What Taxpayers Need to Know About Potential COVID-Related Refunds
- In most cases, the deadline to file a protective refund claim is July 10, 2026. A later deadline applies to taxpayers who paid the relevant tax, interest, or penalties within the last two years.
- If the decision is upheld, the IRS may be required to refund interest and penalties accrued during the disaster period. This applies to accruals between January 20, 2020 and July 10, 2023 and to be eligible, taxpayers must timely file a protective claim.
- If you believe you may be entitled to a refund under these conditions, contact your tax advisor. They can help you review your specific fact pattern to confirm it applies, as well as help estimate the size of the refund that you may be owed.
Recent court case, Kwong v. U.S., calls into question whether the IRS was correct to charge interest and accrue certain penalties during the federally declared COVID disaster period (January 20, 2020 to July 10, 2023). Additionally, the statute of limitations for requesting a refund from the IRS may not have run during that timeframe.
Taxpayers who may be entitled to a refund due to this interpretation of the law should discuss with their tax advisor whether to file a protective refund claim, to preserve their ability to obtain a refund from the IRS once this issue is resolved.
Who Might Benefit from COVID-Related Refunds?
Broadly speaking, there are three categories of individuals who may benefit from this court case, if it is upheld on appeal:
- Taxpayers who filed any type of federal tax return originally due between January 20, 2020 – July 10, 2023 and paid interest or penalties related to one of those returns. This includes taxpayers who paid a penalty for underpayment of estimated tax. This interpretation of the law would benefit all taxpayers who were able to become fully compliant by the end of the COVID disaster period as well as most taxpayers who became compliant at a later date.
- Taxpayers who were assessed additional tax due to an audit of any tax return, where, in connection with the audit, the IRS assessed interest or penalties that the IRS calculated as accruing during the COVID disaster period.
- Taxpayers who discovered an error in a tax return filed during the COVID disaster period that would have entitled them to a refund, but the discovery happened more than three years after the return was originally filed. Although the statute of limitations for requesting a refund appeared to be closed, that may no longer be the case under the reasoning of Kwong.
Considerations
The IRS has appealed the Kwong decision and it is not clear whether the lower court’s interpretation of the law will be upheld on appeal.
Most taxpayers who would benefit under the Kwong decision will likely need to preserve their ability to obtain a refund from the IRS by filing what is known as “protective” refund claim (or amendment) on or before July 10, 2026. That date is extended for taxpayers who have made payments to the IRS related to the relevant tax return within the last two years.
Because there is a cost to filing the protective claim and the future benefit is uncertain, taxpayers should consider whether the size of the potential refund is worth the cost of preserving the ability to obtain the refund.
Consult your tax advisor as you consider your next steps.
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