Potential Refund Opportunity for IRS Penalties and Interest Paid During the COVID Emergency Period

A recent federal court decision may create refund opportunities for taxpayers who paid certain IRS penalties and interest related to tax periods affected by the COVID-19 national emergency.

Background

In Kwong v. United States, the U.S. Court of Federal Claims held that Internal Revenue Code Section 7508A may have automatically postponed certain federal tax deadlines during the COVID-19 national emergency period. Under the court's interpretation, the suspension period began on January 20, 2020, and extended through July 10, 2023 (the end of the national emergency plus the statutory 60-day extension period).

If this interpretation ultimately prevails, many penalties and related interest assessed by the IRS during that period may have been improperly charged.

Who Should Consider Reviewing Their Accounts?

Taxpayers should consider reviewing IRS account transcripts if they paid any of the following during the period from January 20, 2020, through July 10, 2023:

• Failure-to-File penalties
• Failure-to-Pay penalties
• Failure-to-Deposit payroll tax penalties
• Estimated tax penalties
• Interest associated with those penalties
• Other penalties arising from filing or payment deadlines that fell during the COVID emergency period

Potentially affected returns may include:

Individual Income Tax Returns

• 2019 Form 1040
• 2020 Form 1040
• 2021 Form 1040
• 2022 Form 1040

Business Income Tax Returns

• 2019, 2020, 2021, and 2022 corporate, S corporation, partnership, and fiduciary returns with filing or payment deadlines occurring during the COVID emergency period.

Payroll Tax Returns

Potentially affected Form 941 quarters generally include:

• 4th Quarter 2019
• All quarters in 2020
• All quarters in 2021
• All quarters in 2022
• 1st Quarter 2023

Why Protective Claims May Be Important

The IRS currently disagrees with the broad interpretation adopted in Kwong, and additional litigation is expected. However, taxpayers may wish to preserve their rights by filing protective refund claims before applicable statutes of limitation expire.

For many affected taxpayers, a commonly discussed deadline is July 10, 2026

Filing a protective claim does not require the IRS to immediately grant a refund. Instead, it preserves the taxpayer's right to seek a refund if the legal issues are ultimately resolved in favor of taxpayers.

What Should Taxpayers Do?

Taxpayers who paid IRS penalties or interest during the COVID emergency period should consider:

1. Obtaining IRS account transcripts.
2. Identifying penalties and related interest assessed during the relevant period.
3. Determining whether the underlying filing or payment deadline fell within the COVID emergency period.
4. Consulting with their tax advisor regarding the potential benefit of filing a protective refund claim.

Important Disclaimer

The legal issues raised by Kwong remain unsettled. The IRS has not adopted the court's interpretation, and future court decisions could limit or overturn the ruling. Taxpayers should consult with their tax advisor before filing any claim for refund.

 

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Under U.S. Treasury regulations, any tax advice in this communication is not intended or written to be used to avoid IRS penalties. Tzinberg & Associates provides this information for general guidance only. It does not constitute tax advice, accounting services, investment advice, or professional consulting. Consult a professional adviser before making decisions or taking action, as the information is provided "as is" without any warranties regarding its completeness, accuracy, or timeliness.