There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Jeremy Wells: Hey there, back with another episode of Tax in Action here today, we're going to talk about what might be a little bit of a dry topic, but I actually think it's one of the most important topics for us to understand, especially when we're working with taxpayers, or even if you're a taxpayer that's in a situation where maybe [00:00:30] you've fallen behind, maybe for various reasons, you're a year or two behind on keeping up with your tax returns. And so you've got some past due returns. You're not sure what the results there. Or, uh, another case that might happen is you're looking back at some prior year tax returns. So if you're a tax advisor and you've got a new client, and part of the onboarding process should be to get at least one, if not 2 or 3 years of prior year returns there. Maybe you come across some mistakes and maybe you see [00:01:00] an opportunity to amend that would generate a refund for that taxpayer. There are various reasons why this might happen where we look back in the past. And if you're in a situation where return might generate a refund, there is a question of whether it's still possible to claim and get that refund. So the topic for this episode is going to be the refund statute of limitations. That's what we're talking about here. That's a fancy way of saying that [00:01:30] the legally and this is all written by Congress. It's in the tax code.
Jeremy Wells: You can only go back so far. And there are rules about how far back you can go and the rules can get a little complicated. Um, and there's also a lot of misunderstanding about how these rules work, but you can only go back so far. In other words, there's a there's an implicit concept in the tax code that Congress has written into it that, um, you know, it goes by various [00:02:00] names. I tend to call it finality. And there's also a sense of that in the taxpayers Bill of rights that at some point you as a taxpayer, should feel like there is a certain point in history where you don't have to worry about anything before that point, that somebody's not going to come up to you out of the blue and say from 20 years ago or 50 years ago that they found a mistake on a tax return that you filed, whether it's [00:02:30] your tax return or a tax return that you prepared for somebody else and say there's an error here, you owe more money. We want to avoid that kind of situation. We want to avoid that lack of closure and finality. But at the same point, we want to have the ability to go back one, two, three. How many years far in the in the past can we go back and find errors and still be able to open those tax returns up, amend those [00:03:00] returns and and correct them, get some refunds if one is available, those sorts of things.
Jeremy Wells: So the Congress is trying to strike a balance in the tax code. And we're going to talk about specifically how they do this between being able to offer taxpayers that finality, but then also leaving some time in the past open for corrections, amendments, uh, revisions, those sorts of things. There are actually two different aspects [00:03:30] to this. One is what's called the assessment statute of limitations, and that's how far back the IRS can go and review, uh, a tax return that's already been filed, or review what's been reported to the IRS and assess tax based on that if a return hasn't been filed. So again, this concept of finality IRS can can legally only go back so far, so many years into the past, depending on a bunch of different criteria [00:04:00] as to as far as how far back they can go and under what conditions, they can go back that far. In this episode, though, we're going to talk about this a little bit from the opposite perspective. Usually the refund statute of limitations is more on the taxpayer side, and because of the way the rules are written and because they're a little complicated, a little difficult to understand, there's actually quite a bit of contention over them. There have been several situations [00:04:30] recently, just in recent years, where there's been concerns about the way the statute of limitations is written out, and the way certain dates and time periods within that statute of limitations are defined and calculated, that make it a little difficult for taxpayers to understand, make it a little difficult for tax professionals to understand, and then can also actually call some policy problems along the way.
Jeremy Wells: We'll look especially at how there were some issues with this during [00:05:00] the Covid 19 pandemic and some of the period after that. For those keeping up with the employee retention credit IRC, this is also become an issue as well. More on the assessment statute of limitations side. But it's there are two similar concepts. They work similarly. There's a little bit of overlap there. But in this episode we're going to focus on the refund statute of limitations. And in a future episode I'll come back and talk about the assessment statute of limitations. But like I said, refund statute of limitations. [00:05:30] This is more on the tax payer side. So typically, what you see beyond just what Congress has written into the tax code and some of the Treasury regulations, typically what you see in court cases is where a taxpayer realizes that they have a refund due for a prior year, or maybe the taxpayer fell behind in filing and is trying to catch up. And realizes they're due a refund for more than a couple of years prior. Usually three, four, [00:06:00] five years prior, and now the taxpayer is doing whatever that individual can to try to claim that refund. One thing to keep in mind, as we're talking about the refund statute of limitations, and I'll come back to this later, is that once that statute of limitations is up, once you have passed that refund statute end date, I'll talk about what that means later.
