Kwong vs. U.S.: Why You Might Be Owed a Refund on IRS Penalties

If there is one thing we know at Tangible Accounting, it is that the tax code is rarely black and white—especially when it comes to the chaotic timeline of the COVID-19 pandemic. If you found yourself paying the IRS penalties or interest during that period, you need to pay attention to a recent development coming out of the federal courts.

A landmark decision in Kwong vs. United States has challenged how the IRS handled deadlines during the pandemic. For our clients here in West Palm Beach, Phoenix, and beyond, this isn't just legal theory; it represents a tangible opportunity to potentially recover funds you effectively overpaid to the government.

The Court’s Ruling: A Matter of Timing

Let’s break down the legalese. The case centers on Internal Revenue Code Section 7508A(d). This section dictates how tax deadlines shift during federally declared disasters. The IRS took the stance that extensions were limited to one year. However, the U.S. Court of Federal Claims disagreed.

In Kwong, the court ruled that the statute mandates an automatic extension for the entire duration of the disaster declaration. Regarding COVID-19, this means the "disaster period"—and the associated tax extensions—technically ran from January 20, 2020, through July 10, 2023.

What This Means for Your Wallet

If this ruling holds, the legal deadline for filing and paying taxes for those tax years was effectively pushed to July 10, 2023. Consequently, any "failure-to-file" or "failure-to-pay" penalties the IRS assessed against you before that date may have been legally invalid.

This opens the door for taxpayers to demand a refund for those penalties and the interest attached to them.

Your Strategic Move: The Protective Claim

As an Enrolled Agent, my job is often about asset protection and risk management. Here is the reality of the situation: The government rarely hands back money without a fight. It is highly likely the Department of Justice will appeal this decision.

So, why act now? Because of the statute of limitations. You generally have a limited window to claim a refund. By filing what is called a "protective claim," we essentially place a bookmark in your file. It stops the clock on the statute of limitations while the appeals process plays out in the courts. If the Kwong decision is upheld later, your place in line is already secured.

Action Plan for Affected Taxpayers

If you incurred penalties between 2020 and 2023, sitting on the sidelines is not the best strategy. Here is how we recommend approaching this:

Audit Your History: We need to review your taxpayer account transcripts to identify any penalties assessed between Jan 20, 2020, and July 10, 2023. You can access these via the Get Transcript tool on IRS.gov.
File Form 843: This is the Claim for Refund and Request for Abatement. We file this as a "protective claim" referencing the Kwong decision to safeguard your rights.
Watch the Clock: Based on the court's timeline, claims related to this decision must be filed by July 10, 2026 (three years from the end of the disaster period).

Beginning in 2026, the IRS is also rolling out new automated processes for First-Time Abatement (FTA), which may offer another route for relief. However, relying on future automation is risky when you have a valid legal argument available today.

Let’s Preserve Your Rights

Whether you are managing a portfolio of investments or running a business, you shouldn't pay a penny more in penalties than the law requires. If you believe you paid penalties that should now be voided, contact Tangible Accounting, PLLC immediately. We can help you prepare the necessary protective claims to ensure you don't miss out on a potential refund due to a technicality.

Share this article...

Facebook

Twitter WhatsApp LinkedIn Pinterest Reddit Email

Want tax & accounting tips and insights?

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .