A federal court ruling issued late last year is prompting a reassessment of how the IRS handled penalties and interest during the COVID-19 pandemic. The case, Kwong v. United States, 179 Fed. Cl. 382, found that the IRS may have lacked the legal authority to assess certain penalties and interest for a 3.5-year stretch beginning in January 2020. The government disputes that reading and has appealed, so nothing here is settled. But if the decision holds up, a significant number of taxpayers who filed or paid late during that period were charged amounts the IRS may not have been entitled to collect.
We track tax controversy developments closely, and this is one of the more consequential ones we have seen in some time, both for the dollars involved and for the deadline now bearing down on taxpayers who want to preserve their rights. Below, we walk through who this affects, the legal basis for the Kwong decision, and the steps worth taking before July 10, 2026.
Who This Affects
Individual taxpayers who filed a return or made a payment late at any time between January 2020 and July 2023 have reason to review their account history, regardless of the reason for the delay. Business taxpayers, including corporations and pass-through entities, with late employment tax deposits, estimated payments, or filings during that window fall into the same category. Taxpayers with late international information returns warrant particular attention, given the size of those penalties. And taxpayers currently in an open examination, an Appeals proceeding, or litigation involving COVID-period tax years should discuss with counsel how the Kwong issue might bear on settlement posture, separate from the refund claim deadline itself.
Any of these situations call for the same starting point. Pull your IRS account transcripts for tax years 2019 through 2023 and identify what penalties and interest were actually assessed during the postponement window, which runs from January 2020 through July 2023. That review is what determines whether filing an IRS penalty refund claim, an IRS interest refund claim, or a protective version of either makes sense for your specific facts. For taxpayers who have not yet paid an assessment, the relevant filing is generally an IRS penalty abatement refund request or an IRS interest abatement claim rather than a refund of amounts already paid. However, the underlying legal basis is the same.
The Legal Basis: Section 7508A
The statute. The relevant statute is Internal Revenue Code Section 7508A, which authorizes the Treasury Secretary to postpone certain tax filing and payment deadlines during a federally declared disaster period. In 2019, Congress added subsection (d), establishing a mandatory postponement that applies automatically once a qualifying disaster is declared, running from the earliest incident date through 60 days after the disaster period ends. In plain terms, taxpayers don't have to ask for this relief or qualify for it individually. If the statute applies, the clock simply stops.
How Abdo set the stage. The first major court test of that provision came in Abdo v. Commissioner, 162 T.C. 148 (2024). The Tax Court held that Section 7508A(d) provides automatic relief, and that Treasury's regulations could not narrow it to only the acts the Secretary separately chose to extend under discretionary authority. In simpler terms, the court told the IRS it could not use its own rules to shrink relief Congress had already written into the statute. The IRS did not appeal, and the decision is now final, though it addressed only whether a Tax Court petition was timely filed, not how long the COVID-19 postponement period actually lasted.
What Kwong decided. That question reached the U.S. Court of Federal Claims in the Kwong tax ruling. The court determined that the federal COVID-19 disaster declaration ran from January 20, 2020, through May 11, 2023, and that the statutory 60-day tail extended the mandatory postponement period to July 10, 2023. Applying the plain language of the statute, the court rejected the government's position that relief was capped at one year, concluding instead that tax filing and payment deadlines falling anywhere within that 3.5-year window were postponed. In other words, the Kwong decision found that many tax deadlines were pushed back much further than the IRS had assumed. Under that reasoning, the IRS should not have assessed failure-to-file penalties, failure-to-pay penalties, or underpayment interest tied to those dates, though that conclusion is exactly what the government is now challenging on appeal.
The Department of Justice has appealed, and it may take years before an appellate court, or potentially the Supreme Court, settles the question definitively. That timeline is precisely why the procedural deadline discussed below matters regardless of how the substantive legal question eventually shakes out.
