Did You Pay IRS Penalties During COVID? New Court Ruling Could Mean a Refund

For many taxpayers, the pandemic years were a blur of financial uncertainty and shifting regulations. If you found yourself paying the IRS penalties and interest for late filings or payments between 2020 and 2023, you need to pay close attention to a developing legal situation. A recent decision by the U.S. Court of Federal Claims, Kwong vs. United States, challenges how the IRS handled deadlines during the national emergency.

As your trusted advisors at Tax Lady 1040, we are closely monitoring this case because it could open the door for significant refunds of penalties and interest previously paid to the IRS. Here is what Virginia Gibbs wants you to know about the ruling and the protective steps you should consider taking now.

The Breakdown of Kwong vs. United States

In the case of Kwong vs. U.S., the court took a hard look at the Internal Revenue Code Section 7508A(d). The ruling determined that during a federally declared disaster—which the COVID-19 pandemic certainly was—tax deadline extensions are mandatory and automatic, not discretionary.

Freelancer reviewing tax documents on laptop

While the IRS argued that extensions could be limited to one year, the court rejected this stance. Instead, the court found that the mandatory extension period spanned from the start of the disaster declaration on January 20, 2020, through July 10, 2023. This effectively moved the legal deadline for filing and paying taxes to July 10, 2023.

What This Means for Your Wallet

If this ruling holds, any "failure-to-file" or "failure-to-pay" penalties assessed against you between early 2020 and mid-2023 may have been legally invalid. The IRS may have penalized you for missing a deadline that, according to the court, had not yet arrived. Consequently, taxpayers who paid these penalties and accrued interest may be entitled to get that money back.

Strategic Steps to Preserve Your Refund Rights

While the government is likely to appeal the Kwong decision, sitting on the sidelines is not the right strategy. You must act to prevent the statute of limitations from closing the window on your potential refund.

1. Analyze Your Account Transcripts

The first step is fact-finding. We need to identify any penalties or interest charged to your account for tax periods falling between January 20, 2020, and July 10, 2023. You can access your records through the Get Transcript tool on IRS.gov. While you can request these by mail or phone (800-908-9946), the online tool provides immediate access. If interpreting these codes feels like reading a foreign language, our office can help review them for you.

2. File a Protective Refund Claim

This is the most critical step. Because the legal process involving appeals can drag on for years, we recommend filing a "protective claim" using Form 843 (Claim for Refund and Request for Abatement). A protective claim acts as a placeholder. It effectively tells the IRS, "I am claiming this refund based on the Kwong ruling, but hold this claim until the litigation is final."

Filing this form stops the clock on the statute of limitations, ensuring you don't lose your right to a refund simply because the courts moved slowly.

3. The Deadlines Are Real

Based on the court's timeline, claims related to this decision generally need to be filed within three years of the deemed deadline. This sets a hard expiration date for filing claims at July 10, 2026. While that seems far off, gathering records and preparing accurate claims takes time.

Other Avenues for Relief

Even if the Kwong ruling is overturned on appeal, we have other tools in our arsenal to help manage tax debt:

First-Time Abatement (FTA): Moving into 2026, the IRS is automating FTA for eligible taxpayers with a clean three-year compliance history.
Reasonable Cause: We can often argue for penalty removal based on specific hardships or circumstances outside your control.

Don't Leave Money on the Table

Navigating IRS appeals and court rulings is complex, but you don't have to do it alone. If you paid significant penalties during the pandemic, let's review your situation. Virginia Gibbs and the team at Tax Lady 1040 are here to ensure a protective claim is filed correctly so your potential refund is secured while the legal battles play out.

Contact our office today to schedule a review of your pandemic-era tax transcripts.

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