While the COVID-19 pandemic is far in the rear view, a recent case is putting COVID-era penalty and interest relief squarely in the spotlight.

In Kwong v. United States, decided in November, the U.S. Court of Federal Claims sided with the taxpayer in a broad interpretation of the penalty and interest relief granted during the pandemic. Although challenges to the decision are expected, if the court's interpretation prevails, many taxpayers may be entitled to significant refunds for late payments, late filings and other penalties incurred during that period.

The deadline for taking legal action is approaching, so taxpayers who incurred substantial penalties should evaluate their circumstances with the help of an experienced tax professional.

Pandemic-Era Relief: Background

Under IRC Section 7508A, the Internal Revenue Service is entitled to postpone deadlines during federally declared disasters. The deadlines can be suspended for the duration of a presidentially declared disaster period plus 60 days.

Most often, extensions are granted to specific geographic areas during natural disasters. The pandemic was a different situation: A declared nationwide disaster lasted from Jan. 20, 2020, until May 11, 2023. With the 60-day additional period, deadlines were potentially extended until July 10, 2023.

Kwong: Facts of the Case

The primary issue in Kwong v. United States is whether Section 7508A applied broadly to federal tax deadlines or to the more limited relief announced by the IRS during the disaster period.

The government denied the taxpayer's refund claim, after which the taxpayer sued to challenge the denial. The lawsuit was not timely, the government argued, because it was filed after the two-year statute of limitations period had expired. In turn, the taxpayer argued that the statute of limitations was suspended during the pandemic.

The court agreed with the taxpayer, finding that deadlines were extended for the duration of the disaster period, plus 60 days — meaning that the statute of limitations was suspended until July 10, 2023, and the lawsuit was filed before the deadline. The court based its decision on the statutory language that controls, rather than on the guidance released by the IRS and Treasury during the pandemic disaster period.

Thus, taxpayers who incurred failure-to-file penalties, failure-to-pay penalties, underpayment-interest and late-payment penalties during the pandemic disaster period may be able to claim refunds (or abatements if they did not pay the relevant penalty).

Action Steps for Taxpayers

While the government is expected to appeal the decision, the clock for taking relevant actions continues to run. Even if the court's interpretation stands, the government won't automatically issue refunds for interest and penalties. Taxpayers should evaluate whether they incurred interest, penalties and other time-related tax liabilities between Jan. 20, 2020, and July 10, 2023.

Affected taxpayers may wish to file protective refund claims to preserve their right to refunds should the Kwong decision stand. Such a claim effectively freezes the applicable statute of limitations. Given the court's interpretation, the deadline to file a protective claim would be July 10, 2026.

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.

NOT FOR REPRINT

© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.