There is no doubt that the COVID-19 pandemic caused a major disruption to our society. For many taxpayers, the impact of COVID-19 may have resulted in the inability to file tax returns and/or pay tax liabilities in a timely matter. These taxpayers may have been assessed interest and penalties for these tax delinquencies.
However, a recent case decided by the United States Court of Federal Claims, Kwong v. United States, 179 Fed. Cl. 382 (2025), may have provided taxpayers with an opportunity to claim tax refunds of interest and penalties. This article discusses the Kwong case and highlights the critical date of July 10, 2026 to claim tax refunds of interest and penalties.
Terry Kwong was a real estate owner who claimed a loss of $2,315,017 from a transaction on his 2005 tax return. Kwong carried this loss forward, including to the 2007, 2010, and 2011 tax years. The Internal Revenue Service audited Kwong’s 2005 tax return and disallowed the loss in 2012, resulting in additional tax liabilities and the assessment of delinquency penalties for tax years 2007, 2010, and 2011. In 2020, Kwong filed to seek refunds for penalties he had paid for various tax years, including for tax years 2007, 2010, and 2011. In September and October 2020, the Internal Revenue Service issued notices of disallowance for Kwong’s 2007, 2010, and 2011 claims. In February 2023, Kwong filed a complaint in the United States Court of Federal Claims seeking refunds of various penalties, including for tax years 2007, 2010, and 2011. The defendant United States government (the “government”) in the case moved for summary judgment on Kwong’s complaint, arguing that Kwong’s 2007, 2010, and 2011 claims were untimely.
There were two key applicable Internal Revenue Code provisions in the Kwong case. First, under Internal Revenue Code Section 6532, “No suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim . . . nor after the expiration of 2 years from the date of mailing . . . of the disallowance of the part of the claim to which the suit or proceeding relates”. As Kwong filed his complaint (in February 2023) over “2 years” after the Internal Revenue Service rejected Kwong’s claims for refund for tax years 2007, 2010, and 2011 (in September and October 2020), the government argued that Kwong’s 2007, 2010, and 2011 claims were “jurisdictionally barred” under Internal Revenue Code Section 6532.
Second, under Internal Revenue Code Section 7508A(d)(1) (as described below, as determined to be applicable in the Kwong case), “In the case of any qualified taxpayer, the period – (A) beginning on the earliest incident date specified in the declaration to which the disaster area referred to in paragraph (2) relates, and (B) ending on the date which is 60 days after the latest incident date so specified, shall be disregarded in the same manner as a period specified under subsection (a)”. This provision was added to the Internal Revenue Code as part of the “2019 version” of Internal Revenue Code Section 7508A. Initially enacted in 1997 and subsequently frequently amended (in 2001, 2002, 2008, 2018, 2019, 2021, and 2025), Internal Revenue Code Section 7508A generally has been viewed as possible authority to postpone certain tax-related obligations, and thereby to avoid interest and= penalty liability, following the occurrence of “Federally declared disasters”. As President Donald Trump declared a major disaster area in California (relevant because Kwong was a California resident) because of the COVID-19 pandemic “beginning on January 20, 2020 and continuing”, and as this declaration was not “closed” until May 11, 2023, Kwong argued that pursuant to Internal Revenue Code Section 7508A(d)(1), his deadline to file his 2007, 2010, and 2011 claims was postponed until “July 10, 2023, at the earliest” (60 days after May 11, 2023), and his complaint (in February 2023) was timely filed.
An initial issue addressed by the Kwong court was what version of Internal Revenue Code Section 7508A should apply in the case. This issue was critical because the “2019 version” of Internal Revenue Code Section 7508A added the above-described language of Internal Revenue Code Section 7508A(d)(1) to include a period of postponement from “the earliest incident date” to “60 days after the latest incident date”. On the other hand, the “2021 version” of Internal Revenue Code Section 7508A provided a much shorter period of postponement changing the end of the applicable period from “60 days after the latest incident date” to “60 days after the later of such earliest incident date . . . or the date such declaration was issued”. If the “2021 version” of Internal Revenue Code Section 7508A applied, the period of postponement for Kwong would have ended in 2020 and not in 2023. However, the Kwong court applied the “2019 version” of Internal Revenue Code Section 7508A, stating, “[A]s the government ultimately conceded . . . , the November 2021 amendment applied only to disasters declared after the enactment of the amendment. . . . Thus, the November 2021 amendment could not apply to the covid-19 disaster, which was declared in early 2020”.
