Potential Refund Opportunity for Penalties and Interest Paid to IRS
A recent Federal Court of Claims decision, Kwong v. United States, may create a refund or abatement opportunity for taxpayers who paid or were assessed certain IRS penalties or interest during 2020 to 2023.
The case does not automatically grant refunds. Taxpayers need to review their records to determine if they paid any penalties or interest during the applicable period as action must be taken by July 10, 2026, to preserve their rights to a refund. On May 15, the Government filed a Notice of Appeal, making it even more important that taxpayers act by July 10, 2026.
What Does the Court’s Decision in Kwong Mean?
During the COVID-19 pandemic, the IRS deferred tax filing and payment deadlines several times under disaster relief provisions. The Court in Kwong determined that the appropriate period for disaster relief for tax filing and payments should run from January 20, 2020, to May 11, 2023, to match the period of the presidentially declared Public Health Emergency. Disaster relief provided by the IRS did not include this entire 39-month period. As a result, the IRS assessed penalties and interest during this period for returns and tax payments considered to be “late” filed or paid. Under the Court’s interpretation, returns and payments normally due during this period were actually deferred until July 10, 2023 (60 days after the disaster officially ended). Under this interpretation, penalties and interest should not be assessed if returns were filed/payments made prior to the deferred due date of July 10, 2023.
Who Does It Apply To?
The Court’s decision can benefit any taxpayer (individual, business entity, estate or trust) that paid or was assessed (but not paid) certain penalties or interest for returns or payments due during the period January 20, 2020, to July 10, 2023.
Applicable penalties include:
- Failure-to-file penalties
- Failure-to-pay penalties
- Failure to deposit penalty
- Late payment penalties
- Estimated tax penalties
- Late filing of international informational reporting forms
Where Are We Now?
The issue of exactly when tax filing and payments were deferred during the pandemic is unlikely to be resolved soon. The Government has appalled the Kwong decision so it will likely not be resolved for a very long time. In addition, there are two cases currently in litigation dealing with this issue. The Courts’ decision in those cases may impact how the IRS will proceed. Until the issue is resolved, taxpayers need to act to preserve their refund rights.
What Action Is Required Now?
Taxpayers that paid penalties or interest subject to the Kwong decision have three years to submit a refund request to the IRS. This three year period will end July 10, 2026 so impacted taxpayers need to take action by this date. If they fail to act, they will not be entitled to a refund when this issue is finally resolved.
By July 10, 2026, taxpayers need to file a “claim for refund” or a “protective claim”.
Recently, the National Taxpayer Advocate, Tens of Millions of Taxpayers May Be Eligible for Significant Tax Refunds – If They Act by July 10 (Part I), urged the IRS to grant a six month extension period to file refund claims to allow more taxpayers to become aware of the issue and allow claims to be e-filed to simplify the process for both taxpayers and the IRS. As of today (May 26, 2026), the IRS has not implemented either recommendation.
Contact us to help determine how the Kwong decision may impact you and the required next steps.
