The Kwong Case, COVID 19 Penalty Refund Claims, and Why Taxpayers Should Proceed Carefully
A recent federal court decision in Kwong v. United States has generated significant attention among taxpayers and tax resolution firms. Some advertisements suggest that millions of taxpayers may be entitled to refunds of penalties and interest assessed during the COVID 19 disaster period. While the case has created a potential opportunity for certain taxpayers, it is important to understand what the decision actually says, the IRS position on the issue, and why filing a protective claim may be appropriate in limited circumstances.
Most importantly, the Kwong decision does not automatically eliminate COVID era penalties and interest. The case is currently being appealed, the IRS strongly disagrees with the court's reasoning, and any final resolution could take years. Taxpayers should be cautious when evaluating aggressive marketing claims that promise quick refunds or broad relief.
What Happened in the Kwong Case?
The dispute centers on Internal Revenue Code Section 7508A, which provides disaster relief for taxpayers affected by federally declared disasters. During the COVID 19 pandemic, Congress enacted provisions allowing certain tax deadlines to be postponed.
In Kwong v. United States, the United States Court of Federal Claims concluded that the 2019 version of Section 7508A created an automatic postponement period beginning January 20, 2020 and continuing until 60 days after the federal COVID disaster declaration ended. Because the federal disaster declaration remained in effect until May 11, 2023, the court concluded the postponement period extended through July 10, 2023. The court held that certain refund claims that otherwise appeared untimely were still timely under this interpretation of the law.
The practical significance is that taxpayers who paid certain penalties and interest during the COVID disaster period may argue that the statute of limitations for seeking refunds remained open much longer than previously believed.
The IRS Does Not Agree
The IRS recently issued Action on Decision 2026-01 addressing the related Tax Court case Abdo v. Commissioner. The IRS agreed only that taxpayers received a mandatory 60 day postponement running from January 20, 2020 through March 20, 2020. The IRS expressly rejected any interpretation that would extend relief beyond that 60 day period.
The IRS specifically stated that it does not acquiesce to interpretations that would create additional postponement periods beyond the 60 day period recognized in Abdo.
This position is important because it demonstrates that the IRS is unlikely to voluntarily grant refunds based solely on the broader reasoning adopted in Kwong. In fact, the Department of Justice has already appealed the Kwong decision, making it likely that appellate courts will ultimately determine whether the Court of Federal Claims interpreted Section 7508A correctly.
What Is a Protective Claim?
A protective claim for refund is a claim filed before the statute of limitations expires when the taxpayer's right to a refund depends on future events that have not yet been resolved.
Typically, the IRS places protective claims in suspense until the underlying legal issue is finally resolved. Once the courts reach a final decision, the taxpayer may perfect the claim by providing the final calculations and supporting information.
The primary purpose of a protective claim is simple: it preserves the taxpayer's rights while litigation continues. Without a timely protective claim, the statute of limitations may expire before the legal issue is resolved, permanently preventing a refund even if taxpayers eventually prevail in court.
For taxpayers potentially affected by the Kwong issue, a protective claim may be a prudent step when substantial penalties or interest are involved and the refund statute is approaching expiration.
Why Taxpayers Should Be Careful
The recent publicity surrounding Kwong has resulted in aggressive marketing campaigns suggesting that tens of millions of taxpayers may be eligible for refunds. While the National Taxpayer Advocate has encouraged taxpayers to consider protective claims where appropriate, taxpayers should understand that filing a claim does not mean a refund will be approved.
Several important facts are often omitted from marketing materials:
- The Kwong decision is not final.
- The IRS strongly disagrees with the court's interpretation.
- The Department of Justice has appealed the decision.
- The litigation process could take several years.
- Many claims may ultimately be denied.
- Not every penalty assessed during the COVID period is affected by the case.
Taxpayers should be particularly cautious when paying large contingency fees or upfront fees based solely on the possibility of a future favorable court decision.
Better Alternatives May Already Exist
In many cases, taxpayers seeking relief from penalties may have stronger and more immediate options available.
The IRS First Time Abatement program remains one of the most effective methods for removing certain failure to file, failure to pay, and failure to deposit penalties when eligibility requirements are met.
Taxpayers may also obtain relief through a traditional reasonable cause request. Unlike the uncertain outcome of the Kwong litigation, reasonable cause relief focuses on the taxpayer's specific facts and circumstances, such as serious illness, natural disasters, reliance on erroneous written advice, or other events beyond the taxpayer's control.
For many taxpayers, pursuing First Time Abatement or a well documented reasonable cause appeal may produce faster and more predictable results than waiting years for final resolution of the Kwong litigation.
Key Taxpayer Considerations
- Kwong does not automatically eliminate COVID era penalties and interest.
- The IRS disagrees with the court's interpretation and is actively defending its position.
- A protective claim may preserve refund rights while the case proceeds through the courts.
- Protective claims often remain pending for years until litigation is resolved.
- Many taxpayers may have stronger relief options through First Time Abatement or reasonable cause requests.
- Taxpayers should carefully evaluate any firm promising quick refunds based on Kwong.
Final Takeaway
The Kwong case presents an interesting and potentially significant challenge to the IRS interpretation of COVID disaster relief provisions. However, taxpayers should recognize that the case remains under appeal and that the IRS has publicly rejected the broader interpretation adopted by the Court of Federal Claims. Filing a protective claim may be appropriate to preserve refund rights before the statute of limitations expires, but taxpayers should not assume that filing a claim guarantees a refund. In many situations, First Time Abatement or a well supported reasonable cause appeal may provide a more practical path to relief while the courts determine the ultimate outcome of the Kwong litigation.
