COVID Tax Refund Update: New Opportunities for Businesses and Individuals

Following a recent decision by the Court of Federal Claims in Kwong v. United States, taxpayers may now have new opportunities to seek tax refunds or abatements of interest and penalties assessed during the COVID-19 pandemic.

If you or your business accrued IRS interest or penalties between 2020 and 2023, it may be worthwhile to evaluate whether a refund claim or request for penalty or interest abatement should be filed. Our team can help assess your eligibility and prepare the necessary filings, and it is important to act quickly, before the applicable limitation periods expire.

Key Points

• Taxpayers May Be Eligible for Refunds or Abatement of Interest and Penalties.  After  Kwong v. United States, taxpayers who paid interest or penalties that accrued during the pandemic may be entitled to refunds or abatement.
• The Deadline to File Protective Claims Is Approaching. Taxpayers generally have two years from the date of payment to file a refund claim. In addition, protective claims must be filed by July 10, 2026, to preserve your rights.
• Recent Court Decisions Have Expanded Taxpayer Rights. The Kwong decision builds on the Abdo v. Commissioner ruling, in which the United States Tax Court held that the postponement provisions of Internal Revenue Code Section 7508A are mandatory and self-executing. Together, these decisions challenge the IRS’s narrow interpretation of pandemic-related tax relief and may allow taxpayers to recover interest and penalties that should not have been assessed during the COVID-19 emergency period.

Background

In Kwong v. United States, the United States Court of Federal Claims held that Internal Revenue Code Section 7508A(d) postponed certain federal tax deadlines during the COVID-19 pandemic because federal disaster declarations remained in effect throughout that period. As a result, federal tax deadlines falling between January 20, 2020, and July 10, 2023, were extended to July 10, 2023.

The court further concluded that during this period the Internal Revenue Service lacked authority to assess underpayment interest, failure-to-pay penalties, and failure-to-file penalties. The statute also suspended deadlines for filing refund claims and petitions with the United States Tax Court.

In light of this ruling, businesses and individuals who incurred interest or penalties between 2020 and 2023 may be eligible to seek abatement or file refund claims.

Protective Claims Being Filed

The Internal Revenue Service disagrees with the broad interpretation adopted in Kwong v. United States and is expected to appeal the decision. In the meantime, many taxpayers are filing protective refund claims to preserve their rights.

A protective claim notifies the IRS that the taxpayer’s entitlement to a refund depends on whether the court’s interpretation in Kwong is ultimately upheld on appeal. Filing such a claim now helps safeguard the taxpayer’s position while the litigation continues.

If higher courts ultimately affirm that pandemic-related postponements extended tax deadlines through July 2023, the IRS may be prevented from rejecting these claims solely on statute-of-limitations grounds. Although filing a protective claim does not guarantee that a refund will be granted, it preserves the taxpayer’s ability to pursue the issue if the courts uphold the interpretation adopted in Kwong.

Broader Impact for Taxpayers: This potential refund opportunity is not limited to tax years that fall within the pandemic postponement window. Instead, it may apply to any interest or penalties that accrued during that period, even if they relate to earlier tax years.

For example, Western Digital has filed suit seeking a refund of more than $20 million in interest charges that accrued during the COVID-19 postponement period in connection with an audit of its 2008 tax return that was resolved in 2023. In that case, Western Digital owed approximately $53.6 million in additional tax for the 2008 tax year and was assessed roughly $53 million in interest. According to the company’s claim, about $20.8 million of that interest accrued during the postponement period, and therefore could be eligible for refund if the interpretation adopted in Kwong v. United States is ultimately upheld.

Next Steps

1. Review Your Account Transcripts – Taxpayers who were assessed interest or penalties attributable to filing or payment obligations that fell between January 20, 2020, and July 10, 2023, should evaluate whether those assessments were improper under Kwong and whether refund claims or refund suits remain timely.
2. File a Protective Refund Claim – Taxpayers seeking to preserve their right to an abatement or a refund, while litigation continues, should consider filing protective refund claims, using Form 843 (Claim for Refund and Request for Abatement), by July 10, 2026.
3. Limited Time Remains to File Claims – Per the ruling, the statute of limitations for these specific claims relates to the recognized deadline of July 11, 2023. This means you generally have until July 10, 2026, to submit your claims.

If you believe you may have paid interest or penalties during the pandemic period, we encourage you to contact Nick Richards, Tax Partner at Greenspoon Marder, LLP promptly to discuss whether these recent developments may apply to your situation.

This article, “COVID Tax Refund Update: New Opportunities for Businesses and Individuals,” was originally published by Greenspoon Marder, LLP and is republished with permission.