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COVID-19 Tax Penalties: The Kwong Ruling Could Mean a Refund for You

If you found yourself paying the IRS strictly for penalties and interest during the chaos of the COVID-19 pandemic, you are certainly not alone. Between business closures and logistical nightmares, many taxpayers fell behind. However, a significant development in the U.S. Court of Federal Claims suggests that some of those charges might not have been legal.

The recent decision in Kwong vs. United States is shaking up how we look at pandemic-era tax administration. This ruling challenges the IRS's authority to impose certain deadlines during a federally declared disaster, potentially opening the door for you to reclaim money paid in penalties. Here is what you need to know about the case, how it impacts your bottom line, and the protective steps we recommend taking immediately.

Accounting and tax documents

The Core of the Court's Decision

At the heart of Kwong vs. U.S. is a specific part of the tax code: Section 7508A(d). The court ruled that the 2019 version of this code mandates an automatic extension of tax deadlines during a federally declared disaster. While the IRS previously operated under the assumption that they had the discretion to limit these extensions to one year, the court disagreed.

The judge determined that because the COVID-19 disaster declaration spanned from January 20, 2020, to May 11, 2023, the automatic extension for filing and payment should technically have run through July 10, 2023. The IRS's shorter timeline was rejected in this specific instance, meaning the "late" status assigned to many returns during that window may be invalid.

What This Shift Means for Your Wallet

If the deadlines were legally moved to July 10, 2023, then "failure-to-file" or "failure-to-pay" penalties assessed between 2020 and that date may have been wrongly imposed. Essentially, you cannot be penalized for being late if the deadline hasn't passed yet.

This creates a unique opportunity for taxpayers to seek refunds for penalties and interest paid during this three-year window.

Steps to Protect Your Right to a Refund

Because this involves federal revenue, the process requires specific documentation. We recommend the following actions regarding your account history:

  • Analyze Your Tax Transcripts: We need to review your history for any penalties or interest charged between January 20, 2020, and July 10, 2023. You can access these records for free via the Get Transcript tool on IRS.gov. Alternatively, you can file Form 4506-T or call 800-908-9946, though the online tool is the fastest route.
  • File a Protective Refund Claim: This is the most critical step. We expect the government to appeal the Kwong decision. To ensure you don't lose your right to a refund while the lawyers battle it out in appellate court, you should file a "Claim for Refund and Request for Abatement" on Form 843.
  • Leverage the Ruling for Abatement: If you currently owe penalties from this period, this ruling can be cited as a justification for abatement (removal) of those charges.

Pocket watch symbolizing time and deadlines

The Strategy Behind a "Protective Claim"

Think of a protective claim as a placeholder. It stops the clock on the statute of limitations. Without it, by the time the appeals process concludes—which could take years—your deadline to request a refund might have already expired. Filing Form 843 now preserves your place in line so that if the ruling stands, you are eligible for payout.

Separately, looking ahead to 2026, the IRS is planning to automate First-Time Abatement (FTA) for eligible taxpayers with clean histories, which offers another layer of potential relief.

Watch the Clock: July 2026

Per the ruling, claims related to this specific extension must be filed within three years of the legally recognized deadline. This establishes July 10, 2026, as the absolute final cutoff to submit your claims to the IRS.

Rocket launch symbolizing taking action

Your Next Move

If you paid substantial penalties during the pandemic, do not assume that money is gone forever. However, navigating the protective claim process while an appeal is pending can be complex. We encourage you to contact our office to review your transcripts. Let's ensure your paperwork is filed correctly now so you aren't left empty-handed later.

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