Interest on Refunds Claimed on the Original Return
The general rule is that the government will pay interest from the “date of the overpayment” to the date of the refund. Normally the “date of the overpayment” will be the last date prescribed for filing the tax return, without regard to any extension—April 15th for individuals—unless some of the payments shown on the return were actually made after that date. But there are three exceptions applicable to refunds claimed on the original return:
- Under section 6611(b)(2), there is a “refund back-off period” of “not more than 30 days” before the date of the refund, during which interest is not payable. In practice, this period is significantly less than 30 days. See Bob Kamman’s post and the comments for details.
- Under section 6611(b)(3), if a return is filed late (even after taking into account any extension), interest is not payable before the date the return was filed.
- Under section 6611(e)(1), no interest is payable if the refund is made promptly—within 45 days after the later of the filing due date (without regard to any extension) or the date the return was filed.
Section 6611(b)(3) and (e)(1) affect when overpayment interest starts running, while section 6611(b)(2) affects when it ends.
Other Code provisions, however, may adjust this further.
When Is the Return Considered Filed?
This is where “processible” comes in. Section 6611(g) says that for purposes of section 6611(b)(3) and (e), a return is not treated as filed until it is filed in processible form. As the PMTA explains, a return that is valid under Beard v. Commissioner, 82 T.C. 766 (1984), may not be processible yet, because it omits information the IRS needs to complete the processing task. IRM 126.96.36.199.16(2) gives an example of a return missing Form W-2 or Schedule D. Those are not required under the Beard test, but the return cannot be processed “because the calculations are not verifiable.” The PMTA also mentions a return submitted without the taxpayer identification number; still valid under the Beard test but the IRS needs the TIN to process it.
As a result, under normal conditions, if a valid but unprocessible return is filed timely, and a processible return is not filed until after the due date, the latter is treated as the filing date for purposes of section 6611(b)(3) and (e). The return is late, so the taxpayer is not entitled to interest before the date the (processible) return was filed. And the 45-day window for the IRS to issue a refund without interest doesn’t start until the (processible) return was filed.
And Now We Add COVID Relief
The previous discussion covered normal conditions, but today’s conditions are not normal As we all recall, the IRS issued a series of notices in early 2020 that postponed the due date for filing 2019 Federal income tax returns and making associated payments from April 15, 2020, to July 15, 2020. The IRS did the same thing for the 2020 filing season, postponing the due dates from April 15, 2021, to May 17, 2021. (Residents of Oklahoma, Louisiana, and Texas received a longer postponement, to June 15, 2021, as a result of the severe winter storms.)
This relief is granted under authority of section 7508A(a)(1), responding to Presidential declarations of an emergency or terroristic/military actions. For purposes of determining whether certain acts were timely, that provision disregards a period designated by Treasury—in effect, creating a “postponed due date.” The acts covered are specified in section 7508(a) and potentially, depending on what relief Treasury decides to grant, include filing returns and making payments. For the 2019 filing season, the IRS initially postponed the due date for payments and then later expanded that relief to cover the due date for filing tax returns.
(Yes, the section 7508A provision for Presidentially declared emergencies piggybacks on the section 7508 provision for combat duty. As bad as the disruptions caused by COVID have been, I prefer them to serving in an actual “combat zone.” Hurricane Ida, which I am also thankful to have missed, may be somewhere in between. All get similar relief from the IRS.)
Section 7508A(a)(2) goes beyond determining that acts were timely. It states that the designated period, from the original due date to the postponed due date, is disregarded in calculating the amount of any underpayment interest, penalty, additional amount, or addition to tax. No penalties or underpayment interest accrue during periods before the postponed due date, just as they don’t accrue (in the absence of a Presidentially declared emergency) before the normal due date.
That’s the right result, and section 7508A(a)(2) is necessary to reach it. Section 7508A(a)(1) simply says that the specified period is disregarded in determining whether acts—such as payment of the tax balance due—are timely. It doesn’t explicitly modify the dates prescribed elsewhere in the Code for those acts. The underpayment interest provisions, on the other hand, don’t focus on whether a payment was timely. Section 6601(a) says underpayment interest starts as of the “last date prescribed for payment” and section 6601(b) defines that without reference to any postponement under section 7508A.
