New Covid Tax Relief Cases Spur Wave of IRS Interest Challenges

Recent US Tax Court and US Court of Federal Claims decisions are prompting taxpayers to argue that the IRS should suspend interest on tax deficiencies during the Covid-19 pandemic from early 2020 through mid-2023 or pay additional overpayment interest because the interest-limiting provisions are turned off.

The core of their arguments is that the mandatory disaster relief provision in Section 7508A(d) is in effect for disasters declared before November 2021. The tax code section disregards the disaster period plus 60 days for determining whether a certain act is timely and for purposes of computing interest.

The potential benefit to taxpayers of a 39-month interest suspension is enormous, so the issue has triggered a wave of new lawsuits and Tax Court motions to redetermine interest.

Impact of Abdo

During the pandemic, the IRS postponed filing and payment deadlines and suspended underpayment interest during a much smaller window than the 39-month Covid-19 disaster period.

But the US Tax Court in Abdo v. Commissioner held that Section 7508A(d) “provides for an automatic and mandatory postponement period that incorporates all of the acts referenced by section 7508A(a).” As a result, relief is automatic and not limited to the IRS’ discretionary notices.

Abdo, however, didn’t address whether interest and deadlines were suspended for the entire disaster relief period plus 60 days because the beginning of the incident period plus 60 days provided the necessary relief in that case.

That means a critical open question remains: Does the maximum mandatory relief period extend to the end of the incident period plus 60 days, which for Covid-19 is July 10, 2023—over three years after the initial disaster declaration?

Kwong Extends Analysis

In Kwong v. United States, the Court of Federal Claims held last year that the maximum mandatory relief period for statutes of limitations runs through at least July 10, 2023. The court rejected the Treasury Department’s view that a one-year limit applies, finding nothing in Section 7508A(d) that mentions or implies a one-year limit.

This means that, in the statute of limitations context, the maximum mandatory relief period is at least the full 39 months. If Section 7508A(d) tolls the statute of limitations rather than postponing it—an issue expressly not addressed by Kwong—the relief period will be longer.

Interest Enters Picture

Taxpayers are increasingly arguing that an outstanding deficiency doesn’t accrue interest until July 2023—60 days after the government declared the pandemic was over. In Western Digital Corp. v. USA, filed Feb. 6, the taxpayer claims that interest on a 2008 deficiency was suspended from Jan. 20, 2020, until July 2023.

The IRS recently agreed in a Tax Court document in Mayronne v. Commissioner to suspend underpayment interest for a 2021 deficiency until July 10, 2023, perhaps signaling a change in its position of suspending underpayment interest to much earlier dates.

Fleisher v. United States, filed Feb. 9, opens another front—additional overpayment interest for taxpayers who filed returns during the mandatory relief period and later, based on tolling.

Normally, the IRS must pay interest on an overpayment unless an exemption applies. One common exemption is when the IRS pays a refund within 45 days. The core argument in Fleisher is that these exemptions (including the 45-day exemption) are disregarded during the mandatory relief period. The IRS notices addressing Covid-19 relief didn’t address overpayment interest at all.

Overpayment interest is payable from the date of the overpayment. For individuals, that’s usually the unextended due date of the return, which was April 15, 2022, for a 2021 return. The complaint seeks overpayment interest from that date.

It doesn’t matter that the Fleishers filed their tax return later (on Oct. 7, 2022) because their payments were deemed made by April 15, 2022. They normally wouldn’t receive interest because their refund was paid within 45 days, but they argue that Section 7508A(d) disregards that interest-limiting provision.

The tolling calculation can extend relief well beyond July 10, 2023.

For example, for a 2022 return filed by Oct. 26, 2023, the complaint seeks overpayment interest from the unextended due date of April 18, 2023, even if the IRS paid the refund within 45 days. The October date is calculated by adding the 108 days between Jan. 1, 2023, and the unextended due date of April 18, 2023.

For a 2022 return filed on extension, the complaint seeks overpayment interest for an even longer period.

This class action seeks recoveries for taxpayers whose claims don’t exceed $10,000.Taxpayers with greater overpayment interest claims may file suit in the Court of Federal Claims, which has jurisdiction over larger overpayment interest claims.

Next Steps

Taxpayers should review their IRS interest computations and evaluate potential claims for a refund of excessive underpayment interest and for additional overpayment interest. The statute of limitations for overpayment interest is six years from when the refund is scheduled.

Underpayment interest claims must be brought within the normal tax limitations period of three years from when the return was filed or two years from when the tax was paid. If a taxpayer has entered into an agreement with the IRS extending its period of limitations for assessments, the taxpayer may file an underpayment interest claim up to six months from the end of the extension agreement.

Taxpayers may argue for a longer limitations period based on the tolling rationale in Abdo and Kwong. For example, if a limitation period was already running on Jan. 20, 2020, it ran until that date, stopped during the incident period, and resumed with the unexpired portion after July 10, 2023. For a limitations period that hadn’t yet begun as of Jan. 20, 2020, the three-year period would begin running on July 10, 2023, and would end on July 10, 2026.

The developing case law counsels strongly in favor of preserving a taxpayer’s rights to pursue these interest claims.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Mary McNulty and Lee Meyercord are partners in the Dallas office of Holland & Knight and part of its tax controversy team, which McNulty co-chairs.

Write for Us: Author Guidelines