Court ruling could trigger millions in IRS COVID tax refunds
A federal court ruling revives a COVID-19-era tax question, and some Americans may be owed refunds.
The potential for a big COVID-era tax refund may have just gotten a haircut in the latest court ruling that touches on the subject, according to lawyers.
A federal tax court judge ruled last week in Bowen v. Commissioner that only deadline-related, not accuracy-related, penalties during the COVID-19 pandemic years qualify for the protections of Internal Revenue Code Section 7508A, the law used to allow the government to delay tax deadlines, stop penalty fees, and pause interest during emergencies like the 3½-year pandemic.
If the ruliing holds, COVID-related refund and abatement claims millions of Americans may have filed for by July 10 could be subject to this more limited interpretation by the IRS and see either smaller or no refunds.
However, lawyers warn this setback may only be temporary, and Americans should hang in.
“Appellate courts will have the final say,” wrote Matthew Lee, partner at Fox Rothschild in a blog post. “Final answers may take several years.”
What is Section 7508A meant for?
Section 7508A is meant to provide relief to taxpayers in times of crisis. By giving the IRS the authority to temporarily halt tax deadlines, affected individuals and businesses don’t have to face financial penalties for late filings or payments. The scope of relief is what various courts are deciding, lawyers said.
Kwong v. United States late last year kicked off the possibility the IRS would owe tens of millions of Americans COVID-era refunds. The judge in that Court of Federal Claims case said the IRS couldn’t assess underpayment interest, failure-to-pay penalties and failure-to-file penalties during the federal COVID-19 health emergency and disaster, and the time to file refund claims and United States Tax Court petitions was also suspended.
The IRS had tried to limit the period Section 7508A would apply to during the pandemic, but the Kwong case invalidated that attempt and said the halt to the tax deadlines extended through the end of the pandemic. Additionally, not only were filing deadlines postponed, but interest and penalties couldn’t accrue and the statute of limitations for claiming credits or refunds was suspended. The government is appealing this ruling.
The latest Bowen ruling didn’t limit the time period, but it narrowed the types of acceptable claims to only deadline-related ones, Lee said.
“Key questions about the breadth of Section 7508A relief remain unresolved,” Lee said.
What should Americans do?
For now, Americans should stay the course, lawyers said.
Any taxpayer, including individuals, small businesses, large corporations, estates, and trusts, could still be eligible for a refund or abatement, National Taxpayer Advocate Erin Collins has said.
“The issue reaches taxpayers with obligations related to income, employment, estate, gift, and excise taxes,” she said. “It may also affect taxpayers who filed late international information returns, which can result in significant penalties even when no tax is due.”
However, Americans will have to stay patient. “The appellate process is not known for expediency, so we expect it will take a few years for the courts to sort out these issues,” Lee said.
Courts also have to decide whether penalties originally assessed before the pandemic relief period and the related interest are subject to additional penalty and interest accrual during the pandemic relief period, experts said.
“The final answer will be determined by the Courts of Appeals and, perhaps, the Supreme Court,” Lee said.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.