Disaster Relief Delay for Actions Does Not Provide for Relief from Penalties or Interest for Acts With Due Date Before Disaster

IRC §7508A allows the IRS, for taxpayers affected by a federally declared disaster, terrorist, or military action, to delay for up to one year the period for performing certain acts under the IRC and, in such cases, disregarding such period for the imposition of interest, penalties, etc. related to that act.  In Chief Counsel Email 201723023, the question raised was whether who had failed to, say, file a return before the disaster took place would have penalties and interest waived for the period in question.

The memorandum concludes that the provision only grants relief from such penalties and interest if the date for taking the action took place after the disaster.  As the email notes:

Taxpayers who didn’t pay before the due date don’t get the benefit of IRC § 7508A with regard to the failure to pay penalties and interest that began accruing before the disaster hit. Under Treas. Reg. § 301.7508A-1(b)(2), an affected taxpayer is eligible for postponement of time to perform an act until the last day of the relief period if “the affected taxpayer is required to perform [the] tax-related act by a due date that falls within the postponement period.” The tax-related act at issue here (the paying of tax) falls outside the postponement period — the postponement period began August 11, 2016, and ended January 17, 2017. Payment of tax would have been due April 15, 2016, which was before the postponement period began. So in the fact pattern Cong. Graves’ office is asking us to consider, the penalties/interest began to accrue before the postponement period began. Consequently, taxpayers do not get a suspension of penalties/interest between August 11, 2016, and January 17, 2017. (If any of the affected taxpayers had valid extensions of time to pay, then the tax would have been due during the postponement period and the result would be different).

The memorandum directs the reader to Example 6 of Treas. Reg. §301.7508A-1(f).  That example provides:

Example 6.

(i) A is an unmarried, calendar year taxpayer whose principal residence is located in County W in State Q. A intends to file a Form 1040 for the 2008 taxable year. The return is due on April 15, 2009. A timely files Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Due to A’s timely filing of Form 4868, the extended filing deadline for A’s 2008 tax return is October 15, 2009. Because A timely requested an extension of time to file, A will not be subject to the failure to file penalty under section 6651(a)(1), if A files the 2008 Form 1040 on or before October 15, 2009. However, A failed to pay the tax due on the return by April 15, 2009 and did not receive an extension of time to pay under section 6161. Absent reasonable cause, A is subject to the failure to pay penalty under section 6651(a)(2) and accrual of interest.

(ii) On September 30, 2009, a blizzard strikes County W. On October 5, 2009, certain counties in State Q (including County W) are determined to be disaster areas within the meaning of section 1033(h)(3) that are eligible for assistance by the Federal government under the Stafford Act. Also on October 5, 2009, the IRS determines that County W in State Q is a covered disaster area and announces that the time period for affected taxpayers to file returns, pay taxes, and perform other time-sensitive acts falling on or after September 30, 2009, and on or before December 2, 2009, has been postponed to December 2, 2009.

(iii) Because A’s principal residence is in County W, A is an affected taxpayer. Because October 15, 2009, the extended due date to file A’s 2008 Form 1040, falls within the postponement period described in the IRS’s published guidance, A’s return is timely if filed on or before December 2, 2009. However, the payment due date, April 15, 2009, preceded the postponement period. Thus, A will continue to be subject to failure to pay penalties and accrual of interest during the postponement period.

Since the memorandum appears to have been written in response to a query from a Congressman, the agency does offer the possibility of other relief for such individua, indicating that when answering the query, the IRS should “suggest instead that his constituents (or their representatives) should advocate for abatement based on reasonable cause due to the particular facts/circumstances in each case.”