IRS fixes refund trap

The refund trap occurs when there are different credit and refund deadlines.

If you discover missed credits in previous years, it’s important to know the deadline to avoid missing your additional refund.

The IRS fixed a problem that could have prevented you from claiming overdue COVID-19-related tax refunds from the last few years.

You can claim refunds and credits if you make the request within three years from the date your return was filed or two years from the date your tax was paid, whichever is later.

For example, suppose you were an employee in 2019. The original due date for filing your tax return was April 15, 2020. Your tax withholding from your paycheck would be deemed by the IRS to have been paid on April 15, 2020. However, the filing deadline was postponed to July 15, 2020. This situation would cause a payment date that was different from your filing date deadline.

Refunds claimed within three years from when the return was filed are limited to the tax payments made within those three years, according to the lookback clause.

The timeframe allowed to claim credits and refunds and credits are called the "lookback" clause by the IRS.

The National Taxpayer Advocate recommended that the IRS fix the problem permanently and protect the "taxpayer's right to pay no more than the amount of tax."

"I am pleased the IRS addressed this issue for TYs 2019 and 2020. However, the relief offered in this notice is limited to only the COVID-19-related postponements and doesn't offer a permanent solution for other disaster relief," Erin M. Collins, the National Taxpayer Advocate, wrote in a blog this week. "Therefore, I have made a legislative recommendation for the last couple of years that would fix this problem permanently and prevent taxpayers from being harmed and falling into a trap for the unwary."

The new IRS ruling only applies to the 2020 and 2021 tax-filing seasons for 2019 and 2020 tax returns, respectively.

But the IRS often delays tax-filing deadlines for disasters, such as hurricanes and floods. A future delay of tax-filing deadlines could result in some people could face the refund trap again.

It's common for people to realize they missed a deduction or credit after they filed their return. The IRS receives about 3 million amended tax returns annually, according to recent release by the IRS.  Amending your  tax return allows you to retroactively claim a credit that was not on the original return.

In 2019 the deadline was postponed from April 16, 2020, to July 15, 2020. Almost 22% of the returns were filed during the postponement period. The people who filed during the postponement period could potentially be in the refund trap if they tried to claim refunds or credits for 2019.

If you are filing for an additional refund, don’t miss the deadline.

David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at David can be reached at (865) 363-3019 or contacted by email at