Evaluating the new time-sensitive COVID-era tax penalty refund

Nearly five years after the pandemic subsided and life began to normalize, a recent court ruling may open the door to meaningful tax relief. The Kwong decision – a consequential tax case related to the federally declared COVID disaster period – ruled that many unpaid tax penalties and interest charges assessed between January 20, 2020 and July 10, 2023 were improper.

If the ruling stands, businesses and individuals that were subject to these penalties and interest charges may be entitled to refunds – but only if they act by July 10, 2026.

Background: why the Kwong decision matters

The Kwong decision focuses on IRC Section 7508A(d), which governs automatic postponement of tax filing and payment deadlines during federally declared disasters. When COVID was declared a national emergency, this provision applied.

Key points of the ruling:

• The federal disaster period ran from January 20, 2020 through May 11, 2023.
• The statute adds a 60-day extension, pushing the postponement period to July 10, 2023.
• Any tax return or payment due during this three and a half-year window shouldn’t have been considered late.
• As a result, penalties for late filing, payment and underpayment – along with related interest – shouldn’t have been imposed.

The IRS is likely to appeal this decision, but the ruling currently stands. It argued that the disaster occurred for a much shorter time period, but the court disagreed.

Who qualifies and what relief may cover

The decision may benefit a wide range of taxpayers who incurred penalties or interest during the COVID disaster period (January 20, 2020 to July 10, 2023). If you or your organization had an IRS assessment tied to deadlines within this window, you may be eligible for relief.

Eligible refunds

Refund opportunities may apply to the following types of penalties and interest assessments:

• Failure-to-pay penalties:  Penalties for not paying tax by original due date
• Late-filing penalties: Penalties for returns filed after the deadline
• Underpayment penalties: Penalties for failure to fully pay estimates 
• Interest charges: Interest that began accruing earlier than allowed under the postponement rules 
• Late-filing penalties for international forms: Penalties for international forms such as Form 5471 and 5472 filed after the deadline
• Possible other tax penalty or interest situations tied to deadlines within the postponement period

Relief under Kwong may be available whether the taxpayer has already paid the penalties and interest or whether the amounts are still outstanding.

Eligible taxpayers

Relief is broad and may apply to:

• Individuals
• Partnerships
• Corporations
• Trusts
• Tax-exempt organizations

Relief will apply to multiple federal tax categories, including:

• Income tax
• Payroll tax
• Excise tax
• Estate and gift tax

What you need to do now

We recommend you review tax filings during this postponement period with your tax advisor to determine if you have penalties or interest that may be refundable under this recent ruling. Discuss these filings with your tax adviser who may need to obtain your tax account transcripts from the IRS to identify possibly payments that could be eligible for refunds. Alternatively, the IRS National Taxpayer Advocate advises taxpayers to personally obtain their IRS tax account transcripts. 

These transcripts include:

• Tax return filing date
• Federal tax return type
• Payment types made to the IRS: tax type, penalty type, interest payment, etc.
• Payment dates
• IRS assessment dates
• Refunds issued

How to obtain your transcripts:

• Access your IRS online account yourself, where you can review and download your transcripts. It’s accessed by registering or logging in through ID.me. (Fastest method)
• Call the IRS at 1-800-908-9946. 
• File IRS Form 4506-T to request transcripts by mail.
• Your tax advisor can retrieve transcripts with a valid Power of Attorney and assist in this process.

Filing deadline: July 10, 2026

Per IRS rules, refund claims must be filed by the later of:

1. Three years from the date the return was filed, or 
2. Two years from the date the tax was paid

Because the federally declared disaster period ended on May 11, 2023, and IRS Section 7508A(d) adds an additional 60 days, the Kwong decision treats all returns filed during the disaster period as filed on July 10, 2023. The three-year statute of limitations expires on July 10, 2026.

Refund claims must be filed by July 10, 2026 to preserve rights under the Kwong ruling. The IRS is not expected to automatically issue refunds, so only taxpayers that proactively file claims are likely to benefit. Claims should be submitted using Form 843 – Claim for Refund Request for Abatement, not an amended return. Filing a claim, including a protective refund claim, preserves the taxpayer’s rights even if the IRS appeals the Kwong decision. Missing the July 10, 2026 deadline could permanently forfeit the ability to recover funds.

Your Sikich advisor is here to assist you in this process. Don’t hesitate to reach out today with any questions.

About our authors

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.