Pending tax litigation may create a protective refund claim opportunity for taxpayers who paid penalties and related interest to the IRS between January 20, 2020, and July 10, 2023.
Background
Similar to federally declared disasters for natural events such as floods and wildfires which provide a window during which the IRS will not impose penalties in the designated geographical area, the onset of the COVID-19 pandemic resulted in a federally declared disaster for the entire United States effective, for tax purposes, from January 20, 2020 until July 10, 2023, 60 days after the COVID-19 disaster was officially concluded.
The case of Kwong v. United States, at a high level, relates to a taxpayer who paid penalties to the IRS during this period and claims that no penalties should have been paid due to the COVID-19 disaster declaration. This case was ruled in favor of the taxpayer. However, the decision is not yet final as the government has filed an appeal, and a reversal remains possible.
In general, taxpayers have the later of three years from the date a tax return was filed or two years from the date of payment to seek a refund. For taxpayers affected by a federally declared disaster, the IRS is authorized to postpone certain time-sensitive acts. While the details of the potential extension are nuanced, if the Kwong decision is ultimately upheld, the final day to seek a refund of penalties (and related interest) paid during the January 20, 2020 – July 10, 2023 window would be July 10, 2026 – three years from the close of the disaster period.
Next Steps
There is no guarantee that the decision in Kwong will be ultimately upheld. However, if the case is finally adjudicated in the taxpayer’s favor and assuming that this decision occurs after July 10, 2026, a claim filed after this date would be ineligible for relief. To avoid missing this opportunity, taxpayers should consider filing a “protective” refund claim with the IRS prior to July 10, 2026. This claim would most likely be in the form of filing IRS Form 843, Claim for Refund and Request for Abatement, and indicating that the filing is protective under Kwong v. United States.
For most taxpayers, it will not be cost-effective to incur the time and/or professional fees involved to file a protective claim. However, to the extent that a material amount of penalties and interest on those penalties were paid during the above window, then a protective claim may be justified.
Please consult with your WilkinGuttenplan tax advisor to discuss whether a protective refund claim might be appropriate for you.
