Kwong v US: COVID Relief Protective Claims

A recent tax case that may create refund or penalty abatement opportunities for some taxpayers. In Kwong v. United States, the U.S. Court of Federal Claims interpreted Internal Revenue Code section 7508A(d), which provides automatic postponement of certain tax deadlines during a federally declared disaster. In the COVID-19 context, the court concluded that this automatic relief period ran from January 20, 2020 through July 10, 2023, rather than being limited to a shorter period. In practical terms, the decision suggests that for many federal tax filing and payment deadlines falling between January 20, 2020 and July 10, 2023 (generally tax years 2019 to 2022), certain late filing and late payment penalties, and related interest, may have been assessed when they should not have been.

This does not mean every taxpayer is entitled to money back. Eligibility depends on the type of tax, the tax period involved, when the return or payment was due, whether penalties or interest were actually assessed or paid, and whether the applicable refund statute remains open. In addition, the IRS has filed an appeal of the ruling and is expected to continue litigating these issues, so the law is not yet settled. Even so, the National Taxpayer Advocate has recommended that affected taxpayers consider filing a protective refund claim now to preserve their rights while the issue is being resolved.

A protective refund claim is a filing (Form 843) made before the statute of limitations expires when a taxpayer’s right to a refund depends on an unresolved legal issue. Filing a protective claim does not guarantee that the IRS will allow a refund or abatement, but it can preserve the ability to pursue relief later if the law develops favorably. The key date for many taxpayers is July 10, 2026. Based on current guidance, that is the practical deadline for many affected taxpayers to file protective claims relating to penalties and interest connected to tax years whose filing or payment deadlines fell within the COVID disaster period. Missing that date may cause some taxpayers to lose refund rights permanently, even if the courts later confirm a favorable interpretation.

Please note that not all clients will benefit from this process, and in some cases the cost of preparing a claim may outweigh the potential recovery. Also, because the IRS has not fully accepted the broadest reading of these issues and further litigation is expected, we cannot assure any particular result. Our advice and any claim we prepare would be based on the facts available to us and the authorities in effect at that time.

If you believe you may have paid a significant amount of late payment or late filing penalties or interest to the IRS related to tax years 2019 to 2022 and would like to discuss whether this issue may affect you, please contact your WR tax adviser as soon as possible.