Did You Pay IRS Penalties During COVID? The Kwong Decision May Entitle You to a Refund

 Millions of Americans struggled to meet IRS deadlines during the COVID-19 pandemic. Between business closures, staffing shortages, and unprecedented disruption to daily life, filing taxes on time became extraordinarily difficult for countless taxpayers. Many ended up paying significant penalties and interest as a result. Now, a groundbreaking federal court decision is offering hope that some of those payments may be recoverable.

In Kwong v. United States, the U.S. Court of Federal Claims ruled that the IRS miscalculated tax deadlines during the COVID-19 emergency. The decision could open the door for taxpayers who paid penalties between January 20, 2020, and July 10, 2023, to claim refunds.

Understanding the Legal Framework

Internal Revenue Code Section 7508A allows the IRS to extend tax filing and payment deadlines when taxpayers are affected by federally declared disasters. Under the 2019 version of Section 7508A(d), the law mandated an automatic extension running from the earliest declared incident date through 60 days after the latest incident date. For COVID-19, the earliest incident date was January 20, 2020, and FEMA established May 11, 2023, as the latest incident date—meaning the automatic extension ran through July 10, 2023, a span of more than three years.

The statute says this mandatory postponement period “shall be disregarded” when calculating various tax deadlines, including the two-year window to file a refund suit. The IRS, however, argued through its regulations that disaster extensions could never result in more than one year being disregarded, effectively capping the relief available to taxpayers.

What the Court Decided and Why It Matters

Terry Kwong sought refunds of penalties for multiple tax years. The IRS argued his claims were time-barred under the normal two-year limitation, but Kwong contended that the entire COVID-19 disaster period should be excluded from that calculation. The Court of Federal Claims agreed. Reading the plain language of the statute, the court held that the full period from January 20, 2020, through July 10, 2023, must be disregarded when computing filing deadlines, making Kwong’s February 2023 lawsuit timely.

The court also rejected the IRS’s regulatory interpretation that would have capped the extension at one year. Citing the Supreme Court’s decision in Loper Bright Enterprises, which eliminated judicial deference to agency interpretations of ambiguous statutes, the court concluded it was bound by the plain text of the law. The regulation, in the court’s view, had “misread” what the statute required. It’s worth noting that Congress amended Section 7508A in 2021 and again in 2025 to cap disaster extensions, but both amendments apply only to disasters declared after their enactment. The COVID-19 declaration predated these changes, so the original, more generous version of the law still governs.

Who Might Be Entitled to Relief?

The implications extend well beyond Terry Kwong’s case. Any taxpayer who paid IRS penalties or interest for deadlines falling within the COVID-19 disaster period may have grounds to seek a refund—including failure-to-file penalties, failure-to-pay penalties, and associated interest. This also applies to taxpayers with earlier tax years whose administrative or judicial deadlines happened to fall during the pandemic period.

Additional relief came through the Disaster-Related Extension of Deadlines Act, signed into law on December 26, 2025. This legislation modified Section 7508A to ensure that disaster postponement periods are treated as extensions when calculating refund amounts, closing a gap that previously prevented some taxpayers from recovering the full amount of their overpayments.

Taking Action to Preserve Your Rights

For taxpayers who believe they may have overpaid penalties, time remains of the essence. The first step is obtaining IRS transcripts to identify exactly what penalties and interest were assessed and paid between January 20, 2020, and July 10, 2023. Because the government may appeal the Kwong decision, tax professionals are recommending that eligible taxpayers file a protective refund claim using Form 843 (Claim for Refund and Request for Abatement), citing the Kwong decision as the legal basis. A protective claim acts as a placeholder, stopping the statute of limitations clock while legal developments continue to unfold. Claims related to this decision generally need to be filed by July 10, 2026, but acting sooner avoids administrative hurdles. For penalties that remain unpaid, taxpayers can also request abatement based on the Kwong decision.

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