Could You Be Entitled to an IRS Penalty Refund?

Understanding Kwong v. United States

The COVID-19 pandemic created years of confusion, delays, and administrative disruptions for taxpayers and the IRS alike. Now, a recent federal court case — Kwong v. United States — may create an opportunity for some taxpayers and businesses to recover IRS penalties that were assessed during the pandemic years.

If you received IRS penalties between January 2020 and July 2023, this is something worth reviewing carefully with your tax advisor.

What Is Kwong v. United States?

In Kwong v. United States, the U.S. Court of Federal Claims examined how the IRS applied penalty rules during the federally declared COVID-19 disaster period.

The case focused on Internal Revenue Code Section 7508A(d), which addresses the suspension of certain tax deadlines during federally declared disasters. The court concluded that tax deadlines should have been suspended during the COVID disaster period, which ran from January 20, 2020, through July 10, 2023.

As a result, the ruling raises questions about whether certain IRS penalties and related interest assessed during that timeframe were legally valid.

While the IRS has not broadly implemented automatic refunds or abatements at this time, taxpayers may have the ability to file claims requesting relief.

What Types of IRS Penalties Could Be Affected?

The ruling primarily impacts penalties tied to filing and payment deadlines. Potentially affected penalties may include:

Failure-to-File Penalties

Penalties assessed for late-filed individual or business tax returns during the COVID suspension window may qualify for review.

Failure-to-Pay Penalties

Taxpayers who were assessed penalties for unpaid balances during the covered period may also have potential claims.

Payroll Tax Deposit Penalties

Businesses that received payroll tax deposit penalties during the pandemic years may have significant opportunities for relief, especially employers with recurring deposit issues during that timeframe.

Partnership and S Corporation Late Filing Penalties

Late filing penalties for Forms 1065 and 1120-S can become substantial because they are calculated per partner or shareholder, per month. Many businesses were assessed large penalties during the COVID period that could potentially qualify for abatement or refund claims.

Information Return Penalties

Certain late-filed information returns may also be impacted, including:

• Forms 1099
• Forms W-2
• ACA reporting forms such as 1095-B and 1095-C

International Filing Penalties

Some international reporting penalties may also fall within the scope of the ruling, including penalties related to:

• Form 5471
• Form 5472
• Form 3520
• Form 8865
• Form 8938

These penalties can often be significant, making a review especially important for taxpayers with international filing obligations.

How Are Refund or Abatement Claims Filed?

Taxpayers generally request relief using IRS Form 843, which is used to claim refunds or request abatement of penalties and interest.

Depending on the situation:

• Taxpayers who already paid penalties may seek a refund.
• Taxpayers who still owe penalties may request abatement of the balance due.

Because these claims involve legal interpretation, documentation, and timing considerations, it is important to evaluate each case individually.

Important Deadline to Know

One of the most important aspects of the Kwong ruling is timing.

Many claims related to penalties assessed during the COVID period may need to be filed by July 10, 2026. Missing the applicable statute of limitations could permanently eliminate the ability to recover the penalties.

If you received IRS penalty notices during 2020–2023, now is a good time to review your records.

Should You Take Action?

Not every taxpayer with IRS penalties will qualify for relief, and the long-term outcome of the Kwong decision remains uncertain. The IRS could challenge or limit the application of the ruling, and future guidance may impact how claims are handled.

However, businesses and individuals with substantial penalties during the COVID years may benefit from reviewing:

• IRS notices
• Account transcripts
• Penalty assessments
• Filing and payment dates

This is especially important for:

• Businesses with payroll tax penalties
• Partnerships and S corporations with late filing penalties
• Taxpayers with international filing penalties
• Anyone who paid significant IRS penalties during the pandemic period

Final Thoughts

The Kwong v. United States decision has created a potentially significant opportunity for taxpayers to recover or reduce IRS penalties assessed during the COVID disaster period.

While the legal landscape is still evolving, the potential financial impact can be substantial, particularly for business owners and pass-through entities.

If you received IRS penalties between January 2020 and July 2023, it may be worth having your situation reviewed to determine whether a refund or abatement claim should be considered.

This is not intended to be professional tax advice.  Reach out to your CPA or tax preparer for more information.