IRS Penalties During COVID: New Court Case Could Mean Refund Opportunities

Heather Jackson |
Categories
Tax Updates

IRS Penalties During COVID: New Court Case Could Mean Refund Opportunities

A recent court case, Kwong v. United States, is creating potential refund opportunities for taxpayers who were charged IRS penalties during the COVID period. While this is still evolving, there is a limited window to act, and understanding what this means could be valuable for many individuals and businesses.

Here’s what you need to know.

What Is the Kwong Case?

The Kwong v. United States (2025) decision centers on how the IRS applied penalties during the COVID pandemic.

The court ruled that tax deadlines were effectively postponed during a broad federal disaster period, from January 20, 2020 through July 10, 2023, and as a result, certain penalties may have been applied incorrectly. 

This includes penalties such as:

  • Late filing penalties
  • Late payment penalties
  • Estimated tax penalties
  • Related interest charges

If something wasn’t legally late during that timeframe, the penalties tied to it may not have been valid.

Why This Matters to You

This ruling opens the door for taxpayers to potentially recover penalties and interest paid during the COVID years.

However, there are two important realities:

  1. Refunds are not automatic
    The IRS will not proactively send refunds, even if you qualify. 
  2. Action is required to preserve your rights
    Taxpayers must file a claim to request a refund or penalty abatement. 

In other words, if you don’t take action, you could miss out, even if the court ultimately upholds the ruling.

Important Deadline: July 10, 2026

There is a critical deadline tied to the statute of limitations:

July 10, 2026

This is the deadline to file a claim and preserve your ability to receive a refund. 

Even though the case is still being challenged, most advisors recommend filing a protective claim now to avoid missing the opportunity.

Is This Final? Not Yet.

It’s important to understand that this case is not settled law.

  • The IRS disagrees with the court’s interpretation
  • The case is being appealed
  • The outcome could take years to fully resolve

This creates a unique situation:

The courts are creating a potential opportunity, but the IRS has not adopted it.

Because of that, claims are being handled individually and outcomes are uncertain.

What We’re Seeing (And How We’re Helping Clients)

Given the uncertainty, the strategy right now is straightforward:

  • Identify taxpayers with meaningful potential refunds
  • File claims before the deadline
  • Wait for the legal process to play out

At our firm, we are:

  • Reviewing prior tax years (2019 - 2022)
  • Identifying clients who may benefit
  • Filing the necessary claims to protect their position

We are focusing on situations where the potential refund is significant enough to justify the filing process.

What You Should Do Now

If you:

  • Paid IRS penalties or interest
  • Had filing or payment delays between 2020 and mid-2023

…it’s worth taking a closer look.

The key steps are:

  1. Determine eligibility
  2. Calculate potential refund amounts
  3. File a claim before July 10, 2026

Final Thoughts

This is a rare situation where:

  • The court says refunds may be owed
  • The IRS disagrees
  • And the outcome will take time to settle

The biggest risk isn’t whether the case is ultimately upheld, it’s missing the deadline to act.

Need Help Evaluating Your Situation?

We’re proactively reviewing this for clients now. If you think this may apply to you, or if you simply want a second look, reach out and we can walk through it together.