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IRS Penalty Refunds: What the Kwong Ruling Means for Your Wallet

If you found yourself paying the IRS strictly for penalties and interest during the chaos of the COVID-19 pandemic, there is a significant development you need to know about. A recent court decision might put that money back in your pocket.

The U.S. Court of Federal Claims recently issued a ruling in Kwong vs. United States that challenges how the IRS handled deadlines during the pandemic. For our clients here in Las Vegas and across the country—especially business owners and self-employed individuals who felt the cash flow crunch during those years—this decision could be a game-changer. It potentially opens the door to refunds for penalties assessed between 2020 and 2023.

The Breakdown of Kwong vs. U.S.

At the heart of this case is a disagreement over timing. In Kwong vs. U.S., the court determined that Internal Revenue Code Section 7508A(d) mandated an automatic extension of tax deadlines during the federally declared disaster of COVID-19. While the IRS argued these extensions were discretionary and limited to one year, the court ruled that the law required the extension to last for the duration of the disaster incident period.

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The bottom line: The court found that tax deadlines were effectively moved to July 10, 2023. This covers the period starting from January 20, 2020.

Why This Matters for Your Tax Liability

If the legal deadline to file and pay was pushed to July 2023, then "failure-to-file" or "failure-to-pay" penalties charged before that date may have been applied incorrectly. Whether you are a local business owner or managing personal finances, if you paid penalties on 2019, 2020, 2021, or 2022 returns before the disaster period ended, those charges could be invalid.

Strategic Steps for Tax Resolution

Since the IRS may appeal this decision, we are advising a proactive approach known as a "protective claim." This acts as a placeholder to preserve your right to a refund while the legal process plays out. Here is the roadmap for moving forward:

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  • Analyze Your Tax Transcripts: First, we need to see exactly what you were charged. Look for penalty assessments dated between January 20, 2020, and July 10, 2023. You can access these via the Get Transcript tool on IRS.gov. If interpreting these codes feels like reading a foreign language, our office can pull and review them for you.

  • File a Protective Claim (Form 843): To stop the statute of limitations from expiring, you should file a Claim for Refund and Request for Abatement. This formally puts the IRS on notice that you are seeking a return of penalties and interest based on the Kwong precedent.

  • Leverage Penalty Abatement: Even if you still have an outstanding balance, the Kwong ruling can be cited as justification for removing penalties currently on your account.

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Deadlines You Cannot Miss

Tax resolution is often about timing. According to the ruling, claims related to this decision generally must be filed within three years of the legally recognized deadline. This sets a hard cutoff for filing your claim by July 10, 2026.

Additionally, looking ahead to future tax planning, the IRS plans to automate First-Time Abatement (FTA) for eligible taxpayers starting in 2026, offering another layer of potential relief.

Let Us Handle the Heavy Lifting

While the government decides whether to appeal, you shouldn't sit on the sidelines. We specialize in providing the personal attention necessary to navigate these complex tax resolution issues. If you suspect you paid substantial penalties during the pandemic, don't leave that money on the table.

Contact our office today. We can review your transcripts, determine your eligibility, and file the necessary protective claims to ensure your rights—and your refund—are secured.

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