COVID-era IRS penalties may be refundable: why July 10, 2026 matters

ARTICLE | July 07, 2026

A recent federal court decision has opened the door to a potentially significant refund and abatement opportunity for taxpayers who were assessed IRS penalties or related interest during the COVID-19 federal disaster period.

The case, Kwong v. United States, does not guarantee refunds. The federal government has appealed the decision, and the issue may take years to resolve. But for many taxpayers, the deadline to preserve a potential claim may arrive much sooner: July 10, 2026.

For taxpayers that paid certain IRS penalties or interest tied to deadlines during the COVID-19 period, this is an issue worth reviewing promptly.

What the Kwong case is about

In Kwong v. United States, the U.S. Court of Federal Claims considered how federal disaster relief rules applied during the COVID-19 pandemic.

The case focused on Internal Revenue Code §7508A, which allows certain tax deadlines to be postponed when taxpayers are affected by a federally declared disaster. The court interpreted the version of §7508A(d) that was in effect when COVID-19 was declared a federal disaster and concluded that certain filing and payment deadlines were automatically postponed for the duration of the disaster period, plus 60 days.

For COVID-19, that period began on January 20, 2020 and ended on May 11, 2023, with the additional 60-day period extending the relevant date to July 10, 2023. Under the court’s reasoning, certain federal tax filings and payments that would otherwise have been due during that window may not have been late until after July 10, 2023. 

That interpretation could affect penalties and interest the IRS assessed for late filing, late payment, estimated tax underpayments, payroll tax deposit issues, and other federal tax obligations during the COVID-19 disaster period.

Why this matters now

The government has appealed the Kwong decision, and the IRS does not agree with the court’s broader interpretation of the disaster relief rules. The final outcome is uncertain. 

However, taxpayers generally cannot wait for the appeal to be resolved. Refund claims are subject to strict statute-of-limitations rules. If a taxpayer does not file a timely claim, they may lose the right to a refund even if the courts later uphold the taxpayer-favorable interpretation.

That is why many affected taxpayers may need to file a formal refund claim or a protective refund claim by July 10, 2026.

A protective claim is used when a taxpayer may have a valid refund right, but the legal or factual issue has not yet been resolved. It allows the taxpayer to preserve the claim while the courts decide the underlying issue. The National Taxpayer Advocate has stated that protective claims are especially important here because the Kwong issue remains unsettled and may not be finally resolved until after the normal refund period expires.

Who may be affected

This potential opportunity is not limited to one type of taxpayer. It may affect:

• Individuals who filed or paid late during the COVID-19 disaster period;
• Business owners who paid payroll tax penalties, failure-to-deposit penalties, or late-payment penalties;
• Corporations, partnerships, trusts, and estates that paid penalties or interest tied to pandemic-era deadlines;
• Nonprofits or other organizations that filed federal returns late;
• Taxpayers who paid estimated tax penalties;
• Taxpayers who were assessed penalties on late international information returns; and
• Taxpayers who still owe unpaid penalties or interest that may be eligible for abatement.

The National Taxpayer Advocate has described the issue as potentially affecting individuals, small businesses, large corporations, estates, trusts, and taxpayers with obligations involving income, employment, estate, gift, and excise taxes.

What types of penalties could be involved

Depending on the facts, affected amounts may include:

• Failure-to-file penalties;
• Failure-to-pay penalties;
• Estimated tax penalties;
• Failure-to-deposit penalties;
• Interest charged on penalties or tax amounts that may not have been due during the postponed period;
• Certain international information return penalties; and
• Other penalties tied to tax deadlines falling between January 20, 2020 and July 10, 2023.

The exact scope remains uncertain because Kwong is still being litigated and future decisions could narrow, expand, or reject its reasoning. Taxpayers should not assume that every penalty assessed during the COVID period automatically qualifies.

How to identify whether you may have a claim

The practical first step is to review IRS records for the affected years and tax periods.

For individuals, this may include reviewing IRS account transcripts for tax years 2019, 2020, 2021, and 2022. For businesses, it may also include payroll tax transcripts and notices related to Forms 941, 940, 1120, 1065, 1041, 990, or other federal filings.

The National Taxpayer Advocate has suggested that IRS account transcripts can help identify whether penalties or interest were assessed during the relevant period. Transcripts can generally be accessed through an IRS individual online account or business account, or requested by mail.

Taxpayers should also review:

• IRS notices received during or after the COVID period;
• Penalty assessment notices;
• Payment records;
• Prior-year returns prepared by another firm;
• Payroll tax filings and EFTPS records;
• IRS account transcripts for business entities; and
• Any IRS correspondence involving penalty abatements, refund claims, or unpaid balances.

This review is especially important because tax preparation software or firm records may not capture every penalty paid or assessed. For example, a CPA firm may be able to identify penalties on individual income tax returns it prepared, but may not be able to identify payroll tax penalties, penalties tied to returns prepared by a prior accountant, or penalties paid directly by a business.

What taxpayers may need to file

In many cases, the relevant form will be IRS Form 843, Claim for Refund and Request for Abatement. The IRS describes Form 843 as the form used to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax.

For a protective claim, taxpayers generally should clearly identify the claim as protective and explain that it is being filed to preserve refund or abatement rights pending final resolution of Kwong and related litigation.

The National Taxpayer Advocate has noted that a protective claim does not necessarily need to state an exact refund amount, but it must identify the contingency affecting the claim, be clear enough to alert the IRS to the nature of the claim, and identify the specific year or years involved.

Taxpayers should retain proof of timely mailing. At this time, Form 843 generally must be filed on paper rather than electronically, and the National Taxpayer Advocate has recommended certified mail or another method that provides proof of filing.

Why July 10, 2026 is important

Under the reasoning of Kwong, many affected tax deadlines may be treated as postponed until July 10, 2023. The ordinary refund claim period generally runs from the later of three years from the date the return was filed or two years from the date the tax was paid.

For many taxpayers, measuring the three-year refund period from July 10, 2023 leads to a claim deadline of July 10, 2026. The National Taxpayer Advocate has repeatedly warned that most taxpayers must file by that date to preserve their rights.

Some taxpayers may have different deadlines depending on their filing dates, payment dates, open examinations, appeals matters, litigation posture, or other facts. But because the July 10, 2026 date is approaching quickly, taxpayers should review their records as soon as possible.

A word of caution

This is a developing issue, not a guaranteed refund program.

Kwong is a Court of Federal Claims decision, and the government has appealed. Future court decisions may limit or reject the refund theory. Taxpayers should also be careful not to file incomplete or inaccurate claims without understanding the applicable tax periods, penalty types, and filing requirements.

That said, inaction may be costly. If the taxpayer-favorable interpretation ultimately prevails, taxpayers who did not file a timely claim may be unable to recover penalties or interest they otherwise could have had refunded or abated.

What you should do now

If you or your business paid IRS penalties or interest connected to federal tax deadlines during the period from January 20, 2020 through July 10, 2023, you should review your IRS records promptly.

This review should include income tax, payroll tax, estimated tax, business tax, trust and estate tax, nonprofit, and other federal tax obligations. Businesses should pay particular attention to payroll tax penalties and failure-to-deposit penalties, which may not be visible from income tax return records alone.

If a potential claim exists, a protective refund or abatement claim may need to be filed by July 10, 2026 to preserve your rights while the courts continue to address the issue.

Because the rules are complex and the legal outcome remains unsettled, taxpayers should consult their tax advisor before filing. A short review now may be the difference between preserving a potential refund and losing the opportunity permanently.