COVID Penalty Refunds: A Court Ruling Could Mean Money Back for Millions of Taxpayers

If you were assessed a late filing or late payment penalty during the COVID years and paid it without a fight, there may be a meaningful refund opportunity — and for many taxpayers, a critical protective filing deadline of July 10, 2026.

A November 2025 decision from the U.S. Court of Federal Claims, Kwong v. United States, 179 Fed. Cl. 382, interpreted the law in a way the IRS never did. Under the court’s reading, many filing and payment deadlines that fell within the COVID disaster period were automatically postponed by statute — far broader than the targeted relief the IRS had announced. The IRS’s position had been more limited: relief applied only during specific announced windows. The court disagreed, and that difference matters significantly for taxpayers who received penalties in the years between.

Here’s what you need to know, and why timing matters.

First, Some Background

You may not realize this, but the IRS doesn’t write tax law. Congress writes and passes the laws, then it’s up to the IRS and the Treasury Department to interpret and implement those laws. If you’ve ever played a board game that has complicated rules, you can appreciate how different people can read the same rule and think it means different things. When you disagree with what the IRS has ruled, tax disputes can be litigated in different federal courts depending on the type of case and the procedural posture.

What the Court Actually Decided

The core of the Kwong argument involves a distinction between two provisions of IRC §7508A and two different sets of COVID-era declarations.

Under §7508A(a), the Treasury Secretary has discretionary authority to postpone federal tax deadlines after a disaster declaration. That is the mechanism the IRS used during the pandemic: it announced specific relief windows by choice, not legal requirement. Under the pre-2021 version of §7508A(d), by contrast, when the President issues a major disaster declaration that specifies an incident date, postponement is mandatory by operation of law.

The IRS’s position rested on the March 13, 2020 nationwide emergency declaration — the one that launched most of the federal COVID response. Treasury’s regulations took the view that because that declaration did not specify an incident date, it triggered only discretionary relief under §7508A(a), not the mandatory postponement under §7508A(d). That’s why pandemic relief came in announced windows: the IRS chose when to offer it.

The Kwong court focused on a different set of declarations: the subsequent state-by-state major disaster declarations that followed the nationwide emergency. Those declarations commonly used January 20, 2020 as the incident-period start date. The court held that these declarations triggered mandatory postponement under §7508A(d) — and that, under that reading, the mandatory postponement continued through July 10, 2023.

Under that reading, late filing and late payment penalties assessed between January 20, 2020 and July 10, 2023 may have been improperly assessed — not because the IRS declined to offer relief, but because the law required it. The IRS’s announced relief windows were limited. The mandatory postponement period, under Kwong, was more than three years.

That is a significant difference in scope, and it’s the reason this ruling matters for taxpayers who were penalized during that window.

Who May Be Affected

The broad categories of taxpayers potentially affected include:

Individual filers who were assessed failure-to-file or failure-to-pay penalties on federal income tax returns — including returns and payments whose underlying due dates fell between January 20, 2020 and July 10, 2023 under the Kwong theory.

Small business owners who received penalties on business returns — partnerships, S corporations, sole proprietors, and others — during the same window. Business return penalties can be substantial, particularly failure-to-file penalties on partnership and S corporation returns, which accrue per partner or shareholder.

Taxpayers who paid without disputing. This is an important point. You do not need to have protested the penalty at the time to file a claim now. If you received the penalty notice and paid it, you can still file a refund claim — as long as you meet the statute of limitations deadline.

Taxpayers who filed late returns and were denied refunds. A separate and more technical issue involves refund limitation periods. Some taxpayers who filed returns during the COVID period and were denied refunds due to the normal lookback limitation may want those denials reviewed. But this issue is procedurally distinct from a penalty refund claim and can turn on different legal rules. It is a more complex inquiry that typically requires professional analysis.

The key questions are: when was the underlying filing or payment obligation due, what type of penalty was assessed, when was it paid, and is the claim being framed as a refund or an abatement under the Kwong theory? Not every penalty is automatically covered, and the IRS may push back on some claims — but the court’s ruling creates a legitimate legal basis to pursue relief that simply did not exist before.

A Hypothetical to Illustrate the Stakes

Let’s say a small business owner filed an S corporation return for 2020 about three months late and received a penalty of $2,200. The notice arrived, seemed frustrating but perhaps unavoidable, and the owner paid it to make it go away. Under the IRS’s prior interpretation, that penalty was validly assessed. Under Kwong, the filing deadline may have been suspended during that period entirely — meaning the return was not actually late, and the penalty should not have been assessed.

Or consider an individual taxpayer who owed a balance on their 2021 return and paid it several months after the original due date, incurring a failure-to-pay penalty of $400 plus associated interest. Under the same reasoning, if the payment deadline was suspended, the penalty was improperly assessed.

