You probably didn’t learn about Section 7508A in your tax classes. But its powerful provisions—and the government’s approach to them—have much to teach tax practitioners.
Section 7508A, which addresses the interplay between the federal tax system and federally declared disasters, has been in the news following the unprecedented Covid-19 emergency. In January 2021, the Treasury and the IRS issued proposed regulations under the section. This past month, the comment period closed for those proposed regulations. Soon thereafter, the government exercised its authority under Section 7508A to postpone certain tax deadlines nationwide for the second year in a row.
For taxpayers affected by the Covid-19 pandemic and other disasters now and in the future, these developments have significant implications for determining filing deadlines, limitation periods for refund claims and amended returns, and Tax Court petition deadlines, as well as for calculating interest and penalty accrual.
THE BASICS OF SECTION 7508A
Section 7508A provides two key methods for accommodating taxpayers affected by federally declared disasters.
The first permits the Treasury to postpone aspects of tax administration for up to one year for taxpayers affected by a disaster. Given a federally declared disaster, the Treasury Secretary may specify whether, how long, for whom, and for what purposes a period of up to one year may be disregarded. Under this provision, tax return filing deadlines, related assessment periods, Tax Court deadlines, and collection efforts can all be delayed. In addition, the period can be disregarded for purposes of calculating interest, penalties, or additional tax.
The second portion of Section 7508A designates a “mandatory 60-day extension” period spanning from the earliest incident date specified in a disaster declaration through 60 days after the latest incident date.
This second method for disaster relief, found in Section 7508A(d), was enacted in late 2019—mere months before the start of the Covid-19 pandemic in the U.S. Although Congress intended this addition to bring clarity and certainty to disaster-afflicted taxpayers, the Covid-19-related emergency and major disaster declarations spurred questions about whether a mandatory postponement period had been triggered.
The provision’s main sponsor in Congress, Rep. Tom Rice (R-S.C.), himself a tax attorney, believed that the provision had been triggered. But the IRS soon announced its view that the emergency declaration and ensuing state-by-state disaster declarations had not brought on a mandatory postponement period.
The IRS’s announcement left key questions unanswered:
- Why did neither the Covid-19 emergency declaration nor state-by-state major disaster declarations trigger a mandatory postponement period?
- Which tax acts and deadlines would be postponed if a mandatory postponement period were triggered?
- What is the effect of a disaster declaration, such as the Covid-19-related emergency declaration, that does not specify an incident date?
THE PROPOSED REGULATIONS
The proposed regulations clarify the IRS’s reasoning:
- A mandatory postponement period applies only if the Treasury first exercises its discretionary authority for a given disaster.
- A mandatory period delays only those acts and deadlines otherwise specified by the Treasury under its discretionary authority.
- No mandatory period applies for a disaster declaration that does not specify an incident date.
Under these principles, the state-by-state major disaster declarations for Covid-19 did not trigger a mandatory period, because the Treasury did not exercise its discretionary authority with respect to those declarations. And although the government has twice delayed certain income tax deadlines by exercising its discretionary authority with respect to the emergency declaration of March 13, 2020, no mandatory period is triggered because that emergency declaration fails to specify an incident date.
Furthermore, the proposed regulations mean that a “typical” major disaster declaration with specified incident dates (e.g., a severe hurricane) results in no postponed tax deadlines unless and until the Treasury acts—which could be days after the disaster or days after the otherwise applicable tax administration deadline. It is no doubt for this reason that proposed legislation has already been introduced to ensure a mandatory postponement.
COMMENTS ON THE PROPOSED REGULATIONS
In written comments, we argued that the proposed regulations contradict the statutory language and Congressional intent by declining to recognize a truly mandatory postponement period. The IRS’s narrow approach has particularly harsh ramifications for lower income taxpayers, and similarly fails to meet the needs of small business and corporate income taxpayers affected by disasters.