Jeremy Wells: Once you have passed that date, there is no going back with some very, very limited exceptions. And we'll talk about those. But [00:06:30] in general, virtually, there's no way to go back once that statute of limitations has run up to claim that refund that is lost money. Uh, and there's no, uh, consideration of how big or small that refund is. There's no consideration of what's generating that refund with some, again, very, very limited exceptions, which are a bit out of scope for this episode. But in general, for a normal taxpayer, when we're talking about normal income tax, [00:07:00] once you reach the end of that statute of limitations, that's pretty much it. And the courts have consistently said this is the way Congress wrote the law, the way the law is written. There's not a lot of room for interpretation. And so once it's pretty clear, by the way the law is written, that that refund statute of limitations is up. It's up. There's nothing courts can do. There's nothing the IRS can do. And short of Congress changing the law, which probably isn't going to happen anytime soon, there's [00:07:30] really nothing that can be done after that. So let's, uh, get into this really, uh, this is motivated in part by several court cases, uh, that have happened recently.
Jeremy Wells: But one in particular, uh, is the case of Hamilton v US. This came out of, uh, the Northern District of California. So this was in district court. And this is probably a topic for a future episode, but it does make a difference. Uh, and we [00:08:00] you see this when you start reading the court cases and opinions around these, uh, disputes over whether a refund claim, uh, is eligible or not, it does make a difference where that claim is filed. In general, taxpayers have two options. They can go to the US Tax Court, or they can go to federal district court. And in general, the the there's pretty consistent holdings, uh, across these, uh, two different courts. They're both [00:08:30] using, uh, opinions from both of those systems as precedent for the way they're coming up with their decisions. But, uh, in this case, specifically Lenoir Hamilton, uh, she filed her 2017 tax return late in November of 2021. She claimed a refund of $2,070. Now that right there should make your ears perk up. You know it's 2017. We're talking about [00:09:00] $2,000 refund here. It's not a lot of money and especially compared to the costs of litigation. Not even going through US Tax court. We're talking about going to federal district court here. Um, $2,000 refund is not a lot of money. And even if she were to get that refund, um, it's doubtful whether it would really offset the cost, both in terms of her, her, uh, costs of of litigating this as well as just the time [00:09:30] she's in energy she's spending on this case.
Jeremy Wells: But, uh, you know, it's up to her. She's a taxpayer. So she's claiming a refund of $2,070. Uh, she filed her return in November of 2021, claiming that refund. The IRS immediately denied the claim as untimely. She administratively appealed in August of 2022. Remember, this is 2021 2022. We're talking about the Covid era. So things are moving pretty slowly with IRS. So there's going to be some fairly significant time lags [00:10:00] here. Unfortunately, this is nothing that we're not used to nowadays in working with the IRS. So filed our 2017 return in November of 21. Irs denied the claim. She appealed. In 2022 of August of 2022. Irs denied the administrative appeal in February of 2024, so it took a little over 18 months, um, for that administrative appeal to come through. And then pretty quickly, uh, [00:10:30] a few months later, she filed a pro se meeting on her own. So without the benefit of legal counsel, she filed a civil suit in July of 2024. She made a few different claims. She tried to take a few different positions in this suit. One of them I'm going to touch on later was that she was claiming a financial disability. We'll talk about what that means and how she almost, uh, maybe could have qualified for that, but she didn't quite do it.
Jeremy Wells: Right. [00:11:00] Um, and how if you're in a situation where that might apply or, uh, you know, somebody where that might apply, maybe, uh, but it's actually a very high bar. It's pretty difficult to qualify for that. But she filed that suit in July of 2024, and then we get the result, uh, just, uh, this past bit here. So in, in early 2025. So took almost a full year, uh, for this case to work its way through the courts. The court dismissed the case, uh, on behalf [00:11:30] of the government's motion finding that although she filed a timely claim for the refund, she missed what's called the lookback period. The court also rejected that financial disability argument. But thinking about this case, The court said that she filed a timely claim for refund. However, for that timely claim, there was no refund available. What does that mean? How can that be? And this gets really [00:12:00] at the heart of what can be very confusing about the refund statute of limitations, both if we're thinking prospectively about it before we filed that claim, are we filing a timely claim, and if so, how much can we include in that claim? But then also looking back and saying once that return was filed or that claim for a refund was filed, was it timely? And if so, is that taxpayer claiming the right amount? And how do we know that? So these are some [00:12:30] of the questions that I'm asking and looking to answer in thinking about the refund statute of limitations.
