Kwong v. IRS: Could Some COVID-Era Tax Penalties and Interest Be Refunded?

Kwong v. IRS: Could Some COVID-Era Tax Penalties and Interest Be Refunded?

A recent decision of the U.S. Court of Federal Claims, Kwong v. United States, has prompted renewed attention to how federal tax deadlines were postponed during the COVID‑19 emergency and what that might mean for penalties and interest the IRS assessed in those years. While Kwong is not a final or nationwide rule, it raises questions about whether certain penalties and interest tied to deadlines during the federally declared COVID‑19 disaster period were properly imposed.

If the reasoning in Kwong is ultimately upheld, some taxpayers who were treated as late filers or late payers during the pandemic could have a legal basis to seek abatement or refund of related penalties and, in some cases, interest. That said, any relief will be fact‑specific, subject to strict timing rules, and will depend on how the case and related guidance develop.

• Why this case matters now

  Most taxpayers assumed that pandemic‑related IRS relief was largely settled. The IRS postponed certain filing and payment deadlines and later granted limited penalty relief in specific circumstances. Many deadlines passed, and taxpayers generally accepted IRS notices as final.

  Kwong has reopened the conversation by focusing on how Internal Revenue Code (IRC) § 7508A applies to the COVID‑19 disaster declaration. Section 7508A authorizes the Treasury Secretary and the IRS to postpone for up to one year certain tax‑related acts—such as filing returns, paying tax, and filing refund claims—for taxpayers affected by federally declared disasters. During a valid postponement period, affected taxpayers have until the last day of that period to perform covered acts, and the IRS may disregard that period in determining whether penalties and certain additions to tax apply. 

  Recent amendments also provide an automatic 60‑day (now 120‑day for certain future declarations) postponement for qualified taxpayers in federally declared disaster areas, which runs concurrently with any additional discretionary postponement the IRS grants.

  In Kwong, the Court of Federal Claims interpreted these rules in the context of the long‑running federal COVID‑19 disaster declaration. The court concluded that, for certain affected taxpayers, federal tax deadlines falling within the COVID‑19 disaster relief window may have been postponed longer than the IRS had allowed in its published guidance. The precise scope of the decision is still developing, and an appeal could change or narrow its reach.

•  

•  

  What Section 7508A does—and does not—do

  Under IRC § 7508A, when a taxpayer is affected by a federally declared disaster:

  • The IRS can postpone specified tax‑related deadlines for up to one year. 
  •  
  • Affected taxpayers whose due dates fall within the postponement period have until the last day of that period to perform those acts. 
  • During the postponement period, the IRS may provide relief from interest, penalties, and additions to tax that would otherwise accrue with respect to those postponed acts.
  • [

  However, the statute and related guidance also make clear that:

  • Postponement does not change the statutory due date of a return or payment; instead, the IRS is allowed to disregard a period of up to one year in determining whether an act was timely.
  • Taxpayers who had taxes due before the start of the postponement period and did not pay by that earlier due date do not receive relief under § 7508A for failure‑to‑pay penalties and interest that began accruing before the disaster.
  • The postponement period runs concurrently with any extensions of time to file or pay; extensions are still measured from the original due date.

  These limits are important: even if Kwong’s reading of the COVID‑19 disaster period is eventually sustained, not every penalty or interest charge assessed between 2020 and 2023 would be affected.

•  

•  

  How this differs from earlier COVID‑19 IRS relief

  During the early phases of the pandemic, the IRS used its § 7508A authority and related powers to postpone certain filing and payment deadlines—for example, extending the April 15, 2020 due date for many returns and payments to July 15, 2020.

  The IRS also issued targeted penalty relief, including guidance that waived certain failure‑to‑file penalties for specified 2019 and 2020 returns if filed by designated dates. That relief, however, did not:

  • • Eliminate failure‑to‑pay penalties in most circumstances;
  • • Stop interest from accruing on unpaid tax balances; or
  • • Cover every type of return, penalty, or pandemic‑related delay.

   

• Kwong is different because it focuses on what the statute itself—§ 7508A—required, rather than on what the IRS chose to do as a matter of administrative grace. The taxpayers in Kwong argued, and the court agreed at least in part, that the COVID‑19 disaster declaration and the statutory postponement rules together extended certain deadlines longer than the periods the IRS recognized in its notices. How far that reasoning extends is a question that future cases and potential appeals will need to resolve.

•  

•  

  Who may want to take a closer look

  This developing area is most relevant to taxpayers who:

  • • Had federal filing or payment obligations during the COVID‑19 disaster period;
  • • Were located in, or otherwise qualified as affected by, the federal disaster declaration; and
  • • Were assessed failure‑to‑file, failure‑to‑pay, or related underpayment penalties (and associated interest) because the IRS treated their returns or payments as late.
  •  

  Examples include:

  • • Individuals who filed 2019, 2020, or subsequent returns after the IRS’s announced relief dates and were charged penalties;
  • • Small businesses that missed filing or payment deadlines while operations were disrupted and later received IRS notices assessing penalties and interest; and
  • • Taxpayers who made late payments on balances the IRS believed were due before or during the disaster period.
  •  

  Because § 7508A does not provide relief for failure‑to‑pay penalties and interest that started accruing before the relevant postponement period, taxpayers whose liabilities were already overdue before the disaster window are less likely to benefit.

