IRS News
Could the Kwong Case Open the Door to COVID-Era Penalty and Interest Refunds?
Written by: Andrew Schmidt, CPA, Principal, Tax Department
A recent court decision — Kwong v. United States — has generated significant interest among taxpayers and practitioners regarding whether certain IRS penalties and interest assessed during the COVID-19 disaster period may still be challenged or refunded.
This is a meaningful development, but an evolving one. The ruling does not entitle taxpayers to automatic refunds. What it does mean is that some taxpayers may need to act now to preserve potential rights before the statute of limitations expires — and for most affected taxpayers, that deadline is July 10, 2026.
Why This Case Matters
At its core, Kwong addresses how federal tax disaster-relief rules applied during the COVID-19 period. The U.S. Court of Federal Claims issued its decision in November 2025, concluding that certain tax deadlines were automatically suspended for the entire duration of the COVID disaster period — from January 20, 2020 through July 10, 2023 — far longer than the IRS had previously recognized.
The IRS has not accepted that conclusion. Rather than acquiescing — meaning rather than agreeing to follow the decision and apply it to other taxpayers — the government appealed. On May 15, 2026, the Department of Justice filed a notice of appeal, and the case is now before the U.S. Court of Appeals for the Federal Circuit. That court could uphold, narrow, or reverse the lower court’s holding entirely.
If the lower court’s reasoning ultimately stands, penalties and interest assessed during that window may have been imposed without proper legal authority — making them potentially subject to refund or abatement.
Who May Be Affected?
The scope here is broad. This issue is not limited to any particular type of taxpayer or tax. Potentially affected taxpayers include:
- Individuals
- Corporations and S corporations
- Partnerships
- Trusts and estates
- Nonprofit organizations
And it is not limited to income taxes. Penalties and interest connected to payroll tax obligations, information return requirements, and other federal tax filing and payment deadlines that fell within the disaster window may also be in play.
Because COVID-19 was declared a nationwide federal disaster, nearly all U.S. taxpayers meet the geographic qualification requirement. This is not limited to specific disaster zones or hardship cases.
What Kinds of Amounts May Be Affected?
Depending on the facts, the issue may potentially apply to:
- Failure-to-file penalties
- Failure-to-pay penalties
- Estimated tax penalties
- Underpayment interest
- Certain information-return penalties tied to obligations falling within the disaster window
The core theory is straightforward: if a filing or payment deadline was legally suspended during the COVID disaster period, then penalties and interest tied to that deadline should not have accrued. Failure-to-file, failure-to-pay, estimated tax penalties, and underpayment interest are all included in the analysis, as are certain information-return penalties tied to obligations falling within the disaster window.
What Periods Are in Play?
The theory broadly focuses on tax-related deadlines falling within or overlapping the COVID disaster period — January 20, 2020 through July 10, 2023. Depending on the taxpayer’s situation, this may include:
- Annual return filing and payment deadlines for 2020 through part of 2023
- Estimated tax installment due dates during that same window
- Payroll tax deposit and filing deadlines during the period
- Refund claim or litigation deadlines that remained open during the period
Importantly, this is not limited to “COVID tax years.” In some cases, older tax years may still be relevant if the applicable refund or litigation deadline overlapped the COVID disaster period.
What Is a Protective Claim — and Why Does It Matter?
A protective claim is a filing used to preserve a taxpayer’s right to seek a refund when the legal basis for that refund remains uncertain or depends on future developments. In short, it keeps the door open.
Taxpayers typically use protective claims when the law is unsettled, litigation is ongoing, or the amount of a potential refund cannot yet be determined. Filing one does not mean the IRS will immediately issue a refund — it simply preserves the taxpayer’s position while the legal issue plays out.
The reason timing matters: refund rights can expire. If a taxpayer waits until the courts or the IRS definitively resolve this issue, it may be too late to file. For most affected taxpayers, the deadline to file a protective claim is July 10, 2026. That is why some taxpayers are acting now — not because the outcome is certain, but because waiting could mean losing the opportunity entirely.
While a protective claim does not require an exact refund figure, it does need to correctly identify the tax periods, penalty types, and legal basis at issue — which requires a careful review of the taxpayer’s account history before filing.
An Important Caution: This Could Take Years
This is not a quick-refund opportunity.
The government has already acted. On May 15, 2026, the Department of Justice filed a notice of appeal, and the case is now before the U.S. Court of Appeals for the Federal Circuit. That court could uphold, narrow, or reverse the lower court’s holding entirely — and further appeals beyond that remain possible. Taxpayers should understand the practical reality going in:
- Filing a protective claim does not produce an immediate refund
- The government may ultimately prevail, in which case there may be no refund at all
- Even if taxpayers prevail, additional filings or follow-up steps will almost certainly be required
A protective claim is best understood as a procedural step to preserve rights — not the final step in recovering money.
Is This Worth Pursuing?
Not for everyone. Because this issue is uncertain and may take years to resolve, filing a protective claim is generally most practical for taxpayers with more significant penalties or interest assessed during the relevant periods. For taxpayers with relatively small amounts at stake, the time, cost, and uncertainty may outweigh the potential benefit.
The Bottom Line
Kwong has created a real opportunity for a wide range of taxpayers — individuals, businesses, trusts, and others — to revisit whether COVID-era penalties and interest may still be preserved for future refund treatment. But this remains unsettled law — there is no guaranteed refund, no immediate payout, and no assurance that the taxpayer-favorable interpretation will survive appeal.
For taxpayers with substantial dollars at issue, the window to act is open — but not indefinitely. The deadline for most affected taxpayers is July 10, 2026. If you believe you have significant penalties or interest from the affected periods, this is the time to evaluate whether preserving a claim makes sense for your situation.
If you would like help reviewing the relevant periods, identifying potentially affected penalties or interest, and evaluating whether filing a protective claim makes sense, contact D+L for assistance.