Jeremy Wells: So when is the last day to claim a refund and how much can that taxpayer Claim. We'll talk about how those are defined in the tax code in a little bit. How can a claim for a refund be filed timely like Lenoir Hamilton's? Yet the refund is not allowed. There's no refund. So it's a timely claim, but there's no refund allowed. How can that happen? [00:13:00] And then how exactly is refund statute of limitations work? This topic is complicated. There is one particular code section that deals with claims of refund. It's IRC section 6511 limitations on credit or refund. And this is really at the heart of this issue. This is where we get the rules. However, in order to fully understand the rules in section 6511, [00:13:30] we also have to understand some other rules that come from some other sections, around 6511 in particular. We're also going to look at IRC section 6513, which is the time that the that a return is deemed filed and the tax is considered paid. It turns out that these are two critical pieces of information. When we're asking whether a taxpayer's claim for refund is timely or not. We have to look at when the return was actually [00:14:00] filed, and we have to look at when the tax for that tax year was deemed paid or considered paid.
Jeremy Wells: And I'm saying that very particularly because that's the way the law says it, and that's the way we're going to need to think about it in order to understand how the refund statute of limitations works. We're also going to look at a couple other provisions, ones that we're we should be aware of as tax professionals thinking about working with taxpayers in terms of making sure [00:14:30] they're filing things on time. So two other important code sections here. Irc section 7502. Timely mailing treated as timely filing and paying. Uh, we often hear of section 7502 with regard to what's called the postmark rule. This is essentially if you file a return by mailing it to the IRS, and it arrives at the IRS office after the deadline. Is it [00:15:00] timely or not? And it depends. It depends on the rules as they're written in 7502. Generally, if you follow those rules, if you send that document, if you mail it a certain way and the post office, uh, or the private delivery service, who used that instead, if they stamp that, uh, or if they postmark that document by a certain date, then even if it's delivered after the deadline, [00:15:30] it's still considered timely filed. Again, we'll talk about why this might matter in terms of the refund statute of limitations. And then another rule that um, works Similarly, is comes from IRC section 7503, which is the time for performance of acts where the last day falls on a Saturday, Sunday or legal holiday.
Jeremy Wells: We'll talk about how that works. Um, if you were working in in in tax in 2023, 2023 was an interesting year because even [00:16:00] though tax Day, the the tax filing deadline for federal income tax returns is usually April 15th, uh, in 2023, it was actually April 18th. And that's because the 15th was going to fall on Saturday. And then Sunday was the 16th and the 17th Monday. Even though that was a weekday, it was a legal holiday in the District of Columbia, uh, as well as some other places. And so for that reason, the tax filing deadline for 2023 [00:16:30] was actually pushed out all the way to April 18th. Now, again, if we're talking about a a statute of limitations, period, we need to look at the interaction between a deadline and some sort of postponement or extension of a deadline due to that original deadline falling on a weekend day or a holiday. And so we'll look at how that interacts as well. There's also a little bit, um, of interaction with some other code sections as well. [00:17:00] Uh, and we'll talk about those as they pop up, 70 uh, 7508 cap A, uh, which deals with postponements due to federal disasters, those sorts of things that comes in as well. And when we talk about Covid 19 postponements and how that affected, uh, the refund statute of limitations, that will come in important as well. So let's look at the basics here though, going to IRC section 6511, which is all about this refund statute of limitations period.
Jeremy Wells: There [00:17:30] are actually two steps to understanding whether a taxpayer can claim a refund and if so, how much? The first step is to determine what's called the limitation period. That is the latter of either of the following. It's either three years after the return was filed, or it's two years after the tax was paid. If no return [00:18:00] was filed. So we're going to look at the later of either of those two. The filing of an original return, not an amended return, but an original return begins the period of limitation, uh, both for assessment and for, uh, credits or refunds. It's important to understand that when we talk about filing a return, we're talking about filing the original return. If you amend [00:18:30] a return, this does not affect that statute of Limitations if it's an amended return. If it's a late filed return, that's a different issue. A late filed return can affect this limitation period. However, an amended return does not. So the question when we're talking about amending a return is are we amending that return within this limitation period, especially if that amended return has a refund [00:19:00] on it for for this purpose? Now, on the other side, if we find that a client might have a balance due, then we're going to be looking at the assessment statute of limitations, which is a different issue entirely.
