The COVID-19 pandemic reshaped the global business landscape in unprecedented ways. As businesses navigated operational disruptions, workforce challenges, and evolving tax obligations, governments across the world introduced relief measures to ease the compliance burden. In the United States, one such relief was embedded within the Internal Revenue Code through disaster-related provisions under Section 7508A.
However, the scope of this relief has remained the subject of legal debate until recently.
In a significant taxpayer-friendly decision, the United States Court of Federal Claims, in Kwong v. United States, interpreted Section 7508A(d) in a manner that could invalidate certain IRS penalties and interest assessed during the COVID-19 federal disaster period. The ruling has created a potential refund opportunity for businesses and individuals that paid penalties or interest between January 20, 2020 and July 10, 2023.
Although the decision could still be appealed, taxpayers should not ignore its implications. Refund claims are governed by strict statutory deadlines, and delaying action could result in the permanent loss of valuable refund rights.
This article explains the background of the case, the Court’s reasoning, its practical implications, and the steps taxpayers should consider taking.
Background
Section 7508A of the Internal Revenue Code provides relief to taxpayers affected by federally declared disasters by postponing certain tax filing and payment deadlines.
When COVID-19 was declared a federal disaster, FEMA designated January 20, 2020 as the earliest incident date, while the disaster declaration remained in effect until May 11, 2023.
Historically, taxpayers relied primarily on IRS-issued notices announcing disaster relief. However, the Kwong case questioned whether the statute itself granted a broader and automatic extension, irrespective of separate administrative relief issued by the IRS.
The Court’s interpretation has significant consequences because it directly impacts whether penalties and interest imposed during this period were legally valid.
Analysis of the Case Law
Interplay between Sections 7508A(a) and 7508A(d)
The central issue before the Court was how Sections 7508A(a) and 7508A(d) interact.
Section 7508A(a) authorises the Treasury Secretary to postpone specified tax-related deadlines for taxpayers affected by federally declared disasters. Traditionally, this has been viewed as a discretionary power exercised through IRS notices.
Section 7508A(d), introduced in 2019, operates differently. Rather than requiring separate administrative action, it establishes an automatic postponement period beginning on the earliest incident date in the federal disaster declaration and ending sixty days after the latest incident date.
For the COVID-19 disaster declaration, this period extended from January 20, 2020 through July 10, 2023.
The government argued that the discretionary authority under subsection (a) effectively limited the operation of subsection (d). The Court rejected this argument, concluding that subsection (d) functions independently and contains no one-year limitation.
Accordingly, the Court held that taxpayers benefited from an automatic postponement covering the entire disaster declaration period together with an additional sixty days.
This interpretation significantly broadens the scope of taxpayer relief compared to the IRS’s historical position.
Applicability of the 2021 Amendment
Another important issue concerned amendments introduced to Section 7508A(d) in November 2021.
The amendment revised the methodology for calculating the relief period for future federally declared disasters. The government contended that these changes should influence the interpretation of COVID-19 relief.
The Court disagreed.
It held that Congress did not make the amendment retrospective. Consequently, the original statutory language continued to govern the COVID-19 disaster declaration.
As a result, the Court concluded that the automatic postponement remained effective until July 10, 2023, reinforcing the broader interpretation of taxpayer relief.
Impact of the Kwong Ruling
The implications of this decision extend well beyond the taxpayer involved in the litigation.
Businesses, individuals, trusts, estates, multinational groups, and other taxpayers who incurred IRS penalties or interest during the COVID-19 disaster period may now have grounds to seek refunds or abatements.
The ruling is especially relevant for taxpayers who incurred substantial penalties relating to international information returns such as Forms 5471 and 5472, where penalties can be significant even when no additional tax liability exists.
Similarly, taxpayers who paid failure-to-file penalties, failure-to-pay penalties, estimated tax penalties, or related interest during the covered period should carefully evaluate whether the assessments remain legally sustainable under the Court’s interpretation.
While eligibility depends on individual facts and circumstances, the ruling provides a strong legal basis for reviewing historical assessments that may previously have been considered final.
Understanding the Refund Time Limits
Obtaining relief requires more than simply relying on the Court’s decision. Taxpayers must also comply with the statutory limitation periods governing refund claims.
Under Section 6511 of the Internal Revenue Code, refund claims generally must be filed within the later of:
- Three years from the date the return was filed; or
- Two years from the date the tax, penalty, or interest was paid.
The Kwong decision changes how these limitation periods may be calculated.
Since the Court held that filing deadlines were automatically postponed until July 10, 2023, taxpayers who filed returns before that date may be treated as having filed on the postponed due date under Section 6513.
Consequently, many taxpayers could have until July 10, 2026 to submit protective refund claims.
Where penalties or interest were paid after July 10, 2023, the separate two-year payment rule may provide an even longer filing window.
Each taxpayer’s position should therefore be reviewed individually to determine the applicable limitation period.
