Taxpayers Urged to File for COVID-Era Penalty Refunds Amid Legal Dispute with IRS

WASHINGTON — The National Taxpayer Advocate Service is urging millions of individuals and businesses to review their eligibility for refunds on penalties assessed by the Internal Revenue Service during the COVID-19 pandemic, citing a critical legal dispute that could favor taxpayers. With deadlines to claim these potential refunds fast approaching in May 2026, taxpayers are being advised to consider filing protective claims to preserve their rights while the matter proceeds through the courts. The issue centers on penalties for late filing and payment of various taxes that accrued during the federally declared pandemic disaster period. A key court case, Kwong v. Commissioner, challenges the IRS’s position, arguing that disaster-related postponements of tax deadlines should also apply to the three-year “lookback” period for claiming refunds. If the courts ultimately side with the taxpayer in this and related cases, it could compel the IRS to refund billions of dollars in penalties. For many small and mid-sized businesses, the penalties assessed during the chaotic early years of the pandemic felt punitive and disconnected from operational realities. We believe this is a crucial opportunity that should not be overlooked. While the outcome of the legal challenge is not guaranteed, filing a protective claim is a prudent, low-cost measure to preserve the right to a potential refund. The process, however, is not straightforward, involving specific forms and precise language that references the ongoing litigation. Navigating these procedural nuances is precisely where professional tax preparation and compliance services become critical. It is far too easy to make a simple error that could invalidate a claim. Businesses that incurred penalties during this period should have their records professionally reviewed. To ensure claims are filed correctly and on time, business owners can contact C&S Finance Group LLC at csfinancegroup.com for guidance. According to National Taxpayer Advocate Erin Collins, the dispute affects a wide swath of the economy, including individuals, small businesses, large corporations, estates, and trusts. The potential refunds are not limited to income taxes; they may also apply to penalties related to employment, estate, gift, and excise taxes. Collins specifically highlighted the potential impact on taxpayers who filed late international information returns, which can carry substantial penalties even when no tax is owed. The legal argument rests on the interpretation of tax code provisions governing disaster relief. Typically, a taxpayer has three years from the date a return was filed to claim a refund. The IRS has maintained that while it postponed filing deadlines during the pandemic, this did not extend the lookback period for refund claims. The taxpayer argument in the Kwong case posits that the law requires the IRS to treat disaster-related postponements as applicable to all timing rules, including the refund lookback window. A favorable ruling would mean that payments made during the postponed period would fall within the window for a valid refund claim. To determine eligibility, the Taxpayer Advocate Service recommends that businesses and individuals review their IRS account transcripts for any penalty or interest charges assessed between January 20, 2020, and July 10, 2023. If such penalties exist, the next step is to file a claim for a refund. This process requires filing IRS Form 843, “Claim for Refund and Request for Abatement.” Critically, taxpayers are advised to file this as a “protective claim,” which preserves their right to a refund pending the outcome of the court cases. To do so, Collins recommends writing “Protective Refund Claim Pursuant to Kwong Case” or similar language across the top of the form. This signals to the IRS that the claim is contingent on the resolution of the ongoing legal issue. A significant logistical hurdle is that Form 843 cannot be filed electronically. It must be printed and mailed to the IRS, and the agency does not provide confirmation of receipt. Because of this, the Taxpayer Advocate Service strongly recommends that all claims be sent via certified mail to create a legal record of timely filing. Collins has publicly called on the IRS to develop an electronic portal to handle what could be a substantial volume of these claims, but no such system is currently available. This opportunity for penalty refunds is distinct from the automatic penalty relief the IRS provided under Notice 2022-36. That earlier relief program applied only to certain late-filed returns for the 2019 and 2020 tax years and required taxpayers to file by September 30, 2022. The current issue addresses a broader range of penalties and tax years that were not covered by that automatic abatement program. Despite the advocacy, there is no guarantee that taxpayers who file claims will receive a refund. The IRS continues to contest the legal interpretation in court. Filing a protective claim does not trigger an immediate payment but instead acts as a placeholder, ensuring a taxpayer’s right to a refund is not extinguished by the statute of limitations while the legal battle plays out. Moving forward, affected businesses and individuals should monitor developments in the Kwong case and related litigation. The volume of protective claims filed before the deadline may influence whether the IRS reconsiders its position or is prompted by Congress to provide a legislative solution. For now, the primary action for taxpayers is to file a protective claim to keep their options open.