Potential Opportunity to Preserve Refund Claims for Certain COVID-Era IRS Penalties and Interest

A recent federal court decision may provide certain taxpayers with an opportunity to seek refunds of IRS penalties and interest assessed during the COVID-19 pandemic. Although the ultimate outcome remains uncertain, taxpayers who may be affected should consider taking steps now to preserve their rights pending further judicial review.

Background: The Kwong Decision

In Kwong v. United States, a federal district court ruled that federal tax filing and payment deadlines were automatically suspended from January 20, 2020, through July 10, 2023, due to the federally declared COVID-19 disaster. The court’s interpretation could potentially affect the validity of certain penalties and interest assessed during that period.

The Internal Revenue Service has appealed the decision, and the case remains subject to further review. Because statutory deadlines continue to apply to refund claims, however, taxpayers may wish to take proactive action while the appeal process unfolds.

Taxpayers Who May Be Impacted

If the Kwong decision is ultimately upheld, taxpayers who incurred certain IRS penalties or interest during the applicable period may be eligible for relief. Potentially affected items include:

• Failure-to-file penalties
• Failure-to-pay penalties
• Estimated tax penalties
• Interest assessed on underpaid federal tax liabilities

Each taxpayer’s situation is unique, and eligibility for relief will depend on the specific facts and circumstances of their case.

The Importance of Filing a Protective Claim

A protective refund claim is a procedural filing that preserves a taxpayer’s ability to pursue a refund should future legal developments support the claim. This can be filed on Form 843.

Filing a protective claim does not guarantee that a refund or penalty abatement will be approved. Rather, it helps ensure that taxpayers do not lose their right to seek relief if the courts ultimately affirm the Kwong decision. Taxpayers who fail to file a timely claim may be barred by the statute of limitations from obtaining a refund, even if the ruling is later upheld.

For many taxpayers, the deadline to file a protective claim may be July 10, 2026.

Recommended Actions

Taxpayers who may be affected should consider the following steps:

1. Review federal tax filings and IRS notices from the COVID-19 disaster period to identify penalties or interest that may be impacted.
2. Obtain IRS account transcripts to confirm the nature and amount of any penalties or interest assessed.
3. Evaluate the applicability of the Kwong decision based on individual facts and circumstances.
4. File any necessary protective refund claims or abatement requests before the applicable statute of limitations expires.
5. Monitor ongoing developments as the case proceeds through the appellate process and as additional IRS guidance becomes available.

How BMF Can Assist

Assessing whether a protective claim is appropriate requires a detailed analysis of a taxpayer’s IRS account history, the types of penalties assessed, and the applicable statutes of limitation.

BMF can assist taxpayers by:

• Reviewing IRS account transcripts and tax records
• Evaluating potential refund opportunities
• Determining whether a protective claim is warranted
• Preparing and filing protective refund claims
• Monitoring legal developments and advising on next steps

Contact Us

If you have questions about how the Kwong decision may affect you or your business, please contact your BMF advisor. Our team can help assess your situation and determine whether proactive steps should be taken to preserve your potential refund rights while the litigation continues.