A federal court decision just created a real opportunity for taxpayers to recover penalties and interest the IRS assessed during the pandemic. We're breaking down what it means and who might qualify.
What Actually Happened in Court
In Kwong v. United States, a federal court clarified, amongst other matters, how the IRS should apply its disaster relief provisions. The ruling focused on IRC Section 7508A(d), which gives the IRS authority to suspend deadlines during disasters—including the COVID-19 pandemic.
Here's the thing: the court essentially said the IRS was applying these rules too narrowly. That interpretation is now being used by professionals to argue that many penalties and interest charges assessed during the COVID disaster period shouldn't have happened at all.
Who This Affects
If you're taxpayer who had any of these assessed between January 20, 2020 and July 10, 2023, this could matter to you:
- Failure-to-file penalties (because you missed a deadline during the pandemic)
- Failure-to-pay penalties (because you couldn't pay on time)
- Estimated tax penalties (missed quarterly payments)
- Accuracy-related penalties (errors on your return)
- Underpayment interest (interest charged for owing money)
- Penalty interest (interest on top of the penalty itself)
In other words: if COVID threw a wrench in your tax filing or payment obligations, you might have refund-eligible charges sitting on your IRS account.
The Protective Claim Strategy
Here's where it gets practical. The law around these penalties is still evolving—the IRS could push back on refund claims, or higher courts could rule differently. So instead of filing a standard claim and hoping, proactive professionals are filing protective claims.
A protective claim essentially freezes your rights. It says, "We're claiming this refund and preserving your legal position while the courts work through the bigger issues." It protects you while the law develops further—without forcing you to go to trial or spend money fighting with the IRS immediately.
How This Works (And Why You Need to Act)
The deadline to file a protective claim is July 10, 2026. That's the outside limit for the COVID disaster period, and it's not flexible. Here's the timeline:
- Now: Get your IRS transcripts to see if you have eligible penalties or interest on the books.
- Next: Have a tax professional review them and determine if a claim makes sense for your situation.
- Then: If there's a viable claim, file the protective claim before the deadline.
- Later: The law develops. If things go your way, you get the refund. If not, you're no worse off than you are right now.
Bottom line: there's no downside to exploring this—but there is a downside to missing the deadline.
How to Get Started
You have two options to get your IRS account transcripts:
- Option 1: Give us a Form 2848 (Power of Attorney), and we'll request your transcripts directly from the IRS and review them on your behalf. This is usually faster and cleaner.
- Option 2: You can pull your own transcripts from your IRS Online Account and send them to us for review.
Either way, once we see what's on your account, we'll give you a straight answer about whether a claim makes sense and what we'd expect to recover.
The Bottom Line
COVID created hardship for millions of taxpayers. The IRS's strict penalty policies during that period are now being questioned in court—and that creates an opportunity for you.
This doesn't require you to take on risk or go to battle with the IRS. A protective claim is a way to preserve your rights while the legal landscape continues to evolve.
The clock is ticking until July 2026. If you think you might qualify, there's no harm in having us take a look at your transcripts. It takes a day or two, and it could put real money back in your pocket.
Have Questions?
Reach out to the Nichols Cauley tax team. We can walk you through your specific situation and let you know if the Kwong decision applies to you.
