The IRS has begun sending out letters to taxpayers denying COVID-era claims, but the National Taxpayer Advocate warned that their fight for refunds or abatements may not be over.
The potential tax refund stems from a federal judge's ruling in Kwong v. United States late last year suggesting the federal tax filing and payment deadlines were automatically suspended during the federally declared COVID-19 disaster period from Jan. 20, 2020, through May 11, 2023.
Tens of millions of taxpayers may have been entitled to refunds or abatements of penalties and interest that the IRS assessed during the nearly 3.5-year COVID-19 federal disaster period, but the only way to receive relief was to file a claim by July 10. The government is appealing the ruling,
and no final decision has been made about whether the claims are valid.
Still, the IRS has already been sending letters denying them, but those denials may not necessarily mean taxpayers should give up. There's still a chance to file a lawsuit or get an extension until the courts decide what, if any, claims may be allowed, said National Taxpayer Advocate Erin Collins.
"If you received one of these letters, do not ignore it but don't assume it necessarily ends the matter either," she wrote in a blog. "Taxpayers who took timely steps to preserve their rights should not be placed at risk of losing those rights because the IRS prematurely denied or declined to process their claims while the controlling legal questions remain unresolved."
What do taxpayers need to know about the letters?
Taxpayers should carefully read the IRS letter to determine what kind of letter it is.
"Different IRS communications can have very different legal consequences," Collins said.
One of the most important distinctions is whether the IRS issued a statutory notice of claim disallowance under IRC § 6532(a). The IRS commonly uses Letter 105C to fully disallow a refund claim and Letter 106C to partially disallow a claim, she said.
"When the IRS mails a statutory notice of claim disallowance by certified or registered mail, the taxpayer generally has two years from the date the notice is mailed to file a refund suit," Collins said. That may also be extended, but both taxpayer and the IRS must agree on it.
Keep all your letters and records and determine if the disputed amount has been paid. "This is important because the procedures for an unpaid abatement request and a paid refund claim are different," she said.
Don't ignore collection notices if the amount remains unpaid and pay attention to deadlines. "Depending on your circumstances, you may be able to request that the IRS delay certain collection activity while the legal issues continue to be resolved. If your deadline may be approaching, consider obtaining professional advice," Collins said.
What should the IRS do?
The IRS needs to provide taxpayers with an explanation when it disallows a refund claim so they can make informed decisions and protect their rights while these legal issues remain unresolved, Collins said.
"Taxpayers should not have to decipher complicated procedural rules or consult an attorney simply to understand what the IRS has decided, why it reached that conclusion, and what steps they must take to preserve their rights," she said.
"I am particularly concerned that the IRS is sending letters to some taxpayers declining to process or disallowing their Kwong-related claims based on criteria that may not adequately account for the legal issues still being litigated," Collins wrote. "These letters can have significant consequences. Taxpayers may mistakenly believe their claims have no merit, abandon their efforts to obtain relief, or face unnecessary litigation to preserve their rights."
She said the IRS should hold the claims until the litigation has played out.
"Once the litigation is resolved, the IRS can evaluate the claims under the applicable law and determine whether additional information is needed before allowing or disallowing them," Collins said. It "would help protect taxpayers from prematurely losing their rights, reduce confusion, and avoid forcing taxpayers into unnecessary litigation while the courts determine the law. It would also allow the IRS to conserve resources and apply the final legal determination consistently to affected taxpayers."
Glen Frost, founding partner of Frost Law, agreed with Collins saying: "We've seen little consistency in the responses the IRS has sent regarding Kwong-related claims, frequently without instructions or deadlines for taxpayers."
Frost said Collins "makes a number of common-sense recommendations that would help taxpayers, particularly given the large number of open legal questions tied to the Kwong case. These recommendations would help taxpayers on multiple levels, and they would also help the IRS avoid more tax administration headaches in the future."
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.
This article originally appeared on USA TODAY: Got an IRS denial letter for COVID tax refund? Don't give up just yet