After applying the “2019 version” of Internal Revenue Code Section 7508A, particularly including the above-described language of Internal Revenue Code Section 7508A(d)(1), the Kwong court agreed with Kwong that his claims for 2007, 2010, and 2011 were timely filed. The Kwong court stated:
“Section 7508A allows the Secretary of the Treasury to postpone a taxpayer’s deadline to file his taxes, usually during a period of a natural disaster. Although section 7508A changed during the period relevant to this lawsuit, at all relevant times it stated that the Secretary may ‘specify a period of up to 1 year that may be disregarded’ during a taxpayer’s two-year window to bring suit for a tax credit or refund. 26 U.S.C. § 7508A(a) (2019 and 2021) . . . . The statute also includes, at all times relevant to this lawsuit, an automatic, or ‘mandatory,’ extension for any qualified taxpayer in a declared disaster area. 26 U.S.C. § 7508A(d) (2019 and 2021). . . .
Mr. Kwong’s view is correct, under the court’s reading of the 2019 version of section 7508A. The 2019 version of the statute allows the period of automatic extension to run from ‘the earliest incident date’ of the disaster declaration to ’60 days after the latest incident date.’ 26 U.S.C. § 7508A(d) (2019). The plain meaning of that statute is that the automatic extension runs from the beginning of the disaster declaration, through the end of the declared disaster period, and until 60 days after the end of the declared disaster period. The government does not dispute the plain meaning of the 2019 version of section 7508A. . . .
A disaster declaration that lasted more than three years was unprecedented. Congress appears to have intended for the statute to provide routine short-term deadline extensions under section 7508A(d) and, in rare instances under section 7508A(a), further extensions by the Secretary that would last up to a year. 26 U.S.C. § 7508A(d), (a) (2019). Disaster declarations often apply to short-term weather events affecting localized communities; the covid-19 pandemic was an unprecedented and long-lasting national event. Although Congress may not have anticipated a disaster declaration lasting more than three years, the statute’s express text nevertheless applies. . . .
The provision under subsection (a) for the Secretary to optionally issue an extension up to a year does not undermine the plain meaning of the text of subsection (d) that allows for a potentially longer automatic extension. The government argues . . . that because subsection (d) states that the mandatory period ‘shall be disregarded in the same manner as a period specified under subsection (a),’ the extension under subsection (d) can be no longer than the extension available under subsection (a). But the ‘manner’ in which the period is disregarded, discussed in subsection (a), is more evidently not the length of time but the types of actions that can be delayed, such as a taxpayer’s determining amounts of interest and amounts of credit or refund. 26 U.S.C. § 7508A(a)(2), (3) (2019). Nothing in subsection (d) mentions or implies a one-year limit. Under the express text of the statute, the automatic extension lasted until after the end of the disaster declaration, or, in the case of the covid-19 disaster, until July 10, 2023 (60 days after its end date of May 11, 2023).
And nothing in subsection (a) renders the court’s reading of subsection (d) nonsensical. Congress said, and easily could have meant, essentially, that for short-term emergencies, the Secretary was authorized to extend deadlines to up to one year, but for long-term emergencies, there was no further extension available.”
After rejecting two other arguments by the government – 1) “the extension did not continue into 2023 because the date in the initial emergency declaration is both the earliest and latest incident date ‘specified’ for purposes of section 7508A . . . because the initial pandemic emergency declaration was ‘beginning on January 20, 2020, and continuing,’ only the January date was ‘specified’ according to the statute” (“That argument is unpersuasive. If the emergency declaration was intended to include only January 20, 2020, the declaration would not have also said, ‘and continuing.’ . . . The government’s choice to maintain the disaster declaration beyond January 20, 2020, has meaning”), and 2) “in a regulation, the IRS interpreted the 2019 version of section 7508A not to extend the automatic extension indefinitely . . . the IRS, in a regulation effective June 11, 2021, stated, ‘In no event will the mandatory 60-day postponement period [under subsection (d)] be calculated to exceed one year.’ 26 C.F.R. § 301.7508A-1(g)(3)(ii)” (“But the IRS’s reading of the statute is not dispositive. . . . The regulations promulgated by the IRS appear to misread the statute by limiting the mandatory extension time described in section 7508A(d) by the general one-year provision mentioned in section 7508A(a). . . . As discussed above, the court reads the two provisions as independent. The statute is not ambiguous, at least for purposes of the timing question in this case”) – the Kwong court stated, “In sum, under the 2019 statute, the automatic, or mandatory, extension period began on January 20, 2020, and ended on July 10, 2023, 60 days after the emergency declaration’s latest incident date. . . . [T]he mandatory period for covid-19 under section 7508A lasted from early 2020 to July 10, 2023 . . . Mr. Kwong had until at least July 10, 2023, to file suit. He filed suit before that, and his suit for tax years 2007, 2010, and 2011 was therefore timely”.
Strictly read, the Kwong decision is authority for any California taxpayer to extend the permissible due date to file any claim for tax refunds of penalties from any otherwise applicable date within the time period of January 20, 2020 to July 9, 2023 to July 10, 2023. However, the Kwong decision has been read much more broadly. The Kwong case can be cited as authority for any taxpayer (assuming the taxpayer is also from a state that was subject to a qualifying “Federally declared disaster” declaration for purposes of Internal Revenue 7508A from January 20, 2020 to May 11, 2023) to postpone tax-related obligations from any otherwise applicable date within the time period of January 20, 2020 to July 9, 2023 to July 10, 2023. While such broader reading of the Kwong case would have applicability to many tax-related obligations, for purposes of this article, the key focus will be on interest and penalties incurred from January 20, 2020 to July 9, 2023. If you paid interest arising from a tax-related obligation (including interest on tax and/or penalty liability) otherwise due, but not met, from January 20, 2020 to July 9, 2023, the Kwong case would support the argument that such tax-related obligation was in fact postponed until July 10, 2023 and such paid interest should be subject to a claim for refund. In addition, if you paid penalties arising from a tax-related obligation (including failure to file penalties, failure to pay penalties, and/or failure to make estimated tax payments penalties) otherwise due, but not met, from January 20, 2020 to July 9, 2023, the Kwong case would support the argument that such tax-related obligation was in fact postponed until July 10, 2023 and such paid penalties should be subject to a claim for refund. These arguments could also be applied to abate accrued or assessed, but unpaid, interest and penalties arising from such tax-related obligations. It should be noted that it is not a requirement that the failure to meet the applicable tax-related obligation is attributable to the COVID-19 pandemic; as long as the interest and penalties were incurred from January 20, 2020 to July 9, 2023, the Kwong case can support a claim for refund.
The government has recently filed an appeal of the Kwong decision. While there is a Tax Court case, Abdo v. Commissioner, 162 T.C. 148 (2024), that generally supports the reasoning of the Kwong case (the Abdo case is cited in the Kwong decision with the description, “reasoning that section 7508A gave taxpayers an automatic postponement of section 6532’s deadlines”), because of the government’s appeal, it cannot be stated that the Kwong decision is settled law. This uncertainty creates a problem for taxpayers considering filing a claim for tax refund of interest and penalties under the Kwong decision.
Internal Revenue Code Section 6511(a) is considered the general statutory authority to determine the deadline to file an administrative claim for refund of taxes, interest, and penalties. Internal Revenue Code Section 6511(a) generally provides that a claim for refund “shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid”. In addition, Internal Revenue Code 6513(a) provides, “For purposes of section 6511, any return filed before the last day prescribed for the filing thereof shall be considered as filed on such last day”. Based on the Kwong decision in effect postponing “the last day” for filing a return until July 10, 2023, the combined impact of Internal Revenue Code Sections 6511(a) and 6513(a) has been interpreted that a claim for refund “shall be filed by the taxpayer within 3 years from [July 10, 2023] or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid”. Unless if a taxpayer can qualify for the “2 years from the time the tax was paid” language of Internal Revenue Code Section 6511(a), the taxpayer, relying on the Kwong decision, must file a claim for refund within 3 years after July 10, 2023, or before July 10, 2026. However, the appeal of the Kwong decision will not be resolved, and thus the law will remain uncertain, by July 10, 2026. What should a taxpayer do?