A Broader Reach Than Expected
The National Taxpayer Advocate has estimated that tens of millions of taxpayers could be affected if the Kwong ruling is ultimately upheld, making this one of the more significant IRS disaster relief refund opportunities to emerge from federal tax penalty relief litigation in years. That figure reflects the breadth of those who were assessed penalties or interest during the COVID-19 disaster period, which touches individuals, small businesses, large corporations, estates, and trusts, and reaches income, employment, estate, gift, and excise tax obligations.
This is not limited to taxpayers who fell behind specifically because of pandemic-related hardship. Anyone who filed a return or made a payment after its original due date at any point between January 2020 and July 2023, for any reason, may have been charged penalties or interest that, under Kwong's ruling, if it holds, should not have applied. For many of these taxpayers, the Kwong decision may translate into a real COVID IRS penalty refund opportunity rather than just a legal curiosity. Late international information return penalties deserve particular attention here, since those can run into substantial amounts even when no underlying tax liability exists.
None of this happens automatically. The IRS is not proactively reviewing accounts and issuing refunds. A taxpayer has to file a claim, and the statute of limitations governing most of these claims runs out on July 10, 2026.
The Deadline Will Not Wait
Refund claims are generally limited under the tax code to the later of three years from when the original return was filed or two years from when the tax was paid. For COVID-era tax years, the ordinary limitations period now lines up almost exactly with the disaster declaration tax deadlines that the Kwong decision tied to July 10, 2026. Pursuing IRS penalty recovery or IRS interest recovery after that date, once the standard limitations period has run, generally is not an option, regardless of how the appeal turns out.
There is also a practical filing constraint worth flagging. Form 843, Claim for Refund and Request for Abatement, the form used to request an IRS penalty refund or an IRS interest refund under this theory, cannot be filed electronically. It must be submitted on paper, which means taxpayers should send it by certified mail and retain proof of mailing. Paper claims are also more labor-intensive for the IRS to process, so documentation of timely filing carries extra weight if a dispute over the filing date ever arises.
What a Protective Claim Does
A protective refund claim is the mechanism that allows a taxpayer to preserve refund rights while a legal question, such as the outcome of the Kwong appeal, remains unresolved. It is a form of IRS administrative refund claim, meaning it is filed directly with the IRS rather than in court, and it does not require a precise dollar figure or a fully litigated position. According to the IRS's own Internal Revenue Manual guide, a valid protective claim must identify and describe the contingency on which it depends, be sufficiently clear to alert the IRS to the essential nature of the claim, and identify the specific tax years involved.
In practice, this generally means filing Form 843, labeling it as a protective refund claim tied to the Kwong case, and providing enough detail for the IRS to understand the basis for the request. The IRS typically holds these claims in suspense until the underlying legal issue is resolved, whether through the Kwong appeal, related litigation, or formal IRS guidance. If the courts ultimately side with taxpayers, the claim can then be perfected with final figures. If not, the claim simply does not result in a refund.
There are open questions a protective claim does not resolve on its own. Treasury Regulation Section 301.7508A-1(f), Example 4, suggests that taxpayers who were already delinquent before the disaster period began should not receive a windfall elimination of penalties and interest that predate January 20, 2020. The Kwong opinion did not directly address that scenario, so how courts will eventually treat pre-existing delinquencies during the postponement period remains unsettled. What is clear is that taking no action by the deadline forecloses the possibility of relief entirely. At the same time, a properly filed protective claim preserves it at comparatively low cost and effort.
What Remains Uncertain
We think it is important to be direct about what this decision establishes and does not. Abdo settled the question that the postponement is mandatory and self-executing. Kwong addressed how long that postponement lasted during the COVID-19 pandemic specifically, but practitioners remain divided on how the ruling could apply to taxpayers with pre-existing delinquencies, and a final resolution could be years away.