•  

•  

  Refund claims and statutes of limitation

  Even if a taxpayer has a strong legal argument, refund and abatement rights are governed by strict limitation periods under IRC § 6511:

  • In general, a claim for credit or refund must be filed by the later of:
    • • Three years from the time the return was filed; or
    • • Two years from the time the tax was paid. 
    •  
  • The amount that can be refunded is limited to tax paid within a defined “lookback” period ending on the date the claim is filed (typically three years plus any extension of time to file, or two years if the three‑year rule does not apply).
  •  

  Recent legislation provides that, for claims filed after December 26, 2025, any disaster‑related filing postponement period under § 7508A must be treated as an extension of time to file for purposes of calculating the lookback limitation on the amount of a credit or refund. This change can increase the recoverable amount in some disaster‑related refund claims, but it does not create a single universal deadline for all COVID‑era claims.

•  

•  

  Because these rules are highly fact‑dependent, some pandemic‑era claims may already be time‑barred, while others may remain open for several more years, depending on when returns were filed and when payments were made.

•  

• Protective claims and preserving rights

  Given the uncertainty around Kwong and related litigation, many practitioners are considering “protective claims for refund.” A protective claim is a formal claim filed within the applicable limitations period that:

  • • Identifies the specific tax year(s), type of tax, and amount at issue;
  • • States the legal basis for the claim—such as an argument that penalties or interest were improper because § 7508A postponed the relevant deadline; and
  • • Notes that the claim depends on the outcome of ongoing litigation or future guidance.

   

• Protective claims can preserve a taxpayer’s place in line while courts and the IRS continue to clarify how § 7508A applies to the COVID‑19 disaster period. If Kwong (or similar cases) are ultimately resolved favorably, timely protective claims may allow taxpayers to receive refunds or abatements that would otherwise be lost to the statute of limitations.

•  

•  

  Practical steps if you think this may affect you

  If you paid IRS penalties or interest tied to late filings or payments during the COVID‑19 disaster period, consider the following steps:

  1.  
  2. 1. Gather key records
     • • IRS notices showing penalties or interest assessed;
     • • Account transcripts for the affected years;
     • • Copies of the relevant returns;
     • • Payment records (dates and amounts); and
     • • Any prior penalty‑abatement requests and IRS responses.
  3.  
  4. 2. Confirm what type of charge was imposed Determine whether the amounts relate to:
     • • Failure to file;
     • • Failure to pay;
     • • Estimated‑tax or underpayment penalties; or
     • • Interest on unpaid tax.
  5. Different charges implicate different legal and procedural rules, especially in light of § 7508A’s limits on failure‑to‑pay penalties and interest that began before the postponement period. 
  6.  
  7. 3. Match the charge to the underlying deadline Identify the original filing or payment deadline the IRS says you missed and determine whether that deadline fell within any COVID‑19‑related postponement period applicable to your location and tax type. If, under Kwong’s reasoning, that deadline may have been postponed further, there may be a basis to revisit the penalty or interest.
  8.  
  9. 4. Check whether a claim would still be timely Analyze your specific statute of limitations under § 6511, considering:
     • • When your return was filed;
     • • When each relevant payment was made; and
     • • Whether any agreements to extend the assessment period (or other special rules) affect your refund deadline.
     •  
     For claims filed after December 26, 2025, also factor in the new rule that treats disaster‑related filing postponements as extensions of time to file for purposes of the lookback limitation on the amount of the refund. 
  10.  
  11. 5. Avoid vague or generic requests If you pursue a refund or abatement—or file a protective claim—be specific. A well‑crafted claim should clearly state:
      • • The tax year(s) involved;
      • • The type of penalty or interest at issue and the amounts paid;
      • • The relevant dates (original deadlines, postponement periods, filing dates, and payment dates); and
      • • The legal theory being preserved or asserted (for example, that § 7508A postponed the deadline so the act was not late).

  Important cautions

  • The law is still evolving. Kwong is a trial‑level decision from the Court of Federal Claims and may be appealed. Until it is upheld on appeal or adopted in IRS guidance, it should be treated as persuasive rather than universally binding.
  •  
  • Not every taxpayer will benefit. The impact of § 7508A depends on the specific tax, the type of penalty, the original due date, when the disaster postponement applied, and whether any liability was already overdue before the postponement period began.
  •  
  • State tax issues are separate. Section 7508A governs federal tax deadlines. States may have their own disaster‑relief and penalty‑abatement rules; any potential state refunds or abatements must be evaluated separately under state law.

   

• The bottom line for individuals and small businesses

  Kwong and related developments under IRC § 7508A may create a second‑look opportunity for some taxpayers who incurred IRS penalties or interest tied to deadlines during the COVID‑19 disaster period. For taxpayers who were overwhelmed during the pandemic and accepted IRS penalty assessments as final, this could be meaningful.

  But any opportunity is likely to be time‑sensitive and highly fact‑specific. Taxpayers who received IRS notices between 2020 and 2023 should consider reviewing those notices and account transcripts now to determine whether a refund claim, abatement request, or protective claim still makes sense under the current law.

•  

A qualified tax advisor can help you assess whether § 7508A and the court’s reasoning in Kwong might apply to your circumstances, determine whether you are still within the time limits to file a claim, and craft a focused plan before any remaining deadlines run out.

AllTax can work with you to evaluate how Kwong may affect your situation, review your IRS transcripts and notices, assess whether a refund or protective claim is still worthwhile, and put a clear, step‑by‑step strategy in place before those opportunities close.