Jeremy Wells: But here for the refund statute of limitations, we're going to be looking at whether we're amending that return within the limitation period. And if so, how does that affect the amount of that refund that the taxpayer can actually claim? And that comes from revenue ruling 72 311, [00:19:30] that it's the filing of the original return, not an amended return that determines when that limitation period is the latest date on which a taxpayer can timely file a claim for credit or refund is known as the Refund statute end date or the are set the RCD, that is, the the line in the sand that is the final date on which a taxpayer can file that claim for a refund. After that, [00:20:00] it's an invalid claim. It's never going to hold up up until that refund statute end date. That claim is timely filed if it's if it's filed by then. So again, thinking back to some of these definitions of when is the claim filed? When is the deadline to do that? Does that date fall on a weekend or holiday? These kinds of things are important to keep in mind, especially when we're thinking about maybe advising a taxpayer or trying to get a filing done [00:20:30] for a taxpayer on time, the period during which that taxpayer can actually timely file that claim. So the period from now up until that said, is that refund statute of limitations period. If a taxpayer files a return before a deadline, then under uh IRC 6511, then that return is deemed [00:21:00] filed on the original unextended deadline.
Jeremy Wells: And that actually comes from IRC section 6513. A. So in other words, think about the, uh, typical federal income tax filing deadline on a normal year is April 15th. So as an example, let's use Jessica. Jessica files her 2018 federal individual income tax return on February 28th, 2019. So she's ahead of the game, right? She's [00:21:30] ahead of the ball. She's filing her return early. She's not waiting until the last minute. Not waiting. Not waiting until the deadline to file that return. The original extended deadline for tax year 2018 to file that return was April 15th, 2019. Now, let's consider that she later discovers an error in her favor, which means she's now going to claim a refund on that 2018 return. But she's already filed that [00:22:00] return. But she wants to get that refund. So for purposes of calculating that limitation period under 6511, her 2018 return is actually deemed filed on April 15th, 2019. So in other words, any return that is filed before or up to that filing deadline is deemed all filed on the same day, which is that deadline. This is actually good for the taxpayer because think about [00:22:30] it. If we're talking about a three year limitation period, when that return is filed, then that would disincentivize us from filing early right now. There are plenty of issues with filing early, but one of them should not be having to worry about the refund statute of limitations.
Jeremy Wells: So essentially what this does, what 6513 A does in terms of thinking about statute of limitations is help us equalize everybody that filed on time. [00:23:00] There's no penalty, in other words, for filing early in terms of being able to later come back and claim a refund. I mentioned the postmark rule earlier, and this comes out of section 6502. A claim for refund is considered timely filed if it's postmarked and mailed on or before, but then delivered after the end of that refund statute of limitation period that that limitation period. So it's important to keep that in mind if you're [00:23:30] if you're working with a taxpayer that has a claim for refund to file and you're coming up on that end date. That said, then it's important to consider whether you're going to be able to get that claim in on time. You might be in a situation where you know it's not going to be delivered to the IRS on time, but if you can get it to the post office and you can follow the rules in section 7502 and the associated regulations, which is essentially you want to send that [00:24:00] certified, if you can get it there and get it sent certified and get it postmarked by that end date, then for purposes of section 6511, that claim has been filed on time. So Jessica is an example. Jessica files her 2018 federal individual income tax return on April 15th, 2019.
Jeremy Wells: She later discovers an error in her favor, generating a refund. She mails an Ills. An amended return from [00:24:30] the Post Office on April 14th, 2022. Now this is within. In fact, this is just a day before the end of that three year limitation period. It has been just a day under three years since she was deemed to have filed her 2018 tax return. Except it doesn't arrive at the IRS office until after April 15th. In other words, if if she did not follow the rules of [00:25:00] section 7502, IRS would have received that document and said, we got it late. It doesn't count. However, if that envelope is postmarked by April 14th, 2022, and it meets the other criteria in section 7502, then that claim for refund is considered timely filed. So again, we're used to dealing with this with extension filing. For example, we want to make sure those paper filed extensions are in the mail [00:25:30] and postmarked by that that original due date. This is a very similar rule to that. And then again, the weekend and holiday rule under section 7503 applies here as well. Section 7000 503 essentially says if the last day to perform an act falls on a Saturday, Sunday or legal holiday, then the taxpayer can timely perform that act on the very next succeeding day. That is not a weekend or legal holiday. So [00:26:00] let's look at another example. Jessica files her 2019 federal individual income tax return on April 15th, 2020.
