Kwong Decision and COVID-Era IRS Penalties: Protective Claims May Be Needed Before July 10, 20265 Min Read

Many taxpayers remember the COVID-19 period as a time when tax deadlines, cash flow, and IRS communications were unusually difficult to manage.  A recent and widely publicized court decision has put a spotlight back on that period and may create a potential refund opportunity for taxpayers who paid certain federal penalties or interest connected to COVID-era filing or payment deadlines.

Taxpayers who paid federal penalties or interest tied to COVID-era filing or payment deadlines should review their IRS accounts now and consider filing a protective claim by July 10, 2026, to preserve potential refund rights amid ongoing litigation.

Details on Kwong v. United States

The case is Kwong v. United States, 179 Fed. Cl. 382 (2025), decided by the U.S. Court of Federal Claims. In Kwong, the court held that certain tax-related deadlines were postponed longer than the IRS had determined and published. The court interpreted Internal Revenue Code Section 7508A(d) as creating a mandatory disaster-related postponement period tied to the COVID-19 federal disaster declaration.

The COVID-19 disaster incident period began on January 20, 2020, and ended on May 11, 2023. Under that interpretation, certain tax-related deadlines may have been extended until 60 days after the end of the disaster incident period, which means it would have ended on July 10, 2023. As a result, under the court’s reasoning, certain filing deadlines, payment due dates, and other tax-related deadlines that fell during the COVID-19 disaster period may have been postponed to July 10, 2023. The IRS disagrees with the court’s holding in Kwong and has appealed the decision.

Potential Refund Opportunities

The most direct opportunity may involve taxpayers who paid or were assessed federal penalties or interest connected to estimates, payments, filings, or other tax deadlines that were originally due during the COVID-19 disaster period. Under the reasoning in Kwong, those deadlines may have been postponed to July 10, 2023.

For instance, if a taxpayer had a return due on April 15, 2021, but did not file the return and pay the taxes due until May of 2022, they would have been assessed late filing and late payment penalties.  However, pursuant to the Kwong decision, the return and payment are now due July 10, 2023 which means the taxpayer would have timely filed the return along with timely paying the taxes resulting in penalties being incorrectly assessed and an opportunity for the taxpayer to file a claim for refund to have the penalties refunded.

Examples of potential refund opportunities to review include:

• Failure-to-file or failure-to-pay penalties assessed on returns or payments affected by COVID-era due dates.
• Interest charged on penalties or underpayments that may relate to deadlines arguably postponed under Kwong.
• Estimated tax or underpayment-related charges where the relevant payment timing may have fallen within the disaster-relief window.
• Missed refund claims for prior years, including some situations involving tax years 2019 through 2022, where the taxpayer may still need to file a refund or protective claim by July 10, 2026, while the law develops.

Due to strict statute of limitations rules, once any potential refund opportunities have been identified the taxpayer will generally have until July 10, 2026, to file the refund claim.

There is still significant uncertainty around Kwong-related refund claims because the IRS has appealed the decision and has not issued formal guidance broadly addressing the issue for taxpayers. As a result, filing a protective claim may be the best option in many cases.

A protective claim is designed for situations where the taxpayer may be entitled to a refund, but the final answer depends on future events such as legislation, regulations, administrative action, or case law. A protective claim will preserve the taxpayers’ right to file a refund claim if the Kwong decision is upheld even though the statute of limitations has otherwise expired. Taxpayers who file protective claims should be prepared to supplement or perfect those claims once the legal issue is resolved.

Bottom line

Kwong does not guarantee a refund for every taxpayer that paid penalties or interest during the pandemic. It does, however, create a time-sensitive reason to review COVID-era IRS charges and preserve refund rights before the statute of limitations closes.

For many taxpayers, a protective claim may be the best way to keep the door open while the ruling continues to develop.  Taxpayers should review their IRS accounts, identify any potential refund opportunities, and consider filing a protective claim by July 10, 2026.