Practical Illustration
Consider a taxpayer who timely filed its 2021 income tax return on October 15, 2022 but did not file an automatic extension for Form 5472.
The IRS subsequently assessed penalties, which were paid on February 1, 2025.
Ordinarily, taxpayers may assume that the limitation period runs from the original filing date.
However, applying the Court’s reasoning, the postponed due date becomes July 10, 2023. Furthermore, because the penalties were paid in February 2025, the taxpayer may rely on the two-year payment rule.
Accordingly, the refund claim could remain valid until February 1, 2027, demonstrating why taxpayers should carefully analyse payment dates before concluding that refund opportunities have expired.
Expected IRS Response
Although the Kwong decision represents a significant development, taxpayers should recognise that the matter is not yet settled.
The IRS has previously maintained a narrower interpretation of Section 7508A in other litigation and has indicated that mandatory postponement under subsection (d) should operate only after discretionary relief has been granted under subsection (a).
Given this longstanding position, the IRS may continue to challenge refund claims or seek appellate review of the Kwong decision.
However, waiting for the final outcome may prove costly.
Refund limitation periods continue to run regardless of pending litigation. Filing a protective refund claim allows taxpayers to preserve their rights while the legal position continues to evolve.
What Should Taxpayers Do Now?
Given the approaching statutory deadlines, taxpayers should act promptly.
Recommended actions include:
- Review tax returns for tax years 2019 through 2022.
- Obtain IRS account transcripts.
- Identify penalties and interest assessed between January 20, 2020 and July 10, 2023.
- Evaluate whether the assessments fall within the scope of the Kwong ruling.
- Calculate the potential refund amount.
- Prepare supporting documentation.
- Submit protective refund claims before the applicable statutory deadline.
Early action can preserve valuable refund opportunities while reducing the risk of losing rights due to procedural time limits.
Conclusion
The Kwong v. United States decision has introduced one of the most significant taxpayer-favourable interpretations of COVID-19 disaster relief provisions in recent years.
By recognising that Section 7508A(d) created an automatic postponement extending through July 10, 2023, the Court has opened the door for taxpayers to challenge IRS penalties and interest imposed during the COVID-19 federal disaster period.
Although the decision remains subject to potential appeal and future IRS guidance, taxpayers should not delay evaluating their eligibility. Statutory limitation periods continue to apply irrespective of ongoing litigation, and once those deadlines expire, refund opportunities may be lost permanently.
Businesses that incurred late-filing penalties, late-payment penalties, international information return penalties, or related interest during the COVID-19 period should carefully review their historical assessments and consider filing protective refund claims where appropriate.
With the July 10, 2026 deadline approaching for many taxpayers, timely action could make the difference between recovering substantial amounts and losing the opportunity forever.
Frequently Asked Questions (FAQs)
1. What is the Kwong v. United States ruling?
The Kwong v. United States ruling is a decision of the U.S. Court of Federal Claims that interpreted Section 7508A(d) of the Internal Revenue Code to provide an automatic postponement of certain federal tax deadlines during the COVID-19 federal disaster period. This interpretation may allow taxpayers to seek refunds of specific IRS penalties and interest assessed during that period.
2. Who may qualify for an IRS penalty or interest refund?
Individuals, corporations, partnerships, trusts, estates, and multinational businesses that paid IRS penalties or interest between January 20, 2020 and July 10, 2023 may be eligible, depending on their facts and the type of assessment involved.
3. Which penalties could be affected by the ruling?
The ruling may impact failure-to-file penalties, failure-to-pay penalties, estimated tax penalties, and certain international information return penalties, including those relating to Forms 5471 and 5472, where the statutory conditions are met.
4. Does the ruling automatically guarantee a refund?
No. Taxpayers must still satisfy the applicable legal requirements, file refund or abatement claims within the prescribed limitation period, and provide supporting documentation. The ruling may also be subject to further appeals.
5. Why is July 10, 2026 an important date?
Based on the Court’s interpretation, many taxpayers may have until July 10, 2026 to file protective refund claims under the three-year limitation period. However, taxpayers who paid penalties or interest at a later date may benefit from the separate two-year payment rule.
6. What is a protective refund claim?
A protective refund claim is filed to preserve a taxpayer’s right to claim a refund while a legal issue remains unresolved. Filing a protective claim does not guarantee a refund, but it helps ensure that the taxpayer’s rights are protected if the courts ultimately uphold the favourable interpretation.
7. Should taxpayers wait until the IRS issues official guidance?
Waiting may not be advisable. Since statutory deadlines continue to apply, taxpayers should evaluate their position and consider filing protective claims before the limitation period expires.
8. How can taxpayers determine whether they are eligible?
Taxpayers should review their tax returns, IRS account transcripts, and records of penalties and interest assessed during the COVID-19 disaster period. Seeking professional advice can help determine eligibility and identify the appropriate refund or abatement process.
About M2K Advisors
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