NTA Blog: Refund Statutes and the Lookback Rule Make Taxpayer and Tax Professionals’ Eyes Glaze Over (2024)

As I recently stated in my February 27, 2023, blog (NTA Blog: Lookback Rule: The IRS Fixes the Refund Trap for the Unwary), the IRS issued Notice 2023-21 providing taxpayers a longer lookback period when determining the amount of a claim for credit or refund that can be allowed for tax years (TYs) 2019 and 2020. The issuance of this notice addressed the mismatch between the time for filing a claim for credit or refund and the three-year lookback period caused by postponing certain filing deadlines for filing seasons 2020 and 2021, which would result in the denial of timely claims for credit or refund for those taxpayers who took advantage of the postponed deadlines and who had withholding or estimated payments. (In response to the COVID-19 pandemic, the IRS postponed the filing deadlines for TY 2019 to July 15, 2020, and for TY 2020 to May 17, 2021.) This discussion largely focuses on the more esoteric and immediate issues of filing claims for credit or refund for TY 2019, but the same analysis will apply to individuals who file timely claims for credit or refund in 2024 for TY 2020.

Key Takeaway: Many taxpayers still have time to file their original or amended 2019 return and claim a credit or refund, including refundable credits such as the Earned Income Tax Credit (EITC), Additional Child Tax Credit, or the American Opportunity Tax Credit.

The lookback rule tends to generate confusion, and questions continue to arise about when the relief provided under Notice 2023-21 applies. I thought it would be helpful to walk through a few examples.

Example 1

In 2019, a taxpayer had federal income tax withheld from his paycheck every two weeks. In 2020, the taxpayer filed his 2019 return on the postponed filing deadline of July 15. The taxpayer’s 2019 tax liability was fully paid through withholding, which was deemed paid under IRC § 6513(b) on April 15, 2020, the original due date of the return. Based upon the filing deadline postponement to July 15, 2020, the taxpayer files a claim for refund on Form 1040-X, Amended U.S. Individual Income Tax Return, on July 14, 2023. Among other things, this 1040-X included a claim for EITC. (Similar to withholding and estimated tax payments, refundable credits are deemed paid on April 15 following the close of the taxable year to which the credit relates.) Under IRC § 6511(a), the claim for refund is timely, as it was filed within three years from the filing date of the original return. Under the three-year lookback period of IRC § 6511(b)(2)(A) for timely claims for refund, the amount of the taxpayer’s refund is limited to payments made in the three years prior to filing the claim. Prior to the issuance of Notice 2023-21, the taxpayer would have only been able to recover overpayments made on or after July 14, 2020. Now, with the issuance of the notice, the taxpayer may be refunded the excess withholdings that were deemed paid on April 15, 2020. This is because Notice 2023-21 disregarded the period beginning on April 15, 2020, and ending on July 15, 2020, in determining the lookback period for the purpose of ascertaining the amount of a credit or refund under IRC § 6511(b)(2)(A). In plain language, the taxpayer is entitled to receive a refund for the amounts paid through withholding because the claim for refund was filed within three years of the original return and by the last possible date of the lookback period under Notice 2023-21 (i.e., July 15, 2020, plus three years).

Example 2

The taxpayer filed his original 2019 tax return on July 13, 2023, claiming a refund for payments made through federal income tax withheld from his paycheck every two weeks. According to Revenue Ruling 76-511, 1976-2 C.B. 428, the claim for refund is timely because the original return is considered a claim for refund, and the return and claim were filed simultaneously, meaning the claim was filed within three years of the original return. Without Notice 2023-21, the taxpayer would be denied the refund even though the claim is timely because the payments are deemed to be made on April 15, 2020, which falls outside the three-year lookback period that would only include payments made on or after July 13, 2020. However, the taxpayer in this situation would be subject to the relief provided by Notice 2023-21 because Section 3.A. grants relief to any person who had a filing obligation postponed by the IRS for TYs 2019 and 2020. NOTE: Notice 2023-21 does not require that taxpayers take advantage of the postponed time period, only that they were subject to it.

Because the relief under the notice applies in this situation, the period beginning on April 15, 2020, and ending on July 15, 2020, is disregarded in determining the lookback period for the purpose of ascertaining the amount of a credit or refund under IRC § 6511(b)(2)(A) for timely claims for refund. Thus, the taxpayer’s claim is timely, and the amount being claimed falls within the three-year lookback period.