The proposed regulations are in tension with the statute in several respects. Most prominently, whereas the statute describes a “mandatory” deadline delay, the proposed regulations subject any delay to the Secretary’s discretion.
The proposed regulations also limit mandatory postponement periods to one year, despite a statutory mandate running from the earliest to the latest specified incident dates for a disaster and a further 60 days. One commenter suggested that disasters announced by declarations failing to specify an ending incident date could be treated as one-day disasters to avoid potentially unintended results with once-in-a-generation disasters like Covid-19.
In other respects, the Treasury rightly identified facially unclear statutory language, such as the description of which deadlines and acts must be postponed during a mandatory period. However, the legislative history resolves any ambiguity, making clear that at least some deadlines are extended automatically—most obviously the income tax filing deadlines.
It is worth noting that a mandatory period may potentially postpone government deadlines alongside taxpayer deadlines. The IRS also could benefit from postponed deadlines for assessment or collection under either part of Section 7508A. One comment noted that such an interpretation would “create traps for unwary taxpayers.” We suggested that final regulations prevent the IRS from exercising its rights under a mandatory period unless the taxpayer first relied on the extended period.
TAKEAWAYS FOR TAX ADVISERS
Reduced penalties and interest and ‘late’ refund claims and Tax Court petitions
The arguments presented by comments to the proposed regulations suggest a line of defense for taxpayers facing assessment of interest and penalties. Advisers with such clients may consider arguing that a mandatory postponement period has automatically tolled interest and penalty accrual through the Covid-19 disaster period or with respect to other declared disasters.
Advisers may also consider whether clients have an opportunity to file otherwise-late refund claims or Tax Court petitions under the positions advanced in comments.
For example, consider an individual with an unclaimed Earned Income Tax Credit for the 2016 taxable year, or a corporation that has discovered unclaimed research credits reaching back to 2016. In each case, the deadline for claiming a refund via an amended tax return would ordinarily have passed in 2020. But based on the arguments presented in comments, those taxpayers may be able to avail themselves of a mandatory postponement period dating from last year.
To be clear, a refund claim on this theory is not an approach to be taken lightly. The pros and cons should be carefully weighed for each taxpayer’s situation before proceeding. But in some cases, it may be a strategy worth pursuing.
Consider when to comment on or even challenge tax guidance
From a broader perspective, this serves a timely reminder for tax advisers to carefully assess tax guidance.
With the past few years seeing the enactment of the Tax Cuts and Jobs Act, the SECURE Act, the FFRCA, the CARES Act, and the ARPA, the Treasury and the IRS have performed admirably in delivering a tremendous amount of guidance in a brief span of time. Inevitably, however, taxpayers and practitioners have questioned policy choices and even the validity of certain aspects of this guidance.
Commenting on proposed regulations is one effective way of engaging with the process on behalf of clients. The IRS has historically been receptive to well-reasoned comments and has adopted suggestions from taxpayers and their advocates. Even when commenters’ suggestions are not adopted, they can play a role in shaping discussion around an issue and influence future regulations, legislation, or court opinions.
Once finalized, regulations generally enjoy substantial deference from courts. But the Administrative Procedure Act and administrative law doctrines limit the Treasury’s authority in important ways. It is increasingly important for tax advisers to be able to identify and challenge rules susceptible to challenge on grounds of invalidity.
The Treasury now has an opportunity to finalize regulations under Section 7508A with an eye toward providing certainty to taxpayers affected by disasters. Although the deadline for formal comments on the proposed regulations has passed, taxpayers and their advisors can still make their voices heard by asking legislators to pick up proposals to clarify Section 7508A or submitting informal written comments to the IRS. Regardless of how the final regulations resolve these questions, tax advisors should remain alert for opportunities to help disaster-afflicted clients seek relief under Section 7508A.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jonathan Holbrook is an associate, and Spencer F. Walters is a partner at Ivins, Phillips & Barker, Chtd. in Washington.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.