For most taxpayers, the deadline for filing federal income tax returns has passed, but an important federal court ruling could open the door for millions of Americans to seek tax refunds related to penalties and interest incurred during the pandemic. This development stems from the case of Kwong v. United States, where the court determined that the Internal Revenue Service (IRS) should not have imposed specific penalties and interest starting from January 20, 2020, through July 10, 2023. This timeframe encompasses the Covid-19 federal disaster period, which lasted until May 11, 2023, along with an additional 60 days.
The decision hinges on an interpretation of a provision in the tax code regarding postponed filing and payment deadlines in times of disaster. Typically, if taxpayers submit their returns and pay their taxes on time, they retain the right to claim unpaid refunds for up to three years after the initial filing deadline, extending the potential deadline for these claims to July 10, 2026.
While this ruling represents a significant opportunity for tax refunds, it is important to note that the decision is not yet definitive, and the government may choose to appeal.
National Taxpayer Advocate Erin Collins emphasized the potential impact of this ruling in her recent blog posts, stating that it may represent a “major refund opportunity” for a wide array of filers. The Taxpayer Advocate Service, an independent entity within the IRS, advises that relief is not automatic. Affected taxpayers must take action by July 10 to either request a refund or apply for an abatement—essentially a waiver of penalties. The IRS typically imposes penalties and interest for missed filing and payment deadlines. For example, the failure-to-file penalty is 5% of the unpaid taxes per month, capping at 25%, while the failure-to-pay penalty accumulates at a rate of 0.5% monthly, also capped at 25%.
Collins noted that the ruling could particularly affect taxpayers who faced penalties for late filing or failure to pay taxes, including estimated tax payments and accrued interest. She highlighted the widespread impact of the issue, stating, “This issue is widespread and not limited to a small or specialized group of taxpayers.” This encompasses a diverse range of individuals, small businesses, corporations, estates, and trusts.
IRS data from fiscal year 2023 reveals that over 14.2 million estimated tax penalties and approximately 18.6 million failure-to-pay penalties were assessed. Some taxpayers did receive penalty abatements, showcasing the varying experiences among filers.
As the July 10 deadline approaches, many tax professionals are hastily advising their clients about potential refund opportunities. Tax consultant Victoria Boon pointed out, “These cases have opened the door to what could become one of the largest waves of tax refund claims in recent years.” However, she cautioned that the outcome remains uncertain, urging taxpayers to act promptly to secure their rights as the situation evolves.
Taxpayers can check their IRS online accounts to view any applicable penalties or interest charged from January 20, 2020, to July 11, 2023. Most taxpayers will need to use Form 843 to request a refund or abatement, but this cannot be filed online; it must be sent through the mail. Collins suggests utilizing certified mail to confirm submission before the deadline.
If penalties and interest have already been paid, filers can request refunds from the IRS; for balances still owed, an abatement must be requested. To safeguard potential refunds when legal decisions remain unsettled, Collins also recommends filing a “protective claim.” Before proceeding, she advises consulting a reliable tax professional, reviewing IRS guidance, and maintaining records that support individual claims.