Jeremy Wells: She later discovers an error in her favor, generating a refund. April 15th, 2023 is a Saturday, which is true. Remember we I we talked about that before. April 15th, 2023 is a Saturday, April 17th. The following Monday is a legal holiday. So then she files that amended return on April [00:26:30] 18th, 2023. The next succeeding day. That is not a weekend or legal holiday. But notice this is now past three years from when she originally filed that return. She originally filed that return on April 15th, 2020. So if she files the amended return on April 18th, 2023, if it weren't for section 7503, she'd be three days late. However, because April 18th, 2023 [00:27:00] is the next succeeding day, that is not a weekend or legal holiday. Then she's met the criteria under section 7503, and that claim for refund is considered timely filed. Now, where this doesn't work is if you're looking back at when the original deadline was and that original deadline was pushed back because of this weekend or holiday rule. That original deadline was still April 15th. So if you're [00:27:30] in a situation where you're trying to file this claim for refund and you're coming up on the end of that three year limitation period, you can't say because the original deadline was affected by a weekend or holiday, you can't do that. That original deadline was still the 15th. It just happened to fall on a weekend or holiday, and so the taxpayer could wait until the next succeeding day.
Jeremy Wells: That wasn't a weekend or holiday [00:28:00] and act then. But that doesn't push the refund statute of limitations out 2 or 3 more days. All it does is give the taxpayer a couple extra days at the time of that deadline. Now we move on to the second step. We determined that the refund claim is timely because it was filed within that three year limitation period. Now we have to move on to the second step, which is called the look back period. From the time that we are [00:28:30] going to file that claim for a refund, we have to look back a certain amount of time to see how much we can actually claim. How much money can we claim in this refund? And there's actually two different possibilities here. The first one is if we filed within that three year limitation period, then we can look back that full three years. So if a taxpayer claims a refund within the three year [00:29:00] period, then the claim for refund or credit can include any tax paid within the three year period immediately preceding the filing of the claim. And you also get to include extensions here. You can include the extension of the time to file in that three year look back period. This is IRC section 6511 B2A. Now comes the important question. [00:29:30] Well when are those payments made? Because if we're talking about filing a return on April 15th of the next year, and then we wait three years after that to file the claim, and we can look back three years where any payment made on April 15th.
Jeremy Wells: And again, this is where we have to start looking at other sections of the code outside of 6511. In fact, we have to go to we have to go to 6513 [00:30:00] B1, which tells us that tax deducted and withheld at the source. So typically this is going to happen through an employer. An employer deducts federal income tax withholding from the employees paychecks throughout the year and deposits that with the IRS. That kind of withholding, when it's deducted and withheld at the source, is deemed paid on the 15th day of the fourth [00:30:30] month, following the close of the tax year. So for most taxpayers, when we're talking about federal income tax, generally, that's going to be April 15th of the following year. So if you had withholding for all of 2024, then all of that withholding was deemed paid on April 15th of 2025. Let's look at another example. Jessica files her 2018 federal individual income tax return on April 15th, 2019. She later discovers [00:31:00] an error in her favor generating refund. So for purposes of the lookback period, her 2018 withholding is deemed paid on April 15th, 2019, which is the 15th day of the fourth month following the close of that tax year. So she files the claim within three years of April 15th, 2019.
Jeremy Wells: So let's say she waits until April 15th, 2022. She can claim, as part of that refund, the taxes that were [00:31:30] paid as far back as April 15th, 2019, which is going to include all of her withholding for tax year 2018 because all of that is deemed paid as of April 15th, 2019. Now, what about estimated payments? Estimated payments are a little bit different because the taxpayer chose to pay all of that. There wasn't withheld at the source. 6513 B2 [00:32:00] tells us that estimated tax payments are deemed paid on the filing deadline, not counting any extension. So similar situation gesture requests and is granted an automatic six month extension, though for her 2018 Federal individual income tax return. And then she files that on October 15th, 2019. So she got an extension for 2018. And she waited that entire six month period [00:32:30] and didn't file her tax return until October 15th of 2019. She later discovers an error in her favor, generating a refund. So for purposes of her lookback period now, her 2018 estimated payments are deemed paid on April 15th, 2019, the filing deadline not counting any extension. But note when she has the withholding, it's deemed [00:33:00] paid as of 15 days of 15th day of the fourth month after the filing period for estimated payments. It's just deemed paid on the filing deadline. That's the difference I want to pull out and bring up one. Uh, sort of wrinkle in all of this.
