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Refund Opportunity: How the Kwong Ruling Affects IRS Penalties Paid During COVID

For many taxpayers, the COVID-19 pandemic brought not just health concerns, but significant financial confusion regarding tax deadlines and payments. If you found yourself paying the IRS penalties and interest during that period, a recent decision by the U.S. Court of Federal Claims might offer a path to recover those funds.

The ruling in Kwong vs. United States challenges how the IRS handled deadline extensions during the pandemic. The court’s decision suggests that the IRS may have improperly assessed penalties for late filing or payment during the federally declared disaster period. If this ruling holds, it opens a window for individuals and businesses to claim refunds for charges they shouldn't have incurred.

Understanding the Kwong vs. U.S. Decision

At the heart of this case is Internal Revenue Code Section 7508A(d). The court determined that this statute mandates an automatic extension of tax deadlines during a federally declared disaster, rather than leaving it up to the IRS's discretion. While the IRS argued that extensions could be limited to one year, the court rejected that stance.

Family reviewing financial documents

Specifically, the court found that the mandatory suspension of deadlines applied from the start of the pandemic on January 20, 2020, through July 10, 2023. Practically, this means the legal deadline for filing and paying taxes for affected periods was moved to July 10, 2023. Consequently, "failure-to-file" or "failure-to-pay" penalties assessed by the IRS between those dates may have been invalid.

Steps to Preserve Your Refund Rights

Because the government is likely to appeal this decision, the landscape remains fluid. However, waiting for a final appeal outcome could cause you to miss the statute of limitations for claiming a refund. To protect your interests, specific actions are recommended now.

1. Analyze Your Tax History

First, review your account to see if you were charged penalties or interest for deadlines falling between January 20, 2020, and July 10, 2023. You can verify this by pulling your tax transcripts. These are available for free via the Get Transcript tool on IRS.gov. You can also request them by mail using Form 4506-T or by calling 800-908-9946, though online access is significantly faster.

2. File a Protective Claim

This is the most critical step. Since the IRS may appeal the Kwong ruling, you should file a "protective claim" using Form 843 (Claim for Refund and Request for Abatement). A protective claim acts as a placeholder. It effectively freezes the statute of limitations, ensuring your right to a refund is preserved while the courts finalize the legal battle. Without this, you might lose your ability to claim the money even if the ruling is ultimately upheld.

3. Leverage Abatement Options

If you currently owe penalties from this timeframe, you can cite the Kwong decision in your request for abatement. Additionally, looking ahead to 2026, the IRS intends to automate First-Time Abatement (FTA) for eligible taxpayers with clean compliance histories, offering another layer of potential relief.

Important Deadlines

Time is a factor here. Based on the court's timeline, claims for refunds related to this decision generally must be filed within three years of the adjusted deadline. This sets a cutoff date of July 10, 2026. While that seems distant, gathering records and filing properly takes time.

If you believe you paid substantial penalties during the pandemic that may now be refundable, do not assume the IRS will automatically send a check. We recommend contacting our office to review your transcripts. We can help you determine if filing a protective claim is the right strategic move to safeguard your potential refund.

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