Landmark US Court Ruling May Let Taxpayers Reclaim Penalties and Interest
If you paid the IRS tax penalties and interest during the COVID-19 pandemic, this article includes important information on how you may be able to recover those amounts because of a recent court case.
The landmark ruling in Kwong vs. United States by the U.S. Court of Federal Claims has potentially significant implications for taxpayers, particularly those who incurred federal tax penalties and interest during the COVID-19 pandemic. This decision may pave the way for many taxpayers to claim refunds for penalties and interest charges previously assessed during this period. Here, we will explore what this case means for you, what action you might need to take, and the importance of filing a protective claim to preserve your rights.
The Core of the Kwong vs. U.S. Decision - In Kwong vs. U.S., the court ruled that the 2019 version of Internal Revenue Code Section 7508A(d) provides a mandatory, automatic extension of tax deadlines during a federally declared disaster. This specific case deals with the COVID-19 pandemic, during which these extensions spanned from January 20, 2020, to July 10, 2023. The court rejected the IRS's stance that extensions could only last for one year, thereby potentially nullifying certain penalties and interest accrued during that extended period.
What This Means for Taxpayers - The significant takeaway from this decision is that the legal deadlines for paying taxes were effectively moved to July 10, 2023. Consequently, "failure-to-file" or "failure-to-pay" penalties assessed between 2020 and 2023 could have been wrongly imposed. This opens the door for taxpayers to seek refunds for these penalties.
Key Actions for Affected Taxpayers:
Review Your Taxpayer Account Transcripts: It is crucial to check for any penalties or interest charges that were assessed on your accounts for deadlines occurring between January 20, 2020, and July 10, 2023.
Tax transcripts can be ordered from the IRS for free via the online Get Transcript tool on IRS.gov, by mail using Form 4506-T, or by calling 800-908-9946. The fastest method is ordering online for immediate download. You will need to create an account and verify your identity. If you need assistance contact our office.File a Protective Refund Claim: Given the potential that the government will appeal the Kwong case, and to safeguard your rights while the appeal is ongoing, taxpayers should file a Claim for Refund and Request for Abatement on Form 843. This form allows you to claim a refund or request the abatement of penalties and interest.
Request Penalty Abatement: If you still owe penalties from this period, you can use the ruling in the Kwong decision as justification for an abatement request.
Leverage New Automatic Relief: Beginning in 2026, the IRS plans to apply First-Time Abatement (FTA) of certain penalties automatically to eligible taxpayers with a clean three-year history. This presents an alternative route for removing penalties.
Filing a Protective Claim -It's vital to understand that although the Kwong ruling is currently in effect, the IRS may appeal this decision. Filing a protective claim ensures that your rights to potential refunds remain preserved during the appeal process. Such claims act as placeholders, preventing the statute of limitations from expiring while legal proceedings continue.
Deadlines and Expiration - According to the ruling, any claims for refunds related to this decision need to be filed within three years from the legally recognized deadline of July 11, 2023. This means that the final day to submit claims to the IRS is July 10, 2026.
Conclusion: Preparing Your Next Steps – If you are a taxpayer potentially impacted by the Kwong vs. U.S. decision, staying informed and proactive is crucial. Review your past tax records and if the penalties and interest are substantial enough, consult with this office to ensure a protective claim is filed to preserve your potential refund. While the possibility of an IRS appeal looms, taking these steps now could save you from losing out on refunds due to the expiration of the statute of limitations.
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