Taxpayers May Qualify for Refunds of IRS Penalties and Interest Assessed During COVID-19 Disaster Period

A recent decision by the United States Court of Federal Claims in Kwong v. United States created a potential refund opportunity for taxpayers who were assessed penalties and interest related to certain tax filings that had an original due date that fell during the COVID-19 federal disaster period. While the ultimate outcome remains uncertain and subject to appeal, taxpayers should consider taking action by July 10, 2026, to preserve their rights.

Background and Legal Framework

In Kwong v. United States,  179 Fed. Cl. 382 (Nov. 2025), plaintiff filed suit seeking a refund of penalties paid related to tax years 2007, 2010, 2011, 2015, and 2016.  The suit followed plaintiff’s requests for abatement and seeking refunds for penalties paid for the applicable tax years.  In September and October of 2020, the IRS issued notices of disallowance of plaintiff’s requests for abatement as related to the 2007, 2010, and 2011 tax years.  Thereafter, plaintiff filed a complaint in February 2023 in the United States Court of Federal Claims seeking refunds of penalties for all five tax years.  The government moved for summary judgment.  While the government prevailed on arguments related to the 2015 and 2016 tax years, the court rejected the government’s argument, as related to 2007, 2010, and 2011, that the plaintiff’s filing in February 2023 was untimely in that it was more than two years after the September and October 2020 notices.  Rather, the court agreed with plaintiff that IRC § 7508A postponed the deadlines for filing suit for the period of January 20, 2020, through July 10, 2023.  As a result, the court denied the government’s motion to dismiss as related to the 2007, 2010, and 2011 tax years while granting the motion as pertained to the 2015 and 2016 tax years.

Under IRC § 7508A, the Secretary of Treasury may specify a period of up to one year that may be disregarded in determining, in respect of a taxpayer, whether any acts described in IRC § 7508(a) were performed within the requisite time prescribed for such acts, the amount of any interest, penalty, additional amounts, or addition to the tax periods after such date, and the amount of any credit or refund.  The acts prescribed in IRC § 7508(a) include the filing of income, estate, gift, employment, or excise tax returns and payments of tax for any liability as relates to such filings.  Additional acts identified include (list not exhaustive) filing a petition with the Tax Court (or notice of appeal of the Tax Court), allowance of credit or refund of any tax, filing a claim for credit or refund of any tax, and bringing suit upon any such claim for credit or refund.

Prior to amendment in November 2021, the period of automatic extension for a qualified taxpayer ran from “the earliest incident date specified in the declaration” to “the date which is 60 days after the latest incident date so specified.”   While Congress amended IRC § 7508A in November 2021 to reduce the extension to 60 days from the beginning of an emergency or the date the declaration was issued, whichever is later, the government conceded that the November 2021 amendment of the statute was not applicable in the case, as it only applied to federal disasters declared after enactment of the amendment (Note: The 2025 tax law extended the 60-day period to 120 days).

Nonetheless, the government argued that the pre-November 2021 statute did not extend the period for plaintiff to file suit beyond two years from the notices of disallowance as related to the 2007, 2010, and 2011 tax years (i.e., taxpayer’s February 2023 filing was too late).  The court denied the government’s arguments.  The court concluded that the plain meaning of the statute provided an automatic extension from the beginning of a disaster declaration through the end of the declared disaster period, plus 60 days after the end of the declared disaster period.

On March 13, 2020, President Trump declared a nationwide emergency due to COVID-19, and on March 22, 2020, he declared a major disaster area in California beginning on January 20, 2020 (taxpayer was a California resident).  The disaster period continued until May 11, 2023, as declared by President Biden.  As a result:

• The COVID-19 federal disaster period ran from January 20, 2020, through May 11, 2023; and
• With the 60-day extension, the relevant period extended to July 10, 2023.

The court thus concluded that Kwong had until July 10, 2023, to file suit.  Since he filed suit in February 2023, the court concluded his suit was timely as related to the 2007, 2010, and 2011 tax years.

Implications of the Kwong Decision

As discussed, the court’s ruling in Kwong was a partial denial of the government’s motion for summary judgment. A final ruling has not yet been issued in the case, and the government has not yet appealed the court’s ruling on its motion for summary judgment.  However, as it stands, the court’s ruling provides taxpayers with a basis to challenge the assessment of penalties for failure-to-file, failure-to-pay, and estimated tax penalties where such penalties and interest pertain to actions that had an initial due date that fell during the January 20, 2020 through July 10, 2023, period.  Further, taxpayers have a basis to contend they were incorrectly charged interest related to such actions during the affected period.

Accordingly, taxpayers who were assessed penalties and interest for failure to file certain returns or failure to pay as relates to initial due dates during the January 20, 2020, through July 10, 2023, time period may be entitled to:

• Refunds of penalties and interest already paid, and/or
• Abatement of penalties and interest not yet paid.

The ruling provides an opportunity to review penalties and interest paid or accrued as relates to the 2019 through 2022 tax years and part of the 2023 tax year, where the action date fell within the affected period.  While some may contend the ruling also creates an argument to challenge interest paid or accrued during the affected period for actions that had due dates prior to affected period (e.g., interest accruing as related to a 2017 failure to file penalty), such contentions may extend too far from the ruling since the original action date preceded the affected period.  Nonetheless, taxpayers may want to file claims to preserve the argument.

This opportunity potentially affects a broad population of taxpayers, including:

• Taxpayers subject to income, employment, estate, gift, and excise taxes; and
• Taxpayers with international information return penalties (NOTE: IRC § 7508A is not applicable to FBARs as they are required under the Bank Secrecy Act).

