Penalty and Interest Refunds-COVID
A recent federal court decision has opened a narrow opportunity for taxpayers to recover IRS assessed penalties and interest during the COVID-19 disaster period. The opportunity is real, but it is not automatic, and for most taxpayers the window to protect it closes on July 10, 2026.
I am sending this alert because the deadline is close, the claim has to be filed on paper. If any part of this applies to you, please read it and then call the office.
What happened
In Kwong v. United States, the U.S. Court of Federal Claims read the disaster postponement statute (IRC § 7508A(d) as it existed in 2020) to mean that filing and payment deadlines were automatically suspended for the entire length of the COVID-19 federal disaster declaration, plus 60 days. That period ran from January 20, 2020 through July 10, 2023.
If the court's reading holds, returns and payments that came due anywhere inside that three-and-a-half-year window were not actually late. And if they were not late, the IRS should not have charged failure-to-file penalties, failure-to-pay penalties, estimated-tax penalties, or the related interest during that time.
The IRS disagrees with this interpretation. The government filed a notice of appeal to the Federal Circuit on May 15, 2026, so the question is now squarely on appeal and could take years to resolve. A higher court could affirm the decision, narrow it, or reverse it.
Why you may need to act now anyway
Here is the tension. The law is unsettled, but the deadline to file a refund claim is not. Under the normal refund statute of limitations (IRC § 6511, generally three years from filing or two years from payment), the window to claim refunds tied to this issue closes for most taxpayers on July 10, 2026. If you wait for the appeal to finish before filing, that deadline will almost certainly have passed and the right to the refund will be gone for good.
The answer to that problem is a protective claim. A protective claim is a refund claim you file now, before the deadline, to preserve your rights while the legal question is still being litigated. The claim is filed on Form 843, marked Protective Refund Claim Pursuant to Kwong v. United States across the top, identifying the year or years involved and describing the contingency. The IRS holds it in suspense until the courts settle the issue. If Kwong ultimately holds, the claim is perfected with final numbers. If it does not, nothing has been lost but the cost of the filing.
Who this may affect
This is broad. You should take a closer look if, on a return or payment that came due between January 20, 2020 and July 10, 2023, you paid any of the following:
• Failure-to-file or failure-to-pay penalties
• Estimated-tax penalties
• Underpayment interest
• Certain late international information return penalties, which can be large even when no tax was due
It reaches individuals, small businesses, S corporations, estates, trusts, and nonprofits, and it can involve income, employment, estate, gift, and excise taxes.
A note for clients with an open IRS matter
If you are currently in a Collection Due Process matter, an installment agreement, an active examination, or an Appeals proceeding, please talk to a tax professional.
What this is not
A few honest cautions:
• Filing a claim does not guarantee a refund. It preserves the right to one if the law develops in taxpayers' favor.
• The decision is on appeal and could be reversed.
• This is a federal issue only. Alabama and other state penalties and interest run under separate rules and are not automatically covered.
• If your original due date fell before January 20, 2020, the analysis is more complicated and the outcome is less certain.
What to do
If you think any of this might apply to you, call us immediately. Each claim has to go in on paper, by certified mail, and a separate Form 843 is generally needed for each tax year, so the practical deadline to get your materials is much earlier.
Bowman Law Firm LLC, Gene M. Bowman, Attorney, CPA
