For COVID-19, a federal disaster declaration was in effect from January 20, 2020, through May 11, 2023. This disaster declaration applied to all US states, territories and tribal lands.
At the time of the COVID disaster declaration, Section 7508(d) of the Internal Revenue Code included an automatic, or “mandatory,” extension for any qualified taxpayer in a declared disaster area. 26 U.S.C. § 7508A(d) (2019 and 2021). Under the 2019 version of the statute, the period of automatic extension ran from “the earliest incident date specified in the declaration” to “the date which is 60 days after the latest incident date so specified.” 26 U.S.C. § 7508A(d) (2019).
In Kwong v. United States, the Court of Federal Claims ruled that Section 7508A(d) automatically postponed any federal tax deadlines from January 20, 2020, through July 10, 2023 (60 days after the May 11, 2023, end of the disaster). This automatic postponement of deadlines could affect penalties and interest assessed against taxpayers during that time. The theory is that because the IRS computes underpayment interest and failure-to-file/pay penalties from the return and payment due dates, there should not have been penalties and interest during the federal disaster declaration. Thus, taxpayers might have a basis to claim that the IRS should refund any such penalties and interest.
Taxpayers need to be aware that that the IRS, on May 15, appealed the Kwong decision.
This means that the IRS has not acquiesced to the decision. Moreover, the Court of Appeals or United State Supreme Court could narrow or reverse the lower court’s decision. On the other hand, the higher courts could uphold the decision.
The problem for taxpayers is that the statute of limitations for refund claims will expire before the appeal process is concluded. As such, any taxpayer who was assessed interest and penalties during the COVID-19 federal disaster declaration needs to consider whether they should file claims before the July 10, 2026, statute of limitations deadline.
Of course, if a refund claim is filed, the IRS might respond by issuing a notice rejecting the claim. The taxpayer would then have to decide whether to litigate the claim against the IRS, which would be cost prohibitive for most taxpayers. A better alternative for most taxpayers is to file a protective claim with the IRS now to preserve the taxpayer’s rights.
A protective claim allows you to preserve your right to a refund while the law is still uncertain.
A protective claim must be filed using IRS Form 843 and must identify and describe the contingencies affecting the claim; must be sufficiently clear and definite to alert the IRS to the essential nature of the claim; and must identify a specific year or years for which a refund is sought. The National Taxpayer Advocate states that the following procedure should be followed to file a protective claim pursuant to the Kwong decision:
“Taxpayers would need to file a Form 843, write ‘Protective Refund Claim Pursuant to Kwong Case’ or something similar across the top, and fill in as much detail as possible. Generally, taxpayers will need to file the form by July 10, 2026.”
The IRS will generally hold protective claims in suspense until the underlying issue is resolved by the courts. Protective claims also require the taxpayer to later perfect the claim by providing final numbers based upon the court’s final decision.
While the eventual resolution of the Kwong case may take years (Federal Appeals cases can take one to two years to resolve and if appealed to the US Supreme Court it could take one to two years longer), taxpayers only have until July 10, 2026 to file protective claims to preserve their rights. Failure to file by this date may forever bar an abatement or refund claim based upon penalties and interest assessed during the COVID-19 federal disaster declaration even if the IRS eventually loses the appeal.
For more information on the Kwong case and filing a protective claim, please visit the National Taxpayer Advocate’s website at https://www.taxpayeradvocate.irs.gov/; talk to your tax accountant, or make an appointment with a lawyer at Allison & Mosby-Scott.
