 individual filing season (2020 Form 1040s), let’s do a quick refresher on the rules surrounding claims for refund. It’s important to note that the claim for refund rules are extensive and complex with many exceptions, but for this discussion, we will primarily focus on the general rule of IRC § 6511(a). Specifically, a claim for refund must be filed:

  1. three years from the date the return was filed; or
  2. two years from the date the tax was paid, whichever of such periods expires the later.

Filing a timely claim for refund under the general three-year/two-year rule isn’t the only requirement. IRC § 6511(b) then places limits on the amount of the refund by using two look-back periods.

(1) Taxpayers who file a claim within three 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 three years plus the period of any extension of time for filing the original return. See IRC § 6511(b)(2)(A). For our discussion, let’s refer to this as the “three-year look-back period.”

(2) Taxpayers who don’t file a claim for refund within three years of the original return will have their refund limited to the amounts paid within the two years prior to the filing of the claim. See IRC § 6511(b)(2)(B).

Although these limitations may appear straightforward at a glance, a closer look reveals several complexities, particularly when applied to the unusual circumstances of the 2020 and 2021 filing seasons.

Applying the claim for refund limitations to the 2020 and 2021 filing seasons
Let’s start by applying the rule for when a claim for a 2019 tax refund needs to be filed for a 2020 filing season return. As in other years, taxpayers who filed a return on or before April 15 will have three 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. See IRC § 6513(a). As we know, the 2020 filing season deadline was automatically postponed for all taxpayers until July 15, 2020. So, for those taxpayers whose 2019 tax returns were filed with the IRS after April 15, 2020, but before July 15, 2020, a timely claim for refund will need to be filed three years from the date of filing. The 2021 filing season deadline was automatically postponed for individual taxpayers until May 17, 2021. So, for individual taxpayers whose 2020 tax returns were filed with the IRS after April 15, 2021, but before May 17, 2021, a claim for refund will need to be filed within three years from the date of filing to be timely under IRC § 6511(a). Let’s walk through some filing season 2020 examples to illustrate this point.

Example 1
The taxpayer filed his 2019 return on March 2, 2020. Yet, an individual return filed before the April 15 due date is deemed filed on April 15. See IRC § 6513(a). Three years from the date of filing would be April 15, 2023. IRC § 6511(a). However, April 15, 2023, is a Saturday, and Monday, April 17, 2023, is when Emancipation Day is observed, so this taxpayer will have until Tuesday, April 18, 2023, to file a claim for refund. See IRC § 7503.

Example 2
A taxpayer files her 2019 return on June 10, 2020. This taxpayer would have three years from June 10, 2020 to file a claim for refund. However, June 10, 2023, is a Saturday, so the taxpayer will have until Monday, June 12, 2023, to file a claim for refund. See IRC § 7503. (Note: if the taxpayer e-files her return, it will be received the same day it is submitted.) IRC § 6511(a).

But wait – even if a taxpayer has filed a timely claim for refund under IRC § 6511(a), now we need to consider the three-year look-back period of IRC § 6511(b) – what amount was paid within the three years preceding filing the claim for refund plus any extension of time to file?

Let us expand on our examples from above.

Example 3
In 2019, the taxpayer was a W-2 employee and had income tax withheld from his paycheck every two weeks. In 2020, the taxpayer filed his 2019 return on June 25. Fast-forward three years. The taxpayer files a claim for refund on June 26, 2023 (June 25 is a Sunday, so as we noted above, the claim for refund is timely under IRC § 6511(a)). But now let’s apply the look-back rule of IRC § 6511(b). First, let’s remember that withholding taxes, which are income taxes withheld during the year, are deemed to have been paid on April 15 of the following year, the same date the taxpayer’s return would be due. IRC § 6513(b)(1).

Because payments remitted by the taxpayer’s employer are deemed paid on April 15, 2020, these amounts are only available for refund until April 18, 2023 (April 15, 2023 is a Saturday, and April 17, 2023 is when Emancipation Day is observed). Therefore, back to our example: although the claim for refund filed on June 26, 2023, was timely filed, the IRS is precluded from issuing a refund on the withholdings remitted to the IRS because they were deemed paid on April 15, 2020, falling outside the three year look-back period by about two months. The postponement period provided by Notice 2020-23 does not act as an extension of time for filing the three-year look-back rule.

As this example illustrates, the important takeaway is that postponing the tax return filing deadline is not the same as extending the tax return filing deadline. Taxpayers may find that even though they took advantage of the 2020 or 2021 postponed filing deadline, it is possible, depending on their individual circumstances, that the date for filing a claim for refund to claim payments made or deemed made on April 15, 2020, will be April 18, 2023, which is less than three years from the date they filed their return if they took advantage of the postponement for filing their 2019 tax return in Notice 2020-23 (i.e., using the above example, the April 18, 2023, date to file a claim for refund is less than three years from the date the taxpayer filed the return if the taxpayer filed on July 15, 2020, pursuant to Notice 2020-23). Similarly, if a taxpayer filed a 2020 return on May 17, 2021, pursuant to Notice 2021-21, the taxpayer could file a timely claim for refund by May 17, 2024, but not get a refund of the withholding deemed paid on April 15, 2021, as the withholding would be outside the three-year look-back period.

Example 4
A taxpayer files an original 2019 return on the extended due date of October 15, 2020 and must file a claim for refund by October 16, 2023, (October 15, 2023 is a Sunday) to be refunded payments deemed made on April 15, 2020. . . If a taxpayer requested an automatic filing extension from the IRS until October 15, 2020, or October 15, 2021, the look-back period will include payments made or deemed made on April 15, 2020, or April 15, 2021, as long as the taxpayer files a claim for refund within three years of the date the taxpayer filed a timely original return on extension.

But wait – the IRS can fix the situation before it becomes an issue for taxpayers
My office is working with the IRS and the Office of Chief Counsel to rectify this quandary. TAS is advocating that the IRS issue published guidance granting additional relief under IRC § 7508A disregarding the time from April 15 to the date the taxpayer filed his or her tax return (in accordance with each year’s respective postponement periods, i.e., no later than July, 15, 2020, or May 17, 2021, together with the several disaster postponements provided) to determine the look-back period under IRC § 6511(b). Such relief would thereby provide taxpayers more time to file their refund claims for both tax years 2019 and 2020 to obtain refunds of withholding, estimated taxes, or any other payments made or deemed made on April 15, 2020, or April 15, 2021. The IRS has taken similar actions. For example, the IRS issued Rev. Rul. 2003-41 (Situation 3), which extended the look-back date to reach the withholding payments that would have otherwise been time-barred. This relieved taxpayers from being denied refunds because the Code and due dates were not in sync.

I am hopeful the IRS will do the right thing to prevent this unintended inconsistency between the look-back dates and the postponed filing dates, which could cause the inadvertent denial of taxpayers’ potential refunds in 2023 or 2024. Such a change by the IRS will ensure that the taxpayer’s right to pay no more than the amount of tax is being protected.

Stay tuned.

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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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