Would Filing an Extension Be Beneficial?
March 31, 2023
CAMICO has received numerous inquiries from policyholders regarding the merits of filing an extension as an added protection for both tax professionals and their respective clients in light of the current IRS tax relief guidance for victims of severe winter storms. Although some may not perceive a need to extend returns that qualify for automatic postponement, requesting an extension of time to file may be beneficial, even if not required.
Benefits of Filing an Extension
The postponement of the deadline to file tax returns and pay taxes provided as a result of a federally declared disaster is perceived, generally, as a blessing for impacted taxpayers and tax practitioners. However, the interplay between the postponement provided by the federally declared disaster relief provision (IRC § 7508A) and the statute of limitation for refunds (IRC § 6511), if not addressed, could adversely impact some taxpayers who later choose to file a refund claim. The potential issue exists because while the federally declared disaster relief postpones the deadline for filing tax returns and paying taxes, the postponement does not extend the time for claiming a refund or credit on such returns.
Statute of Limitations for Refund Claims (IRC § 6511) and Postponement Relief (IRC § 7508A)
Generally, a taxpayer’s claim for refund must be filed by the later of three years from the date the taxpayer is deemed to have filed the return to which the claim relates, or two years from the date the tax to which the claim relates was deemed paid. Moreover, pursuant to IRC § 6511(b)(2), the amount of a credit or refund is limited to the amount of tax paid within the “lookback period.”
Whether a claim for refund is timely depends on when the underlying tax return is deemed to have been filed.
For the purpose of § 6511, a return is deemed filed on the statutory due date if the return is filed on or before such date [IRC § 6513(a)]. If the return is filed after the statutory due date, it will be deemed filed on the date that it is actually filed.
Therefore, taxpayers qualifying for the IRS postponement who do not file a valid extension would, consequently, be limited to the unextended lookback period for purposes of determining the amount of tax paid that can be refunded.
However, if a taxpayer obtains a valid extension, the lookback period would be extended as well, which effectively extends the time to make a refund claim. It should be noted that for taxpayers with a valid extension, the return is deemed filed on the date the return is actually filed and not on the extended due date [Treas. Reg. § 301.6501(b)-1(a)].
The lookback period is defined as the three-year period preceding the filing of the claim, plus any extension (but not postponements1) of time for filing the return.2 Under IRC § 6511(b)(2), the amount of a credit or refund is limited to the amount of tax paid within a specified period immediately preceding the filing of the claim for credit or refund. For a calendar-year taxpayer, withheld and estimated income taxes are deemed paid on the statutory due date of the tax return, generally April 15 of each year. See IRC § 6513(b)(1) and (2).
For example, currently, the IRS provides relief for victims of severe winter storms, flooding, landslides, and mudslides in California. Specifically, CA-2023-02 postpones certain federal tax return filing and payment obligations that were due to be performed on or after December 27, 2022, and before October 16, 2023. The postponement grants taxpayers additional time to file and pay taxes through October 16, 2023.
Under IRC § 6511, taxpayers who timely filed their tax returns by the postponed due dates provided by CA-2023-02 have three years from the date of filing their return to timely file a claim for credit or refund for that year. Although CA-2023-02 postponed certain return filing due dates, the notice did not extend the time for filing returns because a postponement is not an extension.
As a result, the postponements did not lengthen the lookback periods under IRC § 6511(b)(2)(A), and the dates on which withheld taxes are deemed paid under IRC § 6513(b)(1) or (2) were not affected by CA-2023-02. The postponement could allow a calendar-year taxpayer until October 16, 2023, to timely file a claim for credit or refund for their 2022 taxable year postponed by CA-2023-02. However, in order for the applicable lookback period to include all available amounts, taxpayers who did not receive an extension of time for filing a return must file a claim for credit or refund within three years of the statutory due date. Thus, taxpayers relying solely on federal relief in the form of postponement who otherwise timely filed a refund claim may find that the three-year lookback period does not reach back to when taxes were deemed paid.
The IRS has extended the lookback period to correspond with the postponement period in response to the coronavirus pandemic (see IRS Notice 2023-21). To date, the IRS has not extended the lookback period in response to weather-related disasters.
Given the above, CAMICO recommends policyholders advise impacted clients to consider requesting a federal extension of time to file because doing so increases the period of time for an effective refund claim to be made. While the likelihood of needing the additional protection of an extended lookback period is remote for most clients, the added protection afforded by filing the federal extension may be prudent. Also, generally, there is no apparent downside to advising clients to request an extension to file their income tax return. If a taxpayer chooses not to request an extension and instead relies on the postponement, the taxpayer should be informed that the tax will be deemed paid on the unextended due date (i.e., April 18, 2023), which could lead to unfavorable tax consequences were a refund claim to be made after April 18, 2026.
Request for Federal Extension to File Tax Return in General
In addition to the federally provided postponement issue discussed above, there is also a general case to be made for requesting a federal extension of time to file in that it provides taxpayers with the opportunity to file a “superseding return” during the extension period. A superseding return can be useful for taxpayers who learn during the period after they filed their return, but before their extension expires, that they failed to make a desirable election, or they discover an error or omission in their originally filed tax return.
A superseding return is essentially a replacement tax return that supersedes the original return. It is generally treated as an original return, which means that any changes made within the superseding return are considered final and official. Taxes, interest, and penalties may still accrue from the original due date of the return, even if a superseding return is filed, but the extension permits the superseding return to be used as a substitute for the originally filed return without having to amend it.
However, it’s important to note that the IRS does not consider the superseding return to replace an original return for determining the statutes of limitation for assessments and for the filing of refund claims.3
Risk Management Guidance
CPA firms are on the “front line” for assisting their clients and understanding the options for relief through IRS disaster declarations. You can help your impacted clients make informed decisions about their filing and payment obligations. Although the IRS relief for victims of severe storms is certainly welcome, there could be unintended consequences as noted in this communication which could pose added professional liability exposure. Tread carefully and consider whether the benefits of filing an extension for affected clients would be prudent and take action accordingly.
As always, if you have any questions regarding the risk management guidance provided, please contact CAMICO at 800.652.1772 or email our Loss Prevention Department at email@example.com.
1According to the Treasury, the postponement of time under IRC § 7508A to perform certain acts (e.g., file a tax return or pay taxes) is not an extension of the due date for the act [See Treas. Reg. § 301.7508A-1(b)(4)].
2Pursuant to IRC § 6511, the amount of the credit or refund that can be made has two elements:
- The claim must be made timely, and
- The payment of the amount in issue must have been made within a certain time period prior to the filing of the claim (“lookback period”)
The period for filing a timely claim for refund is governed by § 6511(a). If a claim is not timely under § 6511(a), then § 6511(b)(1) provides that no credit or refund shall be allowed. However, if the claim is timely under § 6511(a), the lookback period provided for in § 6511(b)(2) may limit the amount of a credit or refund depending on the timing of when the claim is filed. The requirements of both § 6511(a) and § 6511(b) must be met for the taxpayer to receive a refund or credit of an overpayment.
3See Chief Counsel Advice (CCA) 202026002 where the IRS outlines its position.