Key Takeaways
- Pandemic-era IRS penalties may be refundable: A recent court ruling could allow taxpayers to seek refunds for certain penalties and interest assessed between January 2020 and July 2023.
- Protective refund claims may preserve taxpayer rights: Filing a protective refund claim now may help taxpayers preserve the ability to recover amounts paid if the ruling is ultimately upheld on appeal.
- The filing window may close in July 2026: Taxpayers considering a refund claim should evaluate their options soon, as the statute of limitations may expire on July 10, 2026.
It’s incredible to reflect on how much time has passed since the start of the COVID-19 pandemic. Shutdowns, masks, business and school closures, and the introduction of “social distancing” feel like distant memories to some and much more recent to others.
In response to the pandemic, the federal government issued a federal disaster declaration that remained in effect from January 20, 2020 through May 11, 2023. During that period, a number of programs were initiated by the government, including the Paycheck Protection Program and the Employee Retention Tax Credit.
One lesser-known aspect of federal disasters recently came into focus in a U.S. Court of Federal Claims case. In Kwong v. United States, taxpayer Terry Kwong challenged penalties and interest previously assessed by the IRS, raising questions about the application of Section 7508A of the Internal Revenue Code. Section 7508A addresses the postponement of certain federal tax deadlines during federally declared disaster periods, including the suspension of certain penalties and interest accrued during those periods.
How the Court Interpreted Section 7508A
In Kwong, the court interpreted the federal disaster postponement rules under IRC Section 7508A(d) in a manner favorable to the taxpayer. The court ruled that the federally declared disaster postponement rules under Section 7508A(d) extended both tax return and payment deadlines throughout the entire disaster period.
Section 7508A was amended in December 2025, ultimately narrowing the scope of its language. However, the court relied on the definition of Section 7508A that was in place at the time of the pandemic. This version, as interpreted by the court, indicated that all postponed deadlines in federally declared disasters extend to 60 days past the end of the declared disaster period. With the federally declared disaster ending on May 11, 2023, the 60-day extension ran through July 10, 2023.
Why the Kwong Ruling Matters in 2026
What is the relevance of this ruling in 2026? In its simplest terms, it opens the door for taxpayers to stake a claim that any penalties or interest charged by the IRS from January 20, 2020 through July 10, 2023 were incorrectly assessed and that any taxes or returns due during this time should have been postponed to July 10, 2023. This applies to any taxpaying entity that was assessed penalties (late filing, late payment, underpayment) and interest by the IRS during this window of time.
What Taxpayers Should Know
The broad implications of Kwong could lead to millions of taxpayers filing for refunds. Understandably, the IRS is appealing the ruling. While the fate of the appeals process remains to be seen, there are some important considerations in the meantime:
- Penalties and interest assessed to taxpayers during the disaster period of January 20, 2020 through July 10, 2023 may be eligible for a refund
- Consideration should be given to filing a protective refund claim, typically using Form 843. In the event the case is upheld, this will ensure that taxpayers will be in a position to receive refunds for penalties and interest assessed during the disaster period
- The statute to file for a refund of any penalties and interest assessed by the IRS during this window runs three years from the end of the 60-days post disaster period, or July 10, 2026
Please note that refunds will be contingent on whether the U.S. Court of Appeals upholds the Kwong ruling. The IRS original interpretation and position was that the postponement period only applied for 120 days from the January 20, 2020 date of the initial disaster declaration, thus making any refund claims at this point a lost cause.
Next Steps Before the July 2026 Deadline
The Taxpayer Advocate Service (a division of the IRS that advocates for taxpayers) recently issued a news release asking the IRS to consider applying penalty and interest refund relief to all impacted taxpayers nationwide – regardless of whether a taxpayer filed a protective refund claim – if Kwong is upheld. While this would be a positive outcome for taxpayers, we do not recommend relying on this becoming a reality.
If you believe that you were assessed penalties and interest by the IRS during the pandemic, we recommend conducting a cost/benefit analysis with your tax professional to determine whether it’s worth pursuing a protective refund claim. You only have until July 10, 2026 to file this claim, so urgent action is highly recommended.
To evaluate your options or begin the protective refund claim process, please contact me or any member of our Tax Strategies team to learn how we can help you navigate this evolving issue and protect your potential refund.