Did You Pay IRS Penalties During COVID? A New Court Ruling Says You Might Be Owed a Refund

If you paid penalties or interest to the IRS at any point between January 2020 and July 2023, a recent court decision could mean money back in your pocket. But you need to understand the ruling, evaluate whether it applies to you, and act before the window to file a refund claim closes, which for many taxpayers could be as soon as mid-2026.

In Kwong v. United States, decided in November 2025 by the U.S. Court of Federal Claims, the court held that the COVID-19 pandemic disaster declarations triggered a provision in the tax code that automatically suspended certain federal tax deadlines for more than three years, from January 20, 2020 through July 10, 2023. The IRS had taken a much narrower position during the pandemic, granting only limited extensions through administrative notices. The court said the IRS got it wrong, and the statute itself, not the IRS's notices, controls how long the suspension lasts.

Here's what that means in practical terms. When a federally declared disaster occurs, Section 7508A of the Internal Revenue Code provides for the postponement of certain tax deadlines. The 2019 version of this provision, which was the law in effect when the COVID-19 national emergency was declared in early 2020, contains a subsection, Section 7508A(d), that uses mandatory language. It states that the entire period from the earliest incident date through 60 days after the disaster ends "shall be disregarded" when determining whether a taxpayer performed a time-sensitive tax act on time. That word "shall" is critical, it means the suspension is automatic and self-executing, regardless of what the IRS says or does.

The COVID-19 disaster period started on January 20, 2020, the date specified in the FEMA disaster declarations, and the federal public health emergency ended on May 11, 2023. Add the 60-day statutory buffer, and the suspension period runs through July 10, 2023. During that entire window, more than three years, the statutory clock stopped running on a wide range of time-sensitive tax acts.

The IRS never acknowledged this full suspension period. Through a series of administrative notices, including Notice 2020-18 and Notice 2020-23, the IRS extended certain filing and payment deadlines by only a few months, typically to July 15, 2020. The IRS took the position that its own administrative guidance controlled the scope of the relief, not the statute itself. The court in Kwong rejected that argument directly. It noted that Section 7508A(a), the discretionary provision, uses the word "may," giving the Secretary of the Treasury flexibility. But Section 7508A(d), the mandatory provision, uses "shall be disregarded," which leaves no room for the IRS to impose a shorter suspension period. The court also cited the Supreme Court's 2024 decision in Loper Bright Enterprises v. Raimondo for the principle that an agency's interpretation of an unambiguous statute does not control.

So who potentially benefits from this ruling? The scope is broader than most people realize. If you were assessed failure-to-file penalties under Section 6651(a)(1) because you filed a return late during the suspension period, those penalties may not have been legally valid, the deadline hadn't actually passed. If you were assessed failure-to-pay penalties under Section 6651(a)(2) because you didn't pay your tax on time during the suspension period, the same logic applies. If you were charged underpayment interest under Section 6601 on a balance that accrued during the window, you may have grounds to recover that interest. And if you were on an installment agreement with the IRS and incurred penalties for late payments during the pandemic period, those penalties may be refundable as well.

This doesn't just apply to people who had brand-new tax problems during the pandemic. Even if you had a pre-existing tax liability, say, a balance from 2017 or 2018, if additional penalties or interest accrued on that liability during the January 20, 2020 through July 10, 2023 window, those accruals may be challengeable under the Kwong reasoning. The suspension applies to the computation period, not just to obligations that originated during the pandemic.

To put the potential scope in perspective, the IRS previously issued approximately $1.2 billion in automatic refunds under Notice 2022-36 for failure-to-file penalties on certain 2019 and 2020 returns that were filed late. The IRS also provided a separate round of failure-to-pay penalty relief in 2024 for 2020 and 2021 returns with balances under $100,000. But all of that prior relief covered only limited penalty types and limited tax years. The Kwong ruling dramatically expands the window, from a few months to over three years, and potentially covers a much broader range of penalties and interest. The total universe of refundable amounts under the Kwong theory is significantly larger than what the IRS has already returned.

Now for the critical timing issue. Under the tax code, refund claims generally must be filed within three years of the date the return was filed, or two years from the date the tax was paid, whichever is later. If the Kwong interpretation of the suspension period holds, it affects how those deadlines are calculated, and for many taxpayers, the resulting refund claim deadlines may begin expiring in mid-2026 or shortly thereafter. The exact deadline depends on your individual facts: when your specific return was filed, when the penalty or interest was assessed, and when you made payments. This is not a one-size-fits-all calculation, which is why it's important to evaluate your situation with a tax professional rather than assuming a single deadline applies to everyone.

There is an important caveat. Kwong is a single decision from the Court of Federal Claims. It is not binding on the Tax Court, and the government is widely expected to appeal to the U.S. Court of Appeals for the Federal Circuit. The case could ultimately be reversed. It's also worth noting that Congress addressed part of this issue in December 2025 when it passed the Disaster Related Extension of Deadlines Act, which amended Section 7508A to treat disaster postponements as extensions for purposes of the refund lookback period. But that legislation addressed a different technical problem, it didn't resolve the core question of how long the mandatory suspension lasted.

Here's why acting now matters even though the legal issue isn't fully settled. Filing a protective refund claim preserves your rights while the courts sort out the law. If the government wins on appeal and Kwong is reversed, your claim gets denied and you're in the same position you're in today, you've lost nothing. If Kwong is upheld, you get your money back. There is no downside to filing a protective claim, and there is significant downside to waiting, if the refund deadline passes before you file, you lose the right to claim the money regardless of how the legal issue is eventually resolved.

A protective refund claim is filed on IRS Form 843, Claim for Refund and Request for Abatement. You identify the type of penalty or interest you're seeking to recover, the tax year involved, the amount paid, and the legal basis for the claim, in this case, Section 7508A(d) and the Kwong v. United States decision. You should attach supporting documentation including your IRS account transcripts showing the penalties and interest that were assessed and paid during the suspension period. Account transcripts can be obtained through your online IRS account at IRS.gov or by filing Form 4506-T.

The practical steps are straightforward. First, pull your IRS account transcripts for every tax year where you had a balance between 2020 and 2023. Second, identify every penalty and interest charge assessed during the January 20, 2020 through July 10, 2023 window. Third, calculate the total amount of penalties and interest you paid during that period. Fourth, file a protective Form 843 for each tax year affected, clearly stating that you are claiming a refund based on the Section 7508A(d) mandatory suspension period as interpreted in Kwong v. United States, Case No. 22-1573T (Fed. Cl. Nov. 25, 2025). Fifth, keep copies of everything you file.

This is one of those situations where waiting for legal certainty could cost you the opportunity entirely. The prudent move is to file protective claims now and let the appeals process play out while your rights are preserved. If you paid penalties or interest to the IRS at any point during the pandemic, whether for late filing, late payment, estimated tax shortfalls, or any other time-sensitive obligation, the potential recovery could be meaningful. But the clock is running, and once the refund deadline passes, no court decision can bring it back.