Today we welcome back guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. He discusses the issue of 7508A and this year’s tax deadlines.
Most years, the due dates for federal tax filings and payments are obvious. This year, the answers are not so clear, especially as disruption caused by the COVID-19 pandemic continues to spread through the summer.
As some practitioners noted early this spring, this year is different for two reasons: COVID-19 and Congress. COVID-19 has created, among other things, an ongoing nationwide disaster. And Congress, late last year, passed a law shielding qualified taxpayers against tax deadlines until 60 days after the last incident in a presidentially-declared disaster area
In this post, we focus again on the potential technical “60-day rolling shield” defense to tax deadlines provided by section 7508A(d) of the Internal Revenue Code. As applied to the pandemic, this position has been embraced by the American Bar Association Tax Section and the IRS National Taxpayer Advocate. Taxpayers facing significant financial hardships—and their advisors—should consider the merits of this position before reaching for their checkbooks on July 15, the extended due date set by IRS. The ability to use the funds for other purposes, delinquency penalties, and interest hang in the balance.
Background: How Hard Can It Be To Figure Out Tax Deadlines?
IRS computers automatically assess delinquency penalties on late-filed returns and late-paid taxes. These penalties can be substantial. They are, however, subject to reasonable cause relief for taxpayers who exercise ordinary business care and prudence. Outside the context of IRS administrative waiver provisions (like first-time abate), it is hard to obtain reasonable cause relief for delinquency penalties, especially when claiming reasonable reliance on professional advice.
As the Supreme Court noted in the 1985 Boyle case: “The Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards. Any less rigid standard would risk encouraging a lax attitude toward filing dates. Prompt payment of taxes is imperative to the Government, which should not have to assume the burden of unnecessary ad hoc determinations.” All well and good.
Here’s the punchline from Boyle: “It requires no special training or effort to ascertain a deadline and make sure that it is met.” In Boyle, the Court rejected an executor’s claimed reliance on an attorney to prepare and timely file an estate tax return to avoid delinquency penalties. The Court established a bright-line general rule, holding that that the failure to timely file could not be excused by the taxpayer’s reliance on an agent to establish reasonable cause for a late filing. The Court allowed, however, that this general rule would not apply in “a very narrow range of situations.”
In particular, Boyle explicitly declined to resolve the circuit split as to whether a taxpayer demonstrates reasonable cause sufficient to avoid delinquency penalties when, in reliance on the advice of an accountant or attorney, the taxpayer files a return after the actual due date but within the time the advisor erroneously thought was available. Before and after Boyle, the Tax Court and some circuit courts consistently have held that erroneous professional advice with respect to a tax deadline constitutes reasonable cause if such reliance was reasonable under the circumstances.
This Year: Pretty Hard
This year, there is a legitimate question about when federal tax returns must be filed and federal tax liabilities paid. In short, this year we may have fallen into one of those narrow situations anticipated by—and expressly reserved in—the Supreme Court’s Boyle opinion.
As noted above, in late 2019 Congress amended the Internal Revenue Code section that gives Treasury authority to postpone tax deadlines by reason of presidentially declared disasters. In a nutshell, new section 7508A(d) extends the postponement period for any qualified taxpayer 60 days after the “latest incident date” specified in the presidentially declared disaster declaration, “in the same manner as a period specified under subsection (a).” Section (d) applies in addition to any other postponement period provided by IRS and Treasury under subsection (a).
Every FEMA Major Disaster Declaration with respect to COVID-19 lists January 20, 2020 as the start date of the “Incident Period.” On March 13, 2020, the President issued an emergency declaration under the Stafford Act in response to COVID-19. The Emergency Declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” IRS and Treasury invoked section 7508A(a) by issuing Notice 2020-23 and other guidance postponing tax filing and payment deadlines until July 15 for all affected taxpayers. Neither the President nor IRS mentioned section 7508A(d) in the declaration or guidance, and IRS didn’t say on which day the Incident Period started: January 20, March 13, or some other date.
While some may argue that Congress did not contemplate ongoing disasters (such as the COVID-19 outbreak) when enacting subsection (d), the provision by its terms is not limited to time-limited disasters such as tornados, hurricanes, or floods.
In March, the IRS issued a tolerably terse statement for use in a Wall Street Journal article: “The President’s March 13 Stafford Act declaration didn’t automatically trigger the full range of filing relief.” Since then, IRS and Treasury have gone mute on the question as to why, in their view, section 7508A(d) does not add a rolling 60-day tail onto the end of the relief Treasury provided under section 7508A(a).
Interested groups have asked IRS for more time, but last week the IRS Commissioner testified to the Senate Finance Committee that IRS anticipates no shift from its current position that July 15 is the final payment deadline for postponed payments. “Protecting the revenue” is always a dubious rationale for IRS enforcement priorities, see Rev. Proc. 64-22, and it seems even more so in the current environment. To be clear, the Commissioner assured the Senate Finance Committee that IRS will “exercise discretion on the back end,” but it is better to build a technical basis before taking a tax position rather than depend on the discretion of the IRS afterwards.
Practitioners and academics continue to discuss the merits of the 60-day rolling shield position. Most taxpayers with no liquidity issues or appetite for picking a fight with IRS will pay their outstanding taxes on or before July 15. And IRS offers many payment plans and alternative arrangements to qualifying taxpayers.
Most taxpayers do not plan into fights with the IRS, and taxpayers and practitioners should not take the 60-day rolling shield position as an opportunistic way to circumvent the postponed due dates. Nevertheless, the position might be proven correct in time.
Taxpayers in dire straits may want to work with their professional tax advisor to consider whether they may further postpone their tax filing and tax payment obligations this year. The first building blocks in any such position would rely on more well-established grounds for reasonable cause relief, such as “undue hardship.” But the 60-day rolling shield position deserves serious consideration as well. Even if the 60-day rolling shield position is not sustained, obtaining competent professional advice before July 15 may mitigate the downside risk of delinquency penalties for taxpayers who rely on that advice in good faith.
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author(s) only, and does not necessarily represent the views or professional advice of KPMG LLP.