A recent federal court case, Kwong v. United States, has created a potential opportunity for taxpayers to recover certain IRS penalties and interest paid during the COVID-19 pandemic. While the outcome is not yet final, many taxpayers need to take action now to preserve their rights.
Kwong case explained
In Kwong, the court concluded that federal tax deadlines were automatically postponed during the COVID-19 national emergency period (January 20, 2020, through July 10, 2023). Based on this interpretation, the IRS may not have had authority to assess certain penalties and interest during that time.
If upheld, this could mean that taxpayers who were charged:
- Failure-to-file penalties
- Failure-to-pay penalties
- Underpayment of estimated tax penalties
- Related interest
may be entitled to refunds or abatements.
What is a protective refund claim?
A protective refund claim is a formal filing with the IRS that preserves your right to claim a refund while the legal outcome is still uncertain. Rather than waiting for the courts to issue a final decision, taxpayers file these claims now to ensure they do not miss the statute of limitations. If the courts ultimately rule in favor of taxpayers, those who filed protective claims are positioned to receive refunds.
Why timing matters
Refund claims are subject to strict deadlines. Generally, you must file a claim within:
- Three years of the date the return was filed, or
- Two years from the date the tax was paid
For many taxpayers, these deadlines are already approaching or have passed for earlier years but could still be open due based on the Kwong decision. Filing a protective claim now may be the only way to preserve your ability to benefit if the Kwong decision is upheld.
Which tax years are affected?
For most calendar-year taxpayers, the key years to review are:
- 2019 tax year (filed in 2020)
- 2020 tax year
- 2021 tax year
- 2022 tax year
These years fall within the COVID emergency period identified in the case. In some situations, specific penalties assessed in early 2023 may also be relevant.
Should you take action?
You may want to consider filing a protective claim if you:
- Paid IRS penalties or interest during 2020–2023
- Received notices for late filing, late payment, or estimated tax penalties
- Had cash flow disruptions during the pandemic that impacted tax compliance
Even if you are unsure, a review can help determine whether a claim is worthwhile.
Important considerations
- The case is not final. The IRS is expected to challenge or appeal the decision.
- Filing a claim does not guarantee a refund. It preserves your right to one if the law ultimately supports it.
- Each situation is unique. The potential benefit depends on your specific facts and payment history.
How we can help
Our team can:
- Review your prior filings
- Identify penalties and interest that may qualify
- Prepare and file protective refund claims
- Monitor developments in the case and advise on next steps
Bottom line
The Kwong decision presents a potentially valuable but time sensitive opportunity to revisit IRS penalties and interest assessed during the COVID period. The right next step is not the same for everyone, but waiting for a final answer may cause some taxpayers to lose options they would prefer to keep.
At YHB, we work with clients to evaluate issues like this in context. That means identifying what is at stake, weighing whether a protective claim makes sense, and helping you decide what matters next.
If you would like to review whether this applies to your situation, reach out to your YHB advisor or contact our team for a focused assessment.