Required Taxpayer Action

In most cases, the IRS will not issue refunds or abatements without a formal claim.  Failure to act within the applicable period may result in a permanent loss of refund rights.

Pursuant to IRC § 6511, refund claims are generally limited to the later of three years from the date the return was filed or two years from the date the tax was paid. Standing alone, these rules would have caused the statute of limitations period to expire during the COVID-19 disaster period for many affected taxpayers. However, as discussed above, in issuing its ruling partially denying the government’s motion for summary judgment, the United States Court of Federal Claims concluded that IRC § 7508A suspended the due date for certain actions initially due during the affected period until July 10, 2023.   As a result, the three-year statute of limitations period began to run as of that date thereby making July 10, 2026, the practical outer deadline for filing a claim.  The ruling may also support a contention for the tolling of the statute of limitations for a period that began prior to January 20, 2020.  However, given the current date, many such periods of limitations may have closed for those taxpayers (or will close prior to July 10, 2026).

Taxpayers should consider filing Form 843 Claim for Refund and Request for Abatement by July 10, 2026. Note that Form 843 is the appropriate vehicle for claims limited to penalties and interest. Where a taxpayer also seeks a refund of the underlying tax, an amended return (e.g., Form 1040-X or Form 1120-X) must be filed separately.

Given the ongoing litigation, taxpayers should consider filing protective refund claims to preserve their rights.

A valid protective claim:

• Does not require a final calculation of the refund amount;
• Must clearly identify the legal basis (e.g., Kwong); and
• Should specify the applicable tax years.

These claims allow taxpayers to maintain eligibility for refunds while awaiting final judicial resolution.

Administrative Considerations

• Form 843 must currently be filed on paper (no electronic filing option);
• The IRS does not provide immediate confirmation of receipt; and
• Taxpayers are advised to submit claims via certified mail with return receipt to document timely filing.

Form 843 must contain original signatures (i.e., electronic signatures are not acceptable).  Given the potential volume of claims, processing delays are likely.  Taxpayers whose penalties were assessed through a deficiency proceeding or who have matters pending in Tax Court should consult counsel separately, as the Form 843 refund claim process may not be available to them.

Illustrative Examples

The following examples are provided for illustrative purposes only. Dollar amounts and specific facts are hypothetical. They assume the reasoning in Kwong is ultimately upheld and are not a guarantee of any particular outcome. Individual facts and circumstances will determine whether a refund or abatement claim is viable in any specific situation.

Example 1 – Failure to File (Individual Taxpayer)

An individual taxpayer had a 2020 federal income tax return originally due on April 15, 2021. The taxpayer did not file the return until September 14, 2022, and did not request an extension. The taxpayer had a tax liability of $47,500, all of which was paid when the return was filed. The IRS subsequently assessed a failure-to-file penalty under IRC § 6651(a)(1), calculated at 5 percent per month on the unpaid tax for each month the return was late, up to a maximum of 25 percent. Because the IRS treated the return as 17 months late (April 2021 through September 2022), the penalty was assessed at the maximum rate of 25 percent, resulting in a penalty of $11,875. The taxpayer paid the assessed penalty in full upon notice.

Under the reasoning of Kwong, because the original due date of April 15, 2021, fell within the COVID-19 disaster period (January 20, 2020 – July 10, 2023), the return was not legally overdue until July 11, 2023. Since the taxpayer filed on September 14, 2022, before the extended due date, no failure-to-file penalty should have been assessed at all. The taxpayer would therefore have a basis to seek a full refund of the $11,875 penalty paid, plus statutory overpayment interest accruing from the date of payment. To preserve this claim, the taxpayer should file Form 843 by July 10, 2026, supported by IRS account transcripts documenting the penalty assessment and payment history, and a statement citing IRC § 7508A and Kwong as the legal basis for the claim.

Example 2 – Failure to Pay (Individual Taxpayer)

An individual taxpayer timely filed a 2021 federal income tax return on April 18, 2022, but had a remaining tax balance due of $63,200 that was not paid at the time of filing. The taxpayer entered into an installment agreement with the IRS and did not pay the balance in full until January 19, 2023. The IRS assessed a failure-to-pay penalty under IRC § 6651(a)(2) at 0.5 percent per month on the unpaid balance for each month from April 18, 2022, through January 19, 2023 (approximately 9 months), resulting in a penalty of approximately $2,844. In addition, the IRS assessed underpayment interest under IRC § 6601 on the unpaid balance for the same period at the applicable federal rate. Both the penalty and interest were paid by the taxpayer.

Under the reasoning of Kwong, because the original payment due date of April 18, 2022, fell within the COVID-19 disaster period (January 20, 2020 – July 10, 2023), the payment obligation was not legally overdue until July 11, 2023. Since the taxpayer paid in full on January 19, 2023, before the extended due date, neither the failure-to-pay penalty nor the underpayment interest should have accrued. The taxpayer would therefore have a basis to seek a full refund of both the $2,844 penalty and the interest paid. Where amounts have not yet been paid, the taxpayer may alternatively seek abatement. To preserve this claim, the taxpayer should file Form 843 by July 10, 2026, supported by IRS account transcripts and a statement citing IRC § 7508A and Kwong as the legal basis for the claim.

Conclusion and Next Steps

The Kwong decision presents a meaningful, but time-sensitive, opportunity for taxpayers to recover penalties and interest assessed during the COVID-19 disaster period.

While the legal landscape is still evolving, taxpayers should:

• Evaluate their exposure to penalties and interest during the affected period;
• Consider filing Form 843 and/or protective claims; and
• Take action before July 10, 2026, to preserve their rights.

Further guidance is expected as the issue develops through the courts or administrative channels.  If you have additional questions or would like to discuss this issue in more detail, please contact FGMK.