COVID-Era IRS Penalties and Interest: Are You Eligible for Relief?

Taxpayers May Be Eligible For COVID-Era Penalty And Interest Refunds, But Action Is Needed Soon

A recent federal court decision in Kwong v. United States has created a potential opportunity for taxpayers who were assessed certain IRS penalties or interest during the COVID-19 pandemic. The court held that federal tax deadlines were automatically suspended from January 20, 2020 through July 10, 2023, due to the federally declared COVID-19 disaster period. Although the government has appealed the decision and the outcome remains uncertain, taxpayers may wish to preserve their rights to potential future relief.

Taxpayers who were assessed failure-to-file penalties, failure-to-pay penalties, estimated tax penalties, or underpayment interest during this period may be eligible to seek relief. To protect their ability to claim a refund or abatement, eligible taxpayers can file a protective claim by July 10, 2026, which is generally three years (plus 60 days) after the end of the federally declared disaster period.

A protective claim does not guarantee a refund or abatement. However, it preserves a taxpayer’s right to seek relief if the Kwong decision is ultimately upheld. If the ruling stands, taxpayers who timely filed protective claims may be eligible for refunds of qualifying penalties and interest.

What Are the Next Steps?

If you were assessed IRS penalties or interest, consider taking the following steps:

• Review prior-year tax filings for any penalties or interest assessed between January 20, 2020 and July 10, 2023.
• Obtain and analyze IRS account transcripts to identify penalty and interest charges and determine whether they may qualify for relief.
• Consult with your tax advisor to evaluate the potential benefit and determine whether filing a protective claim is appropriate for your situation.
• File a protective claim or request for abatement, if warranted, using the appropriate IRS procedures. This claim preserves your rights while the case moves through the appeals process.
• Act before July 10, 2026 because missing the filing deadline could result in the loss of any future refund opportunity, even if the courts ultimately uphold the taxpayer-favorable ruling.
• Monitor future developments and additional guidance from the IRS or future court decisions that may impact the availability and scope of relief.

While there is no guarantee that refunds or abatements will ultimately be granted, filing a timely protective claim may provide taxpayers with an opportunity to benefit from a favorable outcome. If you would like assistance evaluating your potential opportunity or filing a claim, please contact your Ellin & Tucker advisor.