What is not uncertain is the procedural reality facing taxpayers today. The refund statute of limitations is running regardless of the pace of the appellate process, and a missed deadline closes off the possibility of relief, no matter how the courts eventually decide the underlying question. That asymmetry is exactly why a tax refund preservation strategy built around protective claims, rather than a wait-and-see approach, is the path tax attorneys, certified public accountants, and enrolled agents across the country are recommending, ideally with experienced counsel guiding the analysis.
How Hall Lundstedt Can Help
Our firm focuses on tax controversy and IRS dispute resolution, and questions involving unsettled law paired with a hard filing deadline are exactly the kind of matter that benefits from experienced counsel rather than guesswork. Every month that passes without a transcript review is a month closer to that deadline, and once it passes, the ability to preserve a refund claim tied to the COVID-19 disaster period is gone, regardless of how the appeal is ultimately decided. We can help you obtain and review the relevant transcripts, identify the specific penalty and interest assessments at issue, and determine whether an IRS penalty refund claim, an IRS interest refund claim, or a protective version of either should be filed before July 10, 2026. Contact our team now to start that review before the window closes.
Frequently Asked Questions
What is Kwong v. United States?
Kwong v. United States is a November 2025 decision from the U.S. Court of Federal Claims holding that the COVID-19 federal disaster declaration postponed tax filing and payment deadlines for the full disaster period, from January 20, 2020, through July 10, 2023. Under that ruling, the IRS may not have had authority to assess certain failure-to-file penalties, failure-to-pay penalties, or interest during that window.
Does the Kwong decision apply to me?
It may apply if you filed a return or made a payment late, or were assessed interest or penalties, at any point between January 2020 and July 2023, in connection with income, employment, estate, gift, or excise tax obligations. Reviewing your IRS account transcripts for those years is the most reliable way to find out.
How do I file a protective refund claim?
A protective refund claim is generally filed using Form 843, Claim for Refund and Request for Abatement, submitted on paper and labeled to indicate it is related to the Kwong case. The filing should describe the contingency on which the claim depends and identify the specific tax years at issue, though it does not need to state an exact dollar figure.
Can I recover IRS penalties from the COVID years?
You may be able to, depending on your specific facts and how the Kwong appeal is ultimately resolved. Filing a protective refund claim by the deadline preserves the ability to pursue a refund if the courts continue to side with taxpayers on this question.
Can taxpayers recover IRS interest charges as well as penalties?
Yes. The same reasoning that applies to penalties extends to underpayment interest. If filing and payment deadlines were postponed under the court's interpretation of Section 7508A(d), interest charged during that period may also be subject to refund or abatement.
What is the deadline to file a claim related to the Kwong decision?
Most taxpayers need to file by July 10, 2026, which aligns with the standard three-year or two-year refund statute of limitations as applied to the COVID-19 disaster period. Taxpayers with open examinations or pending litigation may have additional time in some circumstances, but that should be confirmed with a tax professional rather than assumed.
Who qualifies for a protective refund claim?
Generally, any taxpayer who was assessed penalties or interest during the COVID-19 disaster period and wants to preserve refund rights while the Kwong issue remains unresolved can file a protective claim. There is no requirement to fully substantiate the claim at the time of filing, only to identify the relevant tax years and the legal basis for the claim.
Can businesses file a protective refund claim?
Yes. Corporations, partnerships, and other pass-through entities that were assessed penalties or interest during the COVID-19 disaster period can file a protective refund claim on the same basis as individual taxpayers, generally using Form 843 and identifying the relevant tax years and entities.
What tax years may be affected by the Kwong decision?
The Kwong decision concerns deadlines and assessments falling within the COVID-19 disaster period, January 20, 2020, through July 10, 2023, which generally touch tax years 2019 through 2023, depending on filing and payment dates. Reviewing transcripts for that full range is the most reliable way to identify which specific years are involved.
Will I definitely get a refund if I file a claim?
No. The IRS disagrees with the Kwong decision and has appealed it, so the underlying legal question remains open. Filing a claim preserves the right to a refund if that question is ultimately resolved in taxpayers' favor, but it does not guarantee a particular outcome.