Federal Court Ruling May Reopen COVID-Era Tax Penalty Refunds

A federal court ruling may allow some taxpayers to recover interest and penalties paid during the COVID-19 disaster period. The decision clarifies how suspended tax deadlines affect refund and abatement opportunities.

Key Takeaways:

• In Kwong v. United States, the U.S. Court of Federal Claims held that the COVID-19 disaster declaration triggered a mandatory suspension of federal tax deadlines under §7508A(d) for obligations falling between January 20, 2020, and July 10, 2023.
• Penalties and interest assessed during the disaster suspension period, including failure-to-file, failure-to-pay, and underpayment interest, may have been improperly applied.
• The suspension period is excluded when calculating refund claim deadlines, meaning some taxpayers may still file timely claims, with potential deadlines around July 10, 2026.
• Filing a protective refund or abatement claim using Form 843 can help preserve potential claims, even if the IRS initially denies them due to pending litigation.
• The government is expected to appeal Kwong, so taxpayers should review prior assessments and act proactively rather than waiting for a final outcome.

A recent federal court ruling may reopen refund opportunities many taxpayers assumed had closed after the pandemic. In Kwong v. United States, the U.S. Court of Federal Claims held that the federal COVID-19 disaster declaration triggered an automatic suspension of certain tax deadlines under Internal Revenue Code §7508A(d). The court concluded that deadlines falling between January 20, 2020, and July 10, 2023, were postponed as a matter of law versus administrative discretion. The ruling raises the possibility that interest and penalties assessed during that period may have been improper, and that some taxpayers still have time to seek refunds.

Court Ruling Revisits COVID Tax Deadlines

The Kwong decision confirms that the COVID-19 pandemic qualified as a federally declared disaster, automatically extending certain tax deadlines under §7508A(d). The court rejected the IRS’s position that its pandemic-related relief, such as Notices 2020-17 and 2020-18, was discretionary. Instead, the statute itself mandated the suspension for the entire period.

As a result, filing and payment deadlines for income, estate, gift, employment, and excise taxes falling within the disaster period were automatically pushed forward. Any interest or penalties assessed for obligations within that timeframe may be subject to refund or abatement.

How the Disaster Suspension Period Impacts Tax Deadlines

Under §7508A(d), the suspension period began on January 20, 2020, the earliest COVID-related incident date, and ended 60 days after the federal emergency declaration closed on May 11, 2023. For simplicity, this period is referred to here as the disaster suspension period.

During this period, deadlines for filing returns, paying taxes, and meeting other statutory obligations were effectively paused. The court held that this statutory suspension applies regardless of prior IRS guidance or notices. Taxpayers who met their obligations late during this time may have had penalties or interest applied incorrectly.

What Tax Penalties and Interest May Be Refunded

Taxpayers may review prior assessments to identify amounts potentially eligible for refund. Common examples include:

• Failure-to-file penalties
• Failure-to-pay penalties
• Underpayment interest
• Interest paid on installment agreements

The ruling applies broadly to both individual and business taxpayers. Any payment due within the disaster suspension period should be treated as occurring no earlier than July 10, 2023, which may reset the timing for calculating penalties and interest.

Consider the following example scenario. A calendar-year corporate taxpayer owed 2020 federal income tax by April 15, 2021, but did not pay until August 1, 2022. The IRS assessed late-payment penalties and underpayment interest. Because the original due date fell within the disaster suspension period, §7508A(d) requires that time to be disregarded. Any penalties or interest applied for that interval may have been improperly assessed. The taxpayer may therefore consider filing a refund or abatement request.

Refund Claim Timing

Normally, refund claims must be filed within three years of filing a return or two years of paying the tax, whichever is later. Under Kwong, the disaster suspension period is excluded when calculating these limits. That means refund claims for penalties and interest paid during the COVID-19 disaster period may still be timely, with some interpretations suggesting a deadline for many claims on July 10, 2026.

Taxpayers may secure their rights by filing a protective claim for refund or abatement using Form 843, even if the IRS initially denies it due to pending litigation. Filing early helps preserve the opportunity to claim refunds if the legal position is ultimately upheld.

Government Response and Likely Appeal

The government had argued that a 2021 amendment to §7508A limited the suspension to 60 days from the start of a disaster. The court rejected this, noting that the amendment only applies to disasters declared after its effective date. Kwong also rejected reliance on Treasury Regulation §301.7508A-1(g), emphasizing that agency interpretations do not override statutory mandates.

While the ruling is significant, an appeal is expected. AAFCPAs advises that clients act now to protect potential claims rather than wait for the final outcome.

How We Help

AAFCPAs takes a holistic approach to tax planning and compliance, combining more than five decades of experience with proactive strategies designed to address both risk and opportunity. Our integrated team of CPAs, tax specialists, and CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals works closely with individuals, businesses, and organizations to navigate complex tax laws, ensure compliance, and identify opportunities for long-term savings. We tailor each strategy to align with the client’s unique financial goals, whether through business tax planning that preserves cash and maximizes value, individual and family tax planning, state and local tax analysis, international tax compliance, entrepreneurial and closely held business advisory, nonprofit and UBIT guidance, or trust and estate planning. By coordinating across financial disciplines and staying ahead of evolving laws, AAFCPAs helps clients manage risk, optimize tax outcomes, and make informed decisions. In situations such as evaluating potential refunds of interest and penalties under the ruling, your AAFCPAs tax advisor can review prior assessments, file protective claims, and provide practical guidance to secure opportunities while maintaining compliance.

These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney and David McManus, CPA, CGMA, Tax Partner & National Cannabis Practice Leader.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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