What about overpayment interest on a refund? Section 7508A(c) applies the rules of section 7508(b). That provision tells us that the rule disregarding the period specified by Treasury “shall not apply for purposes of determining the amount of interest on any overpayment of tax.” Great! We won’t owe interest for that designated period—April 15, 2020 to July 15, 2020 for the first emergency declaration above—on a balance due, but we can potentially be paid interest for that period on a refund.
Section 7508(b) also states that if a postponement with respect to a return applies “and such return is timely filed (determined after the application of [the postponement]), subsections (b)(3) and (3) of section 6611 shall not apply.” That certainly sounds reasonable with respect to 6611(b)(3); it’s a de facto penalty of sorts for filing late, but if you filed your 2019 tax return by July 15, 2020, that should be treated as though you had paid by the original due date of April 15, 2020.
Section 6611(e)(1) is a little bit different. It’s not a de facto penalty for late filing; it’s essentially (1) a recognition that processing returns and issuing refunds takes some minimal amount of time and (2) possibly a small incentive for the IRS to do that expeditiously. But when Treasury grants relief after a Presidentially declared emergency, any refund issued from a timely return will include interest, unless some other provision overrides it. That’s what Bob Kamman’s Procedurally Taxing post pointed out and explained.
And Now, the PMTA
It appears that the PMTA is correcting earlier analysis. I haven’t been able to track down any earlier guidance, but the PMTA refers to “our previous conclusions” and those differed from the conclusions in the PMTA. The conclusions in the PMTA seem correct. Summarized:
- If the IRS determined a postponed due date under section 7508A, a return filed by the postponed due date means section 6611(b)(3) and (e) do not apply. The return need only be valid under the Beard test to be timely and trigger the provisions of section 7508A; it doesn’t need to be processible. This is what the “previous conclusions” got wrong, apparently thinking that whether a return was timely for purposes of section 7508A depended on whether it was processible. But section 6611(g) defines “timely” only for purposes of section 6611(b)(3) and (e), not section 7508A. It doesn’t matter whether the return was timely filed for purposes of 6611(b)(3) and (e); section 7508A negated them. The default rules below don’t apply. Interest will run from the date of the overpayment and there is no exception for a prompt refund.
- If the IRS determined a postponed due date under section 7508A, but a valid return is not filed by the postponed due date, it doesn’t meet one of the requirements for sections 7508A(c)/7508(b)—that the return is timely filed by the postponed due date—so the default rules below apply.
Default rules, if there was no section 7508A relief from Treasury, or the taxpayer did not file a valid return by the postponed due date. Sections 7508A(c)/7508(b) have no effect, so sections 6611(b)(3) and (e) are in effect and the return is “filed” only when it is processible pursuant to section 6611(g). Thus:
- If a processible return is filed by the original due date (or extended due date if applicable) it is not late under section 6611(b)(3), so interest runs from the date of the overpayment. If it is filed after the original due date (or extended due date if applicable) it is late under section 6611(b)(3), so interest runs from the date the processible return was filed.
- Whether or not the processible return is filed late, no interest is payable at all if the IRS makes a prompt refund under section 6611(e). The 45-day grace period starts at the later of the original due date (even if the taxpayer had an extension) or the date the return is filed.
Note that a return filed after the postponed due date (July 15, 2020) but on or before the extended due (October 15, 2020, if the taxpayer requested an extension) is not timely for purposes of section 7508A. As a result, sections 6611(b)(3) and (e) are not disregarded. But it is timely for purposes of 6611(b)(3). Interest runs from the date of the overpayment rather than the date the return is filed, but the taxpayer may still lose all interest if the IRS issues the refund promptly.
Although the PMTA doesn’t mention it, the “refund back-off period” of section 6611(b)(1) will apply in all cases. That rule is not dependent on whether a return is processible or filed timely, and it is not affected by a Presidentially declared emergency.
Two Final Thoughts
First, I think the PMTA is clearly right under the Code. That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading. I double-checked and triple-checked when I worked my way through the PMTA. This was actually a relatively mild instance of a common problem with tax. Code provisions are written in a very odd manner. They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them. I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”. My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners. Which group are you in?
Second, that (relative) complexity leads to mistakes. I assume that these interest computations have to be done by algorithm. There are simply too many returns affected to have manual review and intervention for more than a small percentage. An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year. Even when the law is clear, there is a lot of opportunity for mistakes to creep in. (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.) Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpreation and may not have included enough interest. Is the IRS proactively correcting such errors? If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate.