Tax Law Center Blog

The U.S. Court of Federal Claims recently issued a landmark ruling in Kwong v. United States, 179 Fed. Cl. 382 (2025), that profoundly alters the landscape of Internal Revenue Service (IRS) compliance enforcement for the pandemic era. For tax practitioners, this decision exposes a massive vulnerability in how the IRS assessed failure-to-file penalties, failure-to-pay penalties, and underpayment interest during a nearly three-and-a-half-year window.

For many affected taxpayers, the deadline to file protective refund claims is July 10, 2026. Because the deadline to act is rapidly approaching, tax professionals must immediately audit client transcripts to preserve substantial refund or abatement claims.

The Core Legal Dispute: IRC Section 7508A(d)

The dispute in Kwong centers on the statutory mechanics of Internal Revenue Code (IRC) Section 7508A, which governs the postponement of certain tax deadlines by reason of a presidentially declared disaster. In 2019, Congress enacted subsection (d) to provide a mandatory, self-executing suspension of time for qualified taxpayers during such disasters.

While the IRS historically maintained that its administrative notices and a subsequent June 2021 Treasury regulation established a strict one-year cap on disaster-related extensions, the Court of Federal Claims rejected this narrow interpretation. Following the shifting standards of administrative deference, the court held that the mandatory postponement period for the COVID-19 federal disaster ran continuously from January 20, 2020, through May 11, 2023.

Accounting for the statutory 60-day tail provided under Section 7508A(d), the mandatory postponement period effectively extended all federal tax deadlines falling within that window to July 10, 2023. Consequently, returns and payments due during this period were not legally late until after that date.

Identifying Affected Taxpayers and Liabilities

The implications of the Kwong reasoning are vast, potentially affecting tens of millions of taxpayers. Because the IRS systematically accrued penalties and interest as if standard deadlines remained in force, practitioners should review accounts for any client who, between January 20, 2020, and July 10, 2023, experienced the following:

• Assessed Failure-to-File penalties under IRC Section 6651(a)(1).
• Assessed Failure-to-Pay penalties under IRC Section 6651(a)(2).
• Assessed failure to make estimated tax payments under IRC Section 6654 or 6655.
• Accumulated underpayment interest on liabilities arising within or even predating the disaster window.
• Assessed late-filing penalties on international information returns, such as Form 5471 or Form 3520.

For corporate clients with complex parallel examinations or open Tax Court petitions, these accumulated amounts can represent millions of dollars in improper assessments. If you paid combined penalties and interest of over $50,000 during 2020–2023, we generally recommend filing a refund claim ASAP.  Smaller amounts may not justify the legal fee cost. Larger or more complex matters such as multiple entities, partnership filings, employment tax issues, and large late-filed returns from the relevant period may warrant filing a refund claim.

The Critical Mechanism: Filing Protective Claims Before July 10, 2026

The IRS has not acquiesced to the Kwong decision and is actively contesting the expanded interpretation of Section 7508A(d) in ongoing litigation. Because the law remains unsettled and the government may pursue further appellate review, automatic refunds will not be issued.

To prevent these claims from becoming permanently barred by the standard period of limitations under IRC Section 6511, practitioners must file protective claims for refund or abatement. A protective claim preserves the taxpayer’s right to a refund while the underlying legal issue is finalized in the courts.

For a substantial portion of affected taxpayers, the hard backstop to file these protective claims is July 10, 2026.

To properly execute a protective claim, practitioners should:

1. Execute an IRS Transcript Audit: Pull the official tax account transcripts for each vulnerable tax year or period to verify exact assessment dates, payment dates, and transaction codes.
2. Prepare Form 843: Complete IRS Form 843 (Claim for Refund and Request for Abatement) for each distinct tax period and liability type.
3. Establish Clear Notice: Across the top of the Form 843, clearly state: “Protective Refund Claim Pursuant to Kwong Case.”
4. Detail the Legal Basis: Explicitly connect the contested penalties and interest to the COVID-19 disaster relief period and the statutory mandate of Section 7508A(d).

Partner with Expert Counsel

Navigating the procedural nuances of formal and protective refund claims requires a sophisticated understanding of IRS transcript mechanics and federal tax controversy. When high-value corporate accounts, complex international information returns, or ongoing examinations are involved, errors in filing can result in a permanent forfeiture of client rights.

Outr firm specializes in representing taxpayers in complex civil tax controversies, administrative appeals, and federal tax litigation. We routinely collaborate with accounting professionals and tax advisors to defend client rights and secure maximum relief from erroneous IRS assessments.