The answer is that a taxpayer seeking a tax refund of interest and penalties based on the Kwong decision should file a “Protective Claim for Refund” before July 10, 2026. It is important to recognize that the Internal Revenue Service will not independently advise you that you are eligible for a tax refund of interest and penalties based on the Kwong decision; instead, you must first determine your eligibility and then claim your refund by filing a “Protective Claim for Refund”. A “Protective Claim for Refund” is essentially a request to the Internal Revenue Service to preserve a taxpayer’s right to a refund when the refund is contingent on some future event (in this case, the resolution of the appeal in the Kwong case). You need to file a “Protective Claim for Refund” on Internal Revenue Service Form 843. You should write “Protective Refund Claim Pursuant to Kwong Case” or similar language at the top of the Form 843 and then explain, citing your specifically applicable facts, why you are entitled to refund relief under the Kwong case. You should attach Internal Revenue Service transcripts and other evidence to show what interest and penalties you paid and when you paid such interest and penalties, as well as that such interest and penalties arose from tax-related obligations during the applicable “Kwong time period” of January 20, 2020 to July 9, 2023. The “Protective Claim for Refund” should comply with the requirements in the Instructions for Form 843 and Regulations Section 301.6402-2, including that a separate “Protective Claim for Refund” should be filed for each tax-related obligation and for each taxable period. Unfortunately, a “Protective Claim of Refund” on Form 843 cannot be filed electronically; it should be sent by mail (preferably by certified mail, return receipt requested) before July 10, 2026 to the applicable Internal Revenue Service address described on the Instructions for Form 843.
It has been estimated that millions of taxpayers may be entitled to tax refunds or abatements because of the Kwong case. While we cannot know the final outcome of the appeal in the Kwong case, we can strongly recommend that if you believe you can qualify for a tax refund of interest and penalties based on the Kwong case, to protect your rights, it is critical that you file a “Protective Claim for Refund” before July 10, 2026.
If you have any questions concerning the Kwong case or filing a “Protective Claim for Refund” based on the Kwong case before July 10, 2026, please discuss these issues with your advisers.
Note – Changes Made to Illinois Tax Law
As part of the fiscal year 2027 budget legislation approved in Illinois in June, 2026, there were several changes made to Illinois tax law. First, beginning with the tax year ending on or after December 31, 2027, the Illinois state tax corporate deduction for net operating losses will be limited to 15% (30% in 2028, 50% in 2029, 65% in 2030, and 80% in 2031) of net income or $500,000, whichever is greater. Second, beginning January 1, 2027, Illinois will charge a 10% tax on gross receipts from placing advertisements “conveyed through a digital interface or any other method of delivery . . . that use personal information about the people to whom the ads are being served” by companies with $1 million or more of annual cumulative gross receipts from targeted advertising services provided in Illinois. Third, beginning January 1, 2027, Illinois will tax digital assets (such as cryptocurrency) at the rate of .2% of the value of the digital asset involved in the exchange, transfer, and storage of “a digital asset as part of a business or on behalf of a customer who has entered into an agreement with a business for the provision of those services”; this tax will apply to any “digital asset broker”, including brokers with a physical presence in Illinois and brokers with at least $100,000 of annual digital asset business receipts. Fourth, beginning July 1, 2026, Illinois will impose a 15% tax on the adjusted “fantasy contest” receipts of “fantasy contest” operators. Fifth, beginning January 1, 2027, Illinois will collect monthly graduated fees (called a fee, but generally characterizable as a “quasi-tax”) from social media platforms tied to their Illinois users; the fees would start at $.10 per user per month for social media platforms with 100,000 to 499,999 Illinois users and increase to maximum fees of $165,000 plus $.50 for each user per month above 1,000,000 Illinois users for social media platforms with 1,000,000 or more Illinois users.
If you have any questions concerning the changes made in Illinois state taxation as a result of the fiscal year 2027 budget legislation approved in Illinois in June, 2026, please discuss these issues with your advisers.