Potential Refund Deadline Extensions Under the Kwong Case
The Kwong case may provide taxpayers with an extended deadline for refunds.
A recent decision by the U.S. Court of Federal claims (Kwong vs. U.S.) may give taxpayers an opportunity to recover or appeal penalties and interest related to the COVID disaster period. The court decided in Kwong that the declaration of the COVID disaster extended the deadline for many time-sensitive acts. This includes payment and filing dates that fell within the covered disaster period.
The Kwong case involved a taxpayer with tax penalty and refund disputes. The IRS determined that the deadline for the taxpayer’s claims was barred by the statute of limitations. The taxpayer argued that the COVID disaster declaration extended the period to make a claim. The court agreed and stated the following:
- The start of the disaster period was January 20, 2020,
- The end of the emergency declaration was May 11, 2023, and
- The 60-day period following the end of the declaration ended on July 10, 2023
How the Kwong case affects other taxpayers
The Kwong case may have dealt with the specific refund claim within the COVID disaster declaration period, but a takeaway for other taxpayers is that any taxpayer (individual, trust, estate, business) with a claim for a refund of penalties or interest may be eligible for relief. Some of the penalties and interest that may be eligible for relief include:
- Late-filing penalties for returns filed after the original due date,
- Late-payment penalties for taxes paid after the original due date,
- Estimated tax penalties where quarterly payments were treated as late,
- Potential penalties on certain international information returns,
- Underpayment interest charged when tax was treated as unpaid, and
- Interest tied to penalties that may not have been properly assessed
Eligible penalties and interest include those already paid and those subject to an ongoing dispute with the IRS. Other time-sensitive acts that may qualify for the extended deadline include tax elections and amended returns.
The normal statute of limitations for making a claim for refund expires the later of three years from the filing of a return or two years from paying the tax. The court’s decision in Kwong determined that a deadline falling between 1/20/20 and 7/10/23 was extended until 7/10/23. This means that interest and penalties should not have accrued during these periods. Penalties and interest already paid during this period may be eligible for refunds and penalties and interest subject to a dispute during this period may qualify for relief as well. Taxpayers have three years from 7/10/23 (60 days after the end of the emergency declaration) to make a claim for refund, meaning that taxpayers only have until 7/10/26 to file a claim.
Important caution
The IRS is expected to appeal the Court’s decision. A successful appeal by the IRS would mean that penalties and interest during this period were validly assessed. However, the timing of any IRS appeal will likely extend beyond the 7/10/26 deadline noted above. In situations where a claim is contingent on the outcome of a case that is not decided by the statutory deadline, a protective claim may be filed to preserve a taxpayer’s rights.
If taxpayers file a valid protective refund claim by 7/10/26 and the IRS is unsuccessful in its appeal of the Kwong case, then the IRS would be required to refund eligible penalties and interest to taxpayers who made a timely protective claim even if that IRS appeal was not determined until after the 7/10/26 deadline.
Next Step
The next step for taxpayers is to review their tax history during this period and if applicable file a protective refund claim before 7/10/26. Taxpayers may determine whether interest and/or penalties were paid by reviewing their tax returns and/or their IRS account transcripts.
This is a one-time opportunity unique to the COVID disaster period, but there is a short window to act and uncertainty as to a potential IRS appeal.
If you need assistance with a refund claim or understanding your possible eligibility, please reach out to us for help.