Example 3

The taxpayer filed her 2019 return on the postponed filing deadline of July 15, 2020. The taxpayer made estimated payments for 2019, which were deemed paid on April 15, 2020. The taxpayer files her claim for refund for 2019 on July 17, 2023. The claim for refund is timely under IRC §§ 6511(a) and 7503, as July 15, 2023, is a Saturday, and the claim was filed on the next day that was not a Saturday, Sunday, or legal holiday. Under Rev. Rul. 66-118, 1966-1 C.B. 290, the filing of the claim for refund is considered to have occurred on Saturday, July 15, 2023 (the actual due date), rather than July 17, 2023. Thus, the date on which the taxpayer’s estimated tax payments are deemed paid falls within the three-year lookback period for timely claims for refund after considering that Notice 2023-21 disregarded the period beginning on April 15, 2020, and ending on July 15, 2020, in determining the lookback period.

Example 4

Relying on the postponed filing deadline of July 15, 2020, the taxpayer filed her 2019 return, and it was received by the IRS on July 10, 2020. The taxpayer made estimated payments for 2019, which were deemed paid on April 15, 2020. The taxpayer files her claim for refund for 2019 on July 14, 2023, (because July 15, 2023, is a Saturday). The claim for refund is not timely. Even though the postponed due date is July 15, the three-year period for filing a timely claim under IRC § 6511(a) begins to run on the date the IRS receives the return, July 10, 2020, not on the postponed return due date of July 15, 2020.

Example 5

The taxpayer filed her 2019 return on the postponed filing deadline of July 15, 2020. The taxpayer made estimated payments for 2019, which were deemed paid on April 15, 2020. The taxpayer mails a paper Form 1040-X to claim a refund for 2019 on July 14, 2023 (and it is postmarked on July 14, 2023), but the IRS receives it on July 19, 2023. The claim for refund is timely under IRC §§ 6511(a) and 7502, “the mailbox rule.” Caveat: I would not recommend taxpayers wait until the last minute to mail or electronically file an amended return.

It is important to note two circ*mstances under which the relief provided by Notice 2023-21 does not apply.

1. The relief provided in the notice is unnecessary if the taxpayer requested an extension of time to file for TY 2019 until October 15, 2020, because IRC §6511(b)(2)(A) provides that the lookback period includes the time period for filing extensions. The taxpayer’s claim for credit or refund should be considered timely, and payments should fall within the three-year lookback period as long as the taxpayer files the claim three years from the date of the original filed 2019 return filed within the extension period.
2. Taxpayers who filed their returns prior to April 15, 2020, would be subject to normal time periods for filing claims for credit or refund, including the three-year lookback period, as the relief provided under Notice 2023-21 would not apply because the notice only disregards the time period beginning April 15, 2020, and ending July 15, 2020. For example, if a taxpayer filed his 2019 return on April 14, 2020, that return was deemed filed on April 15, 2020, under IRC 6501(b)(1). The taxpayer would need to file a claim for credit or refund on or before April 18, 2023 (April 15 was a Saturday, and the District of Columbia Emancipation Day holiday was celebrated on April 17), for the claim to be timely and to capture any overpayments that were paid or deemed paid on April 15, 2020.

Conclusion

This year, many taxpayers will have the benefit of a longer lookback period for claims for credit or refund for TY 2019. However, it’s important for taxpayers to consider their particular facts and circ*mstances to see if the relief provided under Notice 2023-21 will apply to their situation. As mentioned above, similar relief will apply to individuals who file a timely claim for credit or refund in 2024 for TY 2020.

The issue remedied by Notice 2023-21 will continue to pop up in other situations where the IRS has postponed filing deadlines due to disaster declarations, and therefore, I will continue to advocate for a more permanent solution to this issue, by including the relief provided by Notice 2023-21 each time the IRS postpones a filing deadline due to a federally declared disaster, or through promulgation of Treasury regulations, or Congress passing legislation. Until regulations can be promulgated, or legislation is passed, the IRS should provide a postponement of the lookback rule at the time disaster relief is granted.

In the meantime, taxpayers who reside in or have a business located in a declared disaster area where the IRS has postponed filing deadlines will need to pay close attention to how taking advantage of those postponed deadlines may affect the filing of claims for credit or refund years down the road.