15 Jun New Court Ruling May Create Tax Refund Opportunities for Some COVID-Era Penalties

A recent federal court decision may create refund opportunities for taxpayers who paid IRS penalties or interest during the COVID-19 pandemic.

In Kwong v. United States, the U.S. Court of Federal Claims ruled that certain federal tax deadlines were automatically suspended during the entire federally declared COVID-19 disaster period. If the ruling ultimately stands, many taxpayers may be entitled to refunds or abatements of penalties and interest assessed between 2020 and 2023.

What Happened in the Kwong Case?

The case began when taxpayer Terry Kwong challenged the IRS’s position that his refund lawsuit was filed too late. The court examined Internal Revenue Code Section 7508A, which provides relief when a federally declared disaster occurs.

The IRS had previously interpreted the law as allowing only limited deadline extensions during the pandemic. However, the court concluded that the statute automatically postponed tax-related deadlines for the entire COVID-19 disaster period—from January 20, 2020, through May 11, 2023—plus an additional 60 days. As a result, the court determined that many tax deadlines were effectively extended through July 10, 2023.

Why Does This Matter?

The ruling goes beyond the specific facts of the Kwong case. If the court’s interpretation is upheld, it could impact millions of taxpayers who incurred IRS penalties or interest during the pandemic years.

The court’s reasoning suggests that the IRS may not have had authority to assess certain failure-to-file penalties, failure-to-pay penalties, estimated tax penalties, and related interest charges during the suspended period. Taxpayers who already paid those amounts may have grounds to request refunds, while those who still owe them may be able to seek abatement.

Who May Be Affected?

Potentially affected taxpayers include:

• Individuals who filed tax returns late during the pandemic period
• Taxpayers who paid their tax liabilities after the original due dates
• Taxpayers who were assessed estimated tax penalties
• Individuals that paid interest on outstanding federal tax liabilities during the affected period

In general, any filing or payment obligation that was originally due between January 20, 2020, and July 10, 2023, may warrant review. This includes obligations related to multiple tax years, not just one specific return.

A Potential Refund Opportunity

Many tax professionals believe the decision could lead to substantial refund opportunities. Some estimates suggest that tens of millions of taxpayers may have been assessed penalties or interest during the COVID-19 disaster period that could now be subject to challenge.

However, refunds will not be issued automatically. Taxpayers generally must file a claim with the IRS to preserve their rights.

Important Filing Deadline

For many taxpayers, the key date is July 10, 2026.

Because of the court’s interpretation of the disaster relief rules, many refund claims that would otherwise be considered untimely may still be filed through that date. Tax professionals are often recommending that eligible taxpayers file protective refund claims before the deadline to preserve their rights while the litigation continues.

A protective claim does not guarantee a refund, but it helps ensure that taxpayers do not lose the opportunity to benefit if the courts ultimately uphold the ruling.

The IRS Does Not Agree

It is important to note that this issue is not yet settled.

The IRS has not adopted the court’s interpretation, and additional litigation or appeals are expected. As a result, taxpayers should not assume that refunds will be automatically approved. Nevertheless, many advisors believe filing a timely claim is a prudent step because waiting until the legal process concludes could result in missed deadlines.

What Should Taxpayers Do Now?

Taxpayers who paid IRS penalties or interest between 2020 and 2023 should consider reviewing their IRS account transcripts and payment history to determine whether they may be affected by the Kwong decision.

While every situation is different, individuals and businesses with significant penalties, interest charges, or late-filing issues during the COVID-19 period may have an opportunity to recover amounts previously paid.

If you believe you may be impacted by this ruling, contact our office. We can help evaluate your situation and determine whether filing a protective refund claim makes sense before the applicable deadlines expire.