Taxpayers May Claim Refunds for Pandemic Penalties After Federal Court Ruling

A federal court ruling issued last November is opening a new window for individuals and businesses to potentially recover millions of dollars in tax penalties and interest assessed by the Internal Revenue Service during the COVID-19 pandemic. The decision in Kwong v. United States has reset the clock on certain tax deadlines, giving taxpayers until July 10, 2026, to file claims for refunds on payments made for tax years 2019 through 2022. The case hinges on the interpretation of Section 7508A(d) of the U.S. tax code, which mandates the postponement of tax deadlines during a federally declared disaster. The COVID-19 national emergency, which officially ran from January 20, 2020, through May 11, 2023, qualified as such a disaster. The U.S. Court of Federal Claims sided with the taxpayer's argument that this provision should have automatically postponed all applicable tax deadlines for the entire duration of the emergency, plus an additional 60 days. This interpretation effectively establishes a new, later tax deadline of July 10, 2023, for filings and payments related to the 2019, 2020, 2021, and 2022 tax years. Consequently, any failure-to-file or failure-to-pay penalties and associated interest that the IRS assessed and collected before this revised date may have been levied improperly. This opens the door for taxpayers who paid these charges to seek a full refund. Any person or business charged penalties or fees by the IRS for the period between January 20, 2020, and July 10, 2023, could be eligible. The potential refunds could be substantial, particularly for businesses that faced significant financial strain and liquidity challenges during the pandemic. "The potential dollar amounts could be significant, particularly for businesses that faced liquidity challenges during the pandemic and incurred substantial failure-to-pay (taxes) penalties," wrote Jessica Marine, a partner at law firm Frost Law, in a recent analysis of the ruling's impact. The financial stakes are significant enough to have prompted major corporate action. In February, data storage company Western Digital filed a lawsuit against the federal government seeking a refund on a portion of the $53.6 million in taxes it paid in August 2023. The company argues it should not have been charged nearly $21 million in interest that accrued during the pandemic disaster period, citing the same legal reasoning as the Kwong case. This ruling could affect a wide range of taxpayers, including those who were under an IRS audit, had established a payment plan with the agency, or were subject to other collection activities during the pandemic. Penalties and interest embedded in these arrangements could now be subject to abatement and refund claims. To pursue a refund, taxpayers must file Form 843, Claim for Refund and Request for Abatement. Tax experts advise that filers should explicitly state on the form that they are submitting a protective claim based on the Kwong v. United States decision regarding Section 7508A(d) and the COVID-19 disaster period. This clarifies the legal basis for the request. The deadline to submit these claims is determined by the standard statute of limitations for refunds, which is typically three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Based on the court's establishment of a July 10, 2023, tax deadline, the three-year lookback period sets the final deadline for these specific pandemic-related claims at July 10, 2026. While this ruling presents a significant opportunity, it is not an automatic refund program. In our experience, many business owners who were navigating unprecedented operational and financial stress during the pandemic paid IRS penalties without question, focusing instead on keeping their doors open. This court decision provides a crucial, if unexpected, chance to revisit those payments and recover funds that may have been improperly collected. The process requires a meticulous review of past tax records to identify all potentially eligible penalties and interest charges, which can be a complex undertaking for businesses that had complicated tax situations during those years. We believe it is essential for every business that paid penalties during this period to assess its eligibility. The capital recovered could be meaningful, especially for small and mid-sized companies still stabilizing their finances post-pandemic. This is a core part of the detailed work involved in professional tax preparation and compliance. For business owners uncertain about how to navigate this process, the first step is a thorough review of their tax payment history from 2020 to 2023. To get help with this complex analysis, contact C&S Finance Group LLC at csfinancegroup.com to ensure a proper claim is filed before the deadline. The situation remains dynamic, as the IRS has not yet issued formal guidance in response to the ruling and could still appeal the Kwong decision. Business owners and their financial advisors should monitor for further announcements from the agency. In the meantime, those who believe they may be eligible are encouraged to consider filing a protective claim to preserve their rights before the 2026 deadline passes.