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Lookback Rule: The IRS Fixes The Refund Trap For The Unwary

For tax year (TY) 2019, there were nearly 34 million returns filed between the postponed period of April 16, 2020, and July 15, 2020, and for TY 2020, there were nearly 29 million returns filed between the postponed period of April 16, 2021, and May 17, 2021. Without IRS intervention, any claims for credit or refund filed during the postponed period three years later that included withholding or estimated taxes would have been denied because the withheld amount(s) would have been credited to the taxpayer’s account as of April 15, outside the three-year lookback period.

Good news: Earlier today the IRS issued Notice 2023-21 addressing 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. Taxpayers will never know this was a potential problem as the IRS did the right thing and proactively fixed the lookback period to eliminate challenges and refund denials for taxpayers.

I first raised this issue internally after the IRS postponed the filing date for the 2020 filing season (TY 2019 returns). On May 11, 2021, I posted a blog, in which I publicly suggested the IRS publish guidance to remedy this problem and submitted a recommendation to include in the U.S. Department of the Treasury/Internal Revenue Service Priority Guidance Plan. I also provided a legislative recommendation as to how Congress could remedy this issue for these tax years and for all future instances when the filing deadline is postponed. This notice resolves the issue for the 2020 and 2021 COVID-19 disaster relief, yet it does not provide relief for other disaster filing postponements.
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Written by National Taxpayer Advocate | Posted in IRS

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
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Written by National Taxpayer Advocate | Posted in Lookback Rule