Across the four-year-plus span of the COVID disaster period, these situations affected a large number of taxpayers. Even individually modest penalties can add up when interest on the penalty amount is factored in.

How to Claim: Form 843

The mechanism for pursuing a refund or abatement of these penalties is Form 843, Claim for Refund and Request for Abatement. If the penalty has already been paid, the claim is generally filed as a refund claim. If the penalty has been assessed but not yet paid, the request is generally framed as an abatement. A few practical notes:

Paper filing only. Form 843 is not e-filed. It must be mailed to the IRS.
Certified mail is strongly recommended. This creates a paper trail documenting that your claim was filed before the deadline. Given the volume of claims likely to be submitted and the nature of the deadline, having proof of timely filing is important.
One form per tax period. As a practical matter, separate Forms 843 are typically filed for each tax period or liability type.
Cite the legal basis clearly. The claim should reference the pre-2021 version of IRC §7508A(d), the COVID-19 major disaster declarations relied on in Kwong, and Kwong v. United States, 179 Fed. Cl. 382.
You do not need exact figures to file. If you know you may have a claim but have not yet calculated the precise amount, you can file Form 843 as a protective claim. This locks in your position before the July 10, 2026 deadline. The exact amount can be determined and supplemented later. Filing something before the deadline is better than waiting for perfect numbers.

A refund is not automatic. The government has opposed the broad reading adopted in Kwong, and the IRS has not acquiesced. Some claims will be denied — potentially requiring appeals or further legal action. That is the realistic picture. The purpose of filing before July 10, 2026 is to preserve your rights while the legal landscape continues to develop. A claim on file gives you options; no claim gives you none.

The July 10, 2026 Protective Filing Deadline

Refund claims are generally governed by 26 U.S.C. § 6511(a), which requires a claim to be filed within three years from when the return was filed or two years from when the tax was paid, whichever period expires later. Under the Kwong reading, returns and payments treated as due during the COVID disaster period would be treated as not due until July 10, 2023 — which is why July 10, 2026 is being discussed as the protective filing deadline for many of these claims.

With that date approaching, timing matters.

Penalties tied to earlier parts of the disaster period may already be time-barred, depending on when they were paid. But for obligations falling during the later portion of the disaster window, the protective deadline is approaching fast.

If you think you might be affected, acting now matters. Waiting until July 8 to start gathering records is not a comfortable position to be in for a certified mail filing.

Why Professional Help Is Worth Considering Here

This type of claim sits at an unusual intersection: it requires identifying which penalties qualify, calculating the correct refund amount (including associated interest), completing the forms accurately, and potentially navigating IRS pushback on a legal theory that the agency has not fully accepted.

That is exactly the kind of IRS matter where working with an Enrolled Agent makes a practical difference. EAs are federally licensed to represent taxpayers before the IRS at all levels — correspondence, examination, appeals — and are specifically trained to handle penalty abatement and refund claims. A poorly prepared claim can be denied on procedural grounds even when the underlying legal basis is sound.

If you are not sure whether you were assessed penalties during the COVID disaster period, pulling your IRS transcript is the right starting point. You can request a Tax Account Transcript directly through the IRS website, or an EA can pull it on your behalf with an authorization on file.

What to Do Right Now

Given the deadline, here is a practical checklist:

Pull your IRS account transcript for tax years 2019 through 2023. Look for penalty assessments — specifically failure-to-file (FTF) or failure-to-pay (FTP) penalties.
Note the key dates — the original filing or payment due date, when the penalty was assessed, and when you paid it. Under the Kwong theory, the underlying due date is often more important than the assessment date alone.
Gather your payment documentation — showing when you paid the penalties, which matters for the statute of limitations calculation.
Decide whether to file yourself or work with a professional. For straightforward situations with a single penalty, a carefully prepared Form 843 may be manageable. For multiple years, business returns, or significant dollar amounts, professional representation is a more sound investment.
File before July 10, 2026 — via certified mail, with return receipt requested.

The Bottom Line

Kwong v. United States opened a window that most taxpayers do not know exists. The legal argument is legitimate, the deadline is firm, and the clock is running. If you paid late filing or late payment penalties during the COVID years and never pursued relief, it is worth taking twenty minutes to check your transcripts before that window closes.

The information in this post is educational in nature and does not constitute specific tax advice for your individual situation. Tax law is complex and fact-specific — eligibility for penalty abatements and refunds depends on the details of each taxpayer’s circumstances. For guidance on whether you may have a viable claim under Kwong v. United States and assistance preparing Form 843, please reach out to schedule a consultation.