New Court Ruling Could Mean Tax Refunds for COVID-Era Penalties

For many individuals and business owners here in the greater Orlando area, the years between 2020 and 2023 were a blur of pivoting business models, navigating health concerns, and trying to keep up with rapidly changing regulations. If you ended up paying the IRS tax penalties or interest during that chaotic time, a new court decision suggests you might have paid them unnecessarily—and you could be entitled to get that money back.

A recent landmark ruling by the U.S. Court of Federal Claims in the case Kwong vs. United States has challenged how the IRS handled deadlines during the COVID-19 National Emergency. This decision could open the door for significant refunds on penalties assessed during the pandemic. At Sandra Stearns CPA, we want to ensure our clients understand what this means and how to protect their rights to a potential refund.

Understanding the Kwong Decision

In simple terms, the court looked at the automatic extension of tax deadlines during federally declared disasters. While the IRS argued that extensions were limited, the court ruled that under the 2019 version of Internal Revenue Code Section 7508A(d), these extensions were mandatory and automatic for the duration of the disaster.

Specifically regarding the COVID-19 pandemic, the court indicated that tax deadlines were effectively extended from January 20, 2020, through July 10, 2023. This contradicts the IRS’s previous stance that extensions were much shorter.

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Why does this matter? If the legal deadline to file or pay was technically moved to July 2023, then any "failure-to-file" or "failure-to-pay" penalties the IRS charged you before that date may have been invalid.

Steps to Potentially Reclaim Your Money

While this is a developing situation, being proactive is the best strategy. Here is the approach we are recommending to our clients to safeguard their financial interests:

Review Your Account Transcripts: The first step is to see if you were actually charged penalties or interest for deadlines falling between January 20, 2020, and July 10, 2023. We can help you pull these records, or you can access them via the Get Transcript tool on IRS.gov. You can also order them by mail (Form 4506-T) or by phone at 800-908-9946.
File a Protective Refund Claim: This is the most critical step. The government will likely appeal the Kwong decision. To ensure the statute of limitations doesn't run out while the lawyers battle it out in court, you should file a "protective claim" using Form 843. Think of this as a placeholder that preserves your right to a refund later, even if the legal process drags on.
Request Abatement: If you currently have an outstanding balance due to penalties from this period, the Kwong ruling can be cited as a justification for abatement (removal) of those penalties.

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Important Deadlines and Considerations

It is vital to note that even though the ruling is favorable, it is not yet set in stone due to the potential for an appeal. However, waiting until the appeal is settled might be too late. The ruling suggests that claims for refunds related to this decision must generally be filed by July 10, 2026 (three years from the recognized end date of the incident period).

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Automatic Relief on the Horizon

Separately, starting in 2026, the IRS plans to implement automatic First-Time Abatement (FTA) for eligible taxpayers with a clean three-year compliance history. While this is helpful for the future, it doesn't solve the issue of penalties you may have already paid during the pandemic.

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