It is doubtful that the IRS will automatically issue refunds, and the IRS is challenging a broad application of the Kwong decision.
As a result of a recent federal court decision, millions of taxpayers may now have a once-in-a-generation opportunity to claim refunds or obtain abatement of IRS penalties and interest that were assessed or paid during the COVID-19 pandemic. However, you must act quickly to preserve your right to any potential refund.
In Kwong v. United States, the U.S. Court of Federal Claims ruled that a COVID-era disaster relief statute automatically postponed many federal tax deadlines from January 20, 2020, through July 11, 2023. Until now, the IRS had largely ignored this provision.
As a result, taxpayers may qualify for refunds or abatement of failure-to-file penalties, failure-to-pay penalties, estimated tax penalties and underpayment interest that accrued during this three and a half year disaster period from January 20, 2020, to July 11, 2023. These penalties could apply to individuals, businesses, estates or trusts, and amounts can be substantial. In addition, the ruling may also affect late filers of informational returns, such as 1099-MISC and 1099-NEC, which can result in significant penalties even when no tax is due. In most cases, the interest and penalties assessed will pertain to the 2019 through 2022 tax years.
It is doubtful that the IRS will automatically issue refunds, and the IRS is challenging a broad application of the Kwong decision. Further, appellate courts could narrow or overturn the ruling. As it stands currently, the decision applies only to the specific taxpayer involved in that case and does not bind the IRS with respect to other taxpayers.
For that reason, if you paid interest and penalties between January 20, 2020, and July 11, 2023, you should take steps now to preserve your rights while the litigation continues and until the issue is ultimately settled.
If you are unsure or simply do not recall:
- Review IRS notices you may have received for tax years 2019 through 2022, inclusive for interest or penalties you paid in connection with late filing, late payment or estimated taxes.
- Pull and examine IRS tax account transcripts for tax years 2019 through 2022, inclusive for interest or penalties you paid in connection with late filing, late payment or estimated taxes.
- Identify any balances that remain assessed but unpaid for tax years 2019 through 2022.
- Contact your tax service provider this month to determine whether a protective refund claim should be filed before the July 10 deadline.
TAG’s Perspective
If you paid meaningful penalties or interest, received assessments, or received IRS notices between January 20, 2020, and July 11, 2023, you should consider filing a protective refund claim with the IRS. A protective claim is used when your right to a refund depends on future events, such as the final outcome of ongoing litigation.
Filing a protective claim preserves your right to seek a refund if the courts ultimately rule in the taxpayers’ favor in Kwong. If you do not file a timely claim, you may permanently lose the opportunity to recover these amounts. Under the Kwong decision, you must file your protective claim by July 10, 2026, so time is limited.
For More Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, Gregory G. Smith or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.