Jeremy Wells: And this doesn't happen very often, but there is a little bit of case law here. And I found it interesting and I wanted to include this. There is another way to [00:33:30] give IRS money. And the reason we give IRS money before we absolutely have to, uh, is to mitigate penalties. Irs wants the money as quickly as they can get it. Typically, taxpayers want to give it as late as they can give it. So IRS incentivizes taxpayers to pay earlier. One of the ways they do this is through what's called the underpayment penalty. Uh, and that's imposed under [00:34:00] IRC 6601. The underpayment penalty essentially looks at how much was paid in throughout the year versus how much should have been paid in throughout the year by taking the taxpayer's total tax liability and dividing it up evenly throughout the year. And we you know, if you've advised taxpayers on this that withholding is also distributed evenly, but then estimated payments are only allocated to the quarters during which they [00:34:30] were paid. So the incentive here is to make those estimated payments earlier in the year. But there's a third way to pay the IRS to mitigate that underpayment penalty that can get you out of trouble worrying about the refund statute of limitations or potentially can. And it's called a deposit. And we call other kinds of payments the IRS deposits. But this is a different kind of deposit. This is a deposit under IRC section 6603. [00:35:00]
Jeremy Wells: So a taxpayer can make a deposit for any tax that has not yet been assessed. And this is the key. The tax can't have been assessed yet. If the tax hasn't been assessed, then the taxpayer can make a deposit and there are rules for how to do this under Revenue Procedure 2005 18. If the taxpayer follows that procedure and follows those rules, then that deposit is considered essentially opening an [00:35:30] account with the IRS. If and when IRS assesses tax, or there's a determination that taxes do, then that tax can be paid with the amount in that deposit. And as long as there is money in that deposit, essentially that account with IRS, then that's going to avoid the underpayment penalty for that tax that's due. However, the courts have held [00:36:00] that the statute of limitations under IRC 6511 applies to payments, but it does not apply to deposits. So if the taxpayer makes a A deposit with IRS tax is paid from that deposit or not. And that deposit sits there with IRS for any given amount of time. There is no refund statute of limitations that applies to that deposit. So under Rev Proc 2005 18, there [00:36:30] are procedures there for the taxpayer then to identify and withdraw those deposits. There's some case law where this is a way that that taxpayers were able to avoid underpayment penalties and at the same time be able to withdraw those amounts that were deposited with IRS without having to worry about the refund statute of limitations, because sometimes you can get into a, a, a bit of contention with the IRS, and you [00:37:00] don't want to run the risk of having penalties assessed.
Jeremy Wells: But at the same time, you want to make it clear that you're not making a tax payment. You don't agree With the fact that taxes going to be assessed. So you don't know how much yet, but you might have an estimate or a rough idea, but you haven't calculated it. You haven't filed a return yet. Irs hasn't assessed it yet. So you want to cover yourself in terms of penalties. But at the same [00:37:30] time, you don't want to start the clock on the refund statute of limitations. And so you can follow the rules in that rev proc and make a deposit. I've never done this. I've not done this for a client, but it's an option that's there. And it might be something to consider if you're in one of these kinds of situations with a client. There's some interesting case law. Most of it is pretty old. Um, but there's some interesting case law to see the kinds of situations where this might be happening. Usually, uh, it was because [00:38:00] the taxpayer was protesting, uh, either having to pay tax at all and not in a, uh, not in a tax protester kind of way. Um, but just more generally in terms of a dispute over how much should be paid.
Jeremy Wells: Right. And those kinds of situations, it might be worth looking at a deposit instead of a payment. If you wait until after the three year limitation period is over, then the lookback period is just two years. This is a pretty significant [00:38:30] limitation on on that lookback period. So if the taxpayer claims a refund after the three year period is over, the claim for the refund or credit can include the tax paid within the two year period immediately preceding the filing of the claim. And this is where a lot of taxpayers get into trouble. And we'll we'll talk about that when we look at how Lenoir Hamilton's case wound up. Before we get there, though, I do want to look at an exception to [00:39:00] the statute of limitations. And this is the this is the issue of financial disability. This was Congress added this, uh, Two ERC 6511. It's now 6511 H that defines this concept of financial disability, and it allows for suspending the statute of limitations during any period of such financial disability. This can only happen if the taxpayer [00:39:30] has not authorized either a spouse or any other individual to act on his or her behalf of the taxpayer in financial matters, though. So that right there is one of the reasons why this claim of financial disability can usually fall apart. Either there's somebody there that could have helped the taxpayer, or if you think about it, if the taxpayer doesn't, hasn't authorized anyone to, uh, act on his or her behalf, then [00:40:00] how did this taxpayer find out about this ability to use a claim of financial disability? Uh, to avoid the running out of the statute of limitations.
Jeremy Wells: So what do we mean by a financial disability here. So a taxpayer is financially disabled. And this is directly from the code section. If that individual is unable to manage his or her financial affairs due to a medically determinable physical or mental impairment, which would result in death or [00:40:30] has lasted or can be expected to last for at least 12 months. So in other words, this is a pretty serious physical or mental impairment. It doesn't have to be complete, uh, inability to function, but it does need to be serious enough to where there's a reasonable claim that this is affecting the individual's ability to comply with their responsibilities as a taxpayer. Again, this is section 6511 H. In [00:41:00] order to substantiate this, the taxpayer has to send two written statements along with the The claim for credit or refund. The first one is a written statement by a qualified physician that supports the taxpayer's claim, essentially, and there are some specific criteria that are listed out in Revenue procedure 9921. That physician statement has to include quite a bit, including a medical opinion about the disability, [00:41:30] for example. So it's important that the taxpayer and the physician understand everything that needs to be included there. There are some court cases where the claim for financial disability was thrown out, was rejected because the physician statement essentially was incomplete.
Jeremy Wells: It didn't fulfill all the criteria of that revenue procedure. And so you don't if you're working with a taxpayer, if you know a taxpayer in this situation, you you don't want to set them up for [00:42:00] failure by not properly advising them on what should be in that position statement. So make sure you are aware of and you've thoroughly read that revenue procedure for what needs to go in there. There also needs to be a written statement by the person signing the claim for credit or refund that no one, including the taxpayer spouse, was authorized to act on behalf of the taxpayer in financial matters. So it's important that both [00:42:30] of these statements go with the claim. There are court cases where the claim didn't include one or the other statement, or either of those statements was incomplete, meaning they didn't fulfill all the criteria in that revenue procedure. So let's go back to this case involving Lenore Hamilton now. She she also claimed, uh, the financial disability, which, which the court just straight up, uh, dismissed for reasons, uh, that she filed the statements during [00:43:00] her administrative appeal. She did not file them with the original claim for the refund, which was when she filed her late filed tax return. Those statements should have been included with the return she filed in November of 2021, which she was late filing her 2017 return.
Jeremy Wells: She did not come up with those statements until her administrative appeal, and the court said that's too late. That's not following the rules of that revenue [00:43:30] procedure. And the other thing is, like I mentioned, the physician statement didn't include all of the things that that revenue procedure said should be included in her case specifically. Uh, it left out the opinion that her medical condition prevented her from managing her financial affairs, which, if you think about it, if you're trying to make a claim for financial disability, it's probably pretty important that your physician include a written opinion that your medical condition prevents you from managing [00:44:00] your financial affairs. So if that's left out. The courts are kind of left in a bind there, where it's just not a complete statement, and therefore it doesn't fulfill the criteria there. There's another exception here. And this is an agreed upon statute extension. This can happen when a taxpayer is already working with the IRS. If the taxpayer and the IRS agree to extend the assessment statute of limitations [00:44:30] under IRC section 6501 C4, then this also extends the period to file a claim for credit or refund up to six months after the expiration of that agreed upon period. This actually works in the taxpayer's favor, so I've seen this before. I haven't been through this situation myself, but I've seen discussion of why would a taxpayer ever agree with the IRS to extend [00:45:00] the assessment statute.
Jeremy Wells: Right. Why would you give the IRS more time to examine your return and assess more tax? Well, it depends. Um, in general, I can understand that argument. But on the other hand, if you are confident about the return to the point at which you expect that, that, uh, that, uh, examination or that audit might actually turn out in your favor, then having [00:45:30] the extra six months on top of that period, uh, that you agree to extend the statute of the assessment statute, it might actually work out to your favor. That allowed amount of the credit or refund is the tax paid between the execution of the agreement and the filing of the claim. So essentially, what might happen is you would be in an examination, IRS is claiming that you owe more tax than you originally thought so. [00:46:00] You pay that. Now you go through the examination, you agree to extend the assessment statute, but it turns out to where you either owe less than IRS originally claimed you did, or maybe you even do a refund of that entire amount that you paid while under exam. And so this allows you to be able to reclaim that payment that you made while the the return was under exam. This is a bit of a protection [00:46:30] for the taxpayer. And then we have to talk about deadline postponements. A postponement is not an extension. I see that a lot with tax professionals. They use the term extension when really they're talking about a deadline postponement.
