Several recent court cases, such as Kwong v. United States, have created the potential for millions of taxpayers to be eligible for refunds from the IRS.
Background
Section 7508A authorizes the IRS to postpone certain federal tax deadlines for taxpayers affected by a federally declared disaster, a significant fire, or a terroristic or military action.
During the COVID-19 federal disaster period, it is argued that the IRS was required to extend filing and payment deadlines from January 20, 2020, through July 10, 2023, and that the IRS should not have assessed late filing or payment penalties, nor charged interest, during this period. For qualified taxpayers in a presidential major-disaster area, the statute now also provides a mandatory disaster extension in addition to any discretionary IRS relief.
As a result, many taxpayers may have been improperly assessed penalties or interest within this extended timeframe and be entitled to substantial benefits. Several court litigations remain unresolved, and the IRS has not yet issued a final determination. Resolution may even take several years.
In light of this uncertainty, taxpayers who believe they may be entitled to a refund should consider filing a claim now to preserve their rights if the decision is ultimately upheld. Recent developments have brought many of the provisions and procedural rules governing filing deadlines to light, but taxpayers should be aware that any possible refund opportunities are time-sensitive with key deadlines looming in 2026.
Eligible Taxpayers
This issue may affect a broad range of taxpayers, including individuals, small and large businesses, estates, and trusts. Taxpayers who paid, or remain liable for, penalties or interest assessed during the disaster period may be entitled to relief.
Applicable Penalties and Interest
Potentially impacted amounts include:
- Failure-to-file, failure-to-pay, and estimated tax penalties
- Interest charged during the disaster period
- Certain international information return penalties
Important Dates
- January 20, 2020 – July 10, 2023 (May 11, 2023 + 60 days): This is the period during which filing and payment obligations were suspended. Penalties and interest assessed during this time may have been improperly charged.
- Refund Claim Deadlines subject to statutory limitation periods the later of: July 10, 2026, OR 2 years from the date the tax, penalty, or interest was paid
Taxpayer Next Steps
Identify Potential Eligibility
Taxpayers are encouraged to review tax years 2019 through 2022 for payments, penalties, or interest amounts occurring during the COVID-19 disaster period and determine whether certain amounts may have been incurred pertaining to this window (1/20/20 through 7/10/23).
Obtain Tax Account Transcripts
A practical (but not mandatory) first step is for taxpayers to obtain their tax account transcripts to determine whether any possible refunds exist. Taxpayers should follow the instructions below to obtain their IRS transcripts online.
- Sign in or create an online IRS account (ID.Me)
- Once on dashboard, chose “Records and Status”
- Got to “Transcripts” and “View Transcripts”
- Select “Transcripts” and “Tax Years 2019-2023”
- Download and print files
Transcripts can also be requested by calling the IRS automated transcript lines listed below. Transcripts will be mailed in 5-10 business days.
- Individuals: 800-908-9946
- Businesses: 800-829-4933
Evaluate Refund Opportunities
Upon reviewing this information and determining whether certain activity falls within the specified time period, the taxpayer should consider whether pursuing a refund claim may be worth exploring. Claims may be filed for both amounts already paid and outstanding liabilities.
Filing Refund Claims
All refund claims, both formal and protective, should be reported and requested through the filing of Form 843. Refund claims must be submitted through the mail, and taxpayers are strongly encouraged to use certified mail for proper tracking and recordkeeping.
Filing a Formal Refund Claim
The formal refund claim would be appropriate for situations where the taxpayer is able to reasonably calculate and determine the amount of the penalty and/or interest at issue. A formal refund claim should include detailed explanations and support to identify the specific refund amount being requested, the tax type and tax year in question, and to establish the legal basis tying the taxpayer’s requested refund to Section 7508A and the COVID-19 federal disaster period. With the filing of a formal refund claim, the IRS generally has six months to respond or act before the taxpayer has the right to file a lawsuit or pursue further action of their own.
Filing a Protective Refund Claim
The protective refund claim, which does not require taxpayers to specify a dollar amount, may be appropriate for taxpayers that cannot yet determine the final amount or entitlement to a refund because the issue at hand depends on unresolved litigation or future developments. Under this situation, the taxpayer would want to preserve Section 6511 timeliness while future events unfold. The future event may be the final outcome of litigation, new IRS guidance, or any other legal developments. Filing a protective claim preserves the taxpayer’s rights to a potential refund in the event that the IRS upholds a court’s decision.
A claim should be submitted for each separate tax year and tax type, and the documentation should provide as much detail as possible explaining the taxpayer’s basis of the claim. With a protective claim, taxpayers should include a clear statement at the top of the form explaining the legal issue pertaining to the claim, such as “Protective Refund Claim – Pursuant to Kwong Case.” Unlike a formal refund claim, the IRS generally would not act on such protective refund claims until the underlying issue or litigation matter is resolved.
Key Take-Aways
The recent interpretation of Section 7508A and rules governing deadlines has garnered nationwide attention potentially affecting millions of taxpayers during the COVID-19 disaster period. While litigation remains unresolved and ultimate eligibility for refunds from the IRS is uncertain, taxpayers are encouraged to evaluate their tax situations now and act swiftly. Refund claims must be filed by July 10, 2026, or two years after the penalty and/or interest was paid. Preserving taxpayer rights is widely regarded as more critical than waiting for certainty. Should the court’s decision result in a favorable outcome, the taxpayer could be at risk of losing out on significant refunds if a claim was not properly filed in a timely manner.
Importantly, the IRS is unlikely to actively publicize this potential refund opportunity and will not automatically issue refunds. Taxpayers who believe they may qualify should consult their tax advisors prior to the deadline to avoid permanently forfeiting their eligibility.
Joe Rys and RaeAnna Wargo edited this post. RaeAnna
