What started out as a claim for a refund could potentially be one of the most significant procedure tax cases in recent years. This is why the US courts of Federal Claims decision in the Kwong v. United States case is getting a lot of attention, not because of the underlying facts, but because of how the court interpreted IRS disaster relief authority.
Although the case is being appealed, practitioners are not waiting for the outcome to act. Many practitioners are eyeing July 10, 2026, as the protective refund claim deadline tied to the court’s interpretation of the COVID-19 postponement period. Practitioners should not ignore the deadline and the potential saving for their clients because the Kwong case may have opened the door for some taxpayers to recover IRS penalties and interest tied to the COVID relief period.
The Kwong case did not begin as a challenge to IRS procedures during the COVID-related relief period. In fact, the Kwong case circled around tax years 2007, 2010, 2011, 2015, and 2016 that were outside the COVID-related relief period.
For tax years 2015 and 2016, the Tax Court ruled against Kwong. However, for the earlier tax years, at the surface, it was simple; Kwong was disputing penalty refunds and the associated deadline; however, he missed a refund deadline by a mere few days. What seemed like an easy win for the IRS unexpectedly shifted. The Kwong case called into question procedural timing rules by linking IRS COVID-related relief to refund deadlines outside the relief period.
Under IRC §6532(a), the typical deadline would be two years from the date of the notice of denial. According to the case, Kwong received a notice of denial for tax years 2007, 2010, and 2011 in the fall of 2020. However, the Kwong case raised an important question: did the COVID-related relief period extend the deadline to July 10, 2023?
In Kwong, the court treated that period as suspending certain tax deadlines that fell during that time, including deadlines for tax years outside the period. The court focused on IRC §7508A and the duration of relief. Specifically, COVID-19 was declared a federal disaster beginning March 1, 2020, and the federal emergency ended on May 11, 2023. The court interpreted §7508A as extending the postponement period through 60 days after the end of the federally declared disaster.
An interpretation no one expected.
As a result, many practitioners now believe taxpayers may have additional time to file refund claims for penalties and interest paid during the COVID years. Many are considering filing protective refund claims to preserve refund rights while the litigation develops.
Many practitioners are treating July 10, 2026, as the conservative deadline for filing protective refund claims tied to the COVID postponement period. The July 10, 2026, date comes from the IRS COVID relief period that lasted from January 20, 2020, through July 10, 2023.
Under IRC §6511, refund claim rules generally allow taxpayers:
Many taxpayers paid penalties associated with the COVID-related relief period, and many practitioners never considered contesting the penalties until now. In many offices, these accounts are sitting quietly in closed files; however, Kwong creates a reason to pull some of those files back out.
This includes potential refunds of:
Although the case is in the appeal stage, it is now recommended that practitioners should consider filing a timely protective refund claim to keep their client’s rights open. The challenge is that the Kwong case does not allow much time to file a protective claim, and waiting could make it difficult to meet the deadline. The closer the deadline approached, the more difficult it would be to gather records, transcripts, payment histories, and client authorizations.
Practitioners should consider beginning their client reviews sooner rather than later to allow time to:
Once that deadline passes, the opportunity to recover penalties and interest for clients may disappear completely.
While the case remains pending, it is also unclear how the decision could affect payroll tax liabilities, including Form 941 filings and related penalties and interest paid during the COVID-related relief period. Practitioners are encouraged to consider filing protective claims in case they are later ruled eligible.
The Kwong decision also continues the trend of courts taking IRS procedural compliance more seriously in penalty cases. The court examined whether the IRS properly followed IRC §6751(b), which requires written supervisory approval before certain penalties are formally determined. That procedural issue has become increasingly important in IRS tax resolution work over the last several years.
In tax resolution abatement cases, typically, the defense is centered on reasonable cause. Although reasonable cause is still an important defense, the courts appear to be paying closer attention to the IRS’s internal procedures, timelines, and documentation. That shift has changed how many practitioners approach penalty abatements and refund claims.
Unlike fine wine, IRS penalties generally do not improve with age; however, it is looking very possible that the Kwong ruling may prove to be a rare vintage. With a potential deadline of July 10, 2026, practitioners have a limited window to act, and as with anything IRS related, is better to be proactive now than to watch a potential rare opportunity slip away.
By Kim Tipsord, EA
Tax Materials Specialist, U of I Tax School
Sources
Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact taxschool@illinois.edu if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.
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