Jeremy Wells: Irc section 7508 cap A authorizes the Secretary of the Treasury to postpone certain deadlines due to federally declared disasters, significant fires, or terroristic or military actions. And of course, over the last several years we've [00:47:00] seen a lot of these due to natural disasters as well as the Covid 19 pandemic. A taxpayer has, until the end of that postponement period to perform a tax related act, with a due date that falls within the postponement period and is eligible for relief from interest, penalties, additional amounts or additions tax during that postponement period. This is all out of section 7508 cap A now what does this do to the refund statute of limitation? So a postponement is not an extension [00:47:30] like I just said. Rather, it permits the IRS to disregard deadlines for up to one year for purposes of calculating tax liabilities, assessing penalties and interest and amounts of credit or refund. So this can help the taxpayer by giving them relief from deadlines and penalties during that period of postponement. However, it is not an extension, Chin, so it will not affect [00:48:00] the statute of limitations directly unless IRS actually provides specific relief. So unless Treasury, the IRS offers specific relief, a postponement under section 7508 cap A does not affect the lookback period under 6511 B2A, and this comes from the regulations under section 7508 cap A. Now this became an issue during the [00:48:30] Covid pandemic.
Jeremy Wells: So we got two postponements. The first one was for tax year 2019 and that postponement was until postponed the deadline until July 15th of 2020. Then for 2020 tax year 2020, the deadline was postponed to May 17th 2021. Now, this left taxpayers who didn't file extensions for those tax years stuck with potentially valid refund claims, yet they didn't [00:49:00] have any periods within lookback period because those payments were still deemed filed as of April 15th for those tax years. So if you waited until you filed the return, if you waited until the end of that postponement period, and let's say you filed your 2019 tax return on July 15th, which was timely filed due to the postponement. However, if you waited until July 15th of 2023 to file a claim [00:49:30] for refund, the three year look back period went from July 15th of 2023, back to July 15th of 2020, but all the payments were deemed made April 15th of 2020. So IRS in notice 20 2321 provided relief by disregarding those postponement periods for purposes of the lookback period, so it made it to where a claim for refund on July 15th of 2023 [00:50:00] could look back all the way to April 15th of 2020 for tax year 2019 and similarly for 2020. But that only was allowed because of that extra IRS notice. 20 2321. There's a common misunderstanding, right? And this is this is really at the heart of this topic. And I want to make sure this is clear.
Jeremy Wells: There's a common misunderstanding that the refund statute end date is I'll see this [00:50:30] a lot. It's three years from the due date is how I'll see that expressed. And that is not accurate. I want to give a hat tip here to Tom Gorzinski for coming up with that line and for educating on this topic. He he helped me understand this topic a lot better as well. Um, but he's he's where I began to pick up on this because I had seen this a lot, especially throughout the Covid years. People were saying that the the refund statute in date is three [00:51:00] years from the due date. And I just want to make it very clear that that is not accurate. The end date is actually three years from the filing date or possibly two years from the payment date. Now, generally for people who file on time, we're talking about the due date being the same as that, uh, start of that refund statute of limitations, period. However, there are a couple reasons where that may not be the case. Fairly [00:51:30] common. Uh, example. So one is a late filed original return claiming payments made within the three years prior to the returns filing date. Right. So it might work out to where you file that late return. You're able to look back to a period claim, uh, some payments, but it's not necessarily three years from the due date. And then there's also, uh, amended returns, amended returns where the payments were [00:52:00] made after the deadline.
Jeremy Wells: Right. In those cases, you might have payments made after the deadline, but a valid refund claim made more than three years after the due date, could look back into those payments made after the deadline. And so the due date or the deadline may or may not be relevant for thinking about the refund statute of limitations. [00:52:30] It's much better to think about that end date as relative to the filing date or the payment date, and not the due date. So remember that. Keep that in mind if you take anything away from this episode. The refund statute of limitations is based on the filing date and the payment date. So to sum all this up, no. When the that end date is and no when your lookback period is [00:53:00] once a refund statute of limitations period has passed. Once you're past that end date, there's virtually no going back at that point. There are some very limited exceptions where you might be able to go back past that point, but in general, once you have past that date, whatever you might have been able to claim as a refund is lost and it is lost forever. So determining a taxpayer's are set in lookback period is critical. When considering whether [00:53:30] to amend a return or claim a refund, it can mean the difference between a refund claim and losing that money forever. There's been another episode of Tax Action Podcast, I'm Jeremy Wells, thank you very much.