Taxes

Court Ruling Creates Path for Tax Penalty Refunds; Taxpayers Face 2026 Deadline

Following the Kwong v. United States ruling, taxpayers who incurred penalties or interest during the 3.5-year COVID-19 federal disaster period may seek relief, provided claims are filed by the July 10, 2026 deadline.

The Financial Curio · World

Tens of millions of taxpayers may be eligible for refunds or abatements of penalties and interest assessed by the Internal Revenue Service (IRS) during the COVID-19 federal disaster period, following a recent court interpretation. Most affected taxpayers must file a claim for refund on or before July 10, 2026, to protect their rights.

This opportunity stems from court decisions, notably Kwong v. United States, 179 Fed. Cl. 382 (November 2025), which interpreted a tax code provision governing disaster-related filing and payment deadline postponements. Internal Revenue Code § 7508A(d), as it existed during the COVID-19 federal disaster, provides for an automatic postponement of deadlines throughout the disaster period, plus an additional 60 days.

The federal disaster declaration for COVID-19 was in effect from January 20, 2020, through May 11, 2023. An additional 60 days extended the period to July 10, 2023, for tax purposes. Under the Kwong court’s reasoning, filing and payment deadlines were postponed for this entire duration, meaning tax returns and payments due within this window were not late until after July 10, 2023. Consequently, the IRS should not have assessed penalties for late filing or payment, nor charged interest on those amounts, during the roughly 3.5-year period.

The government, through its pleadings, has interpreted the postponement statute more narrowly, asserting that it did not suspend obligations for the full 3.5 years. On May 15, 2026, the Department of Justice filed a notice of appeal of the Kwong decision. Despite this, the Kwong opinion stated, “The plain meaning of that statute is that the automatic extension runs from the beginning of the disaster declaration, through the end of the declared disaster period, and until 60 days after the end of the declared disaster period.” A final judicial resolution could take several years.

Under the Kwong decision’s rationale, taxpayers may be entitled to a refund or abatement of amounts assessed during the COVID-19 period, including penalties for failure to timely file returns, failure to pay taxes, or failure to make estimated tax payments. Interest that began accruing earlier than it should have, or not at all, may also be subject to refund or abatement, as may overpayment interest for the 2020–2023 disaster period.

Some tax practitioners contend that even liabilities originating before the disaster period might not have accrued interest or penalties during that time. The IRS disputes this, citing Example 4 in Treas. Reg. § 301.7508A-1(f), which suggests pre-disaster delinquencies do not receive retroactive relief. However, this regulation may not control if a court determines that the statutory language provided for a suspension of all timing penalties and interest accruals, a point not directly addressed by the Kwong opinion regarding pre-disaster delinquencies.

This issue potentially affects a broad spectrum of taxpayers, including individuals, small businesses, large corporations, estates, and trusts, with obligations related to income, employment, estate, gift, and excise taxes. Taxpayers who filed late international information returns, which can incur substantial penalties even without a tax liability, may also be impacted. Many affected taxpayers, particularly those with low and moderate incomes, may lack professional representation, increasing their risk of missing this opportunity.

To claim potential refunds or abatements, most taxpayers must file Form 843, Claim for Refund and Request for Abatement, on or before July 10, 2026. Given the ongoing litigation, taxpayers should consider filing protective claims to preserve their rights. A protective claim need not specify an exact dollar amount, but it must identify the contingencies affecting the claim, clearly describe its essential nature, and specify the relevant tax year or years.

Typically, protective claims are held in suspense by the IRS until the underlying legal issue is resolved. This prevents the period of limitations from expiring while awaiting a final determination, though resolution may take years. Taxpayers with ongoing examinations, Appeals proceedings, or litigation may have open statutes for applicable years, providing additional time to claim refunds, and should assess the Kwong issue’s impact on their cases.

A significant challenge in this process is that, for most people, Form 843 cannot be filed electronically and requires paper submission unless the Form 843 is being filed for abatement of interest and penalties that have been fully paid. This imposes burdens on taxpayers, who are advised to send claims by certified mail for proof of timely submission. For the IRS, processing potentially millions of paper claims could lead to administrative strain, delays, and inconsistent treatment. Calls have been made for the IRS to develop an electronic filing mechanism for these claims.

Concerns have been raised regarding potential disparate outcomes, where “well-advised” taxpayers may secure refunds while “unaware” taxpayers, particularly those without representation, might lose their rights simply due to lack of information or the complexity of the process. Some argue that this situation undermines fundamental taxpayer rights, including the rights to be informed and to a fair tax system.

The National Taxpayer Advocate has recommended that the IRS take several steps: publicize the issue to inform taxpayers of their rights and the claims deadline; provide an additional six-month extension for filing refund claims; explore systemic relief for all eligible taxpayers to avoid requiring individual claims; and establish an electronic portal or mailbox for Kwong-related claims to ease taxpayer burden and improve tracking.

This is a complex and evolving legal issue. Taxpayers are advised to review their individual circumstances and consider seeking professional guidance.