Important Tax Update: Court Decision May Allow Refunds of Interest and Penalties from 2020–2023

Important Tax Update: Potential Refund Opportunity for 2020–2023 Interest & Penalties

Article Written by Biana Mester, EA

A recent federal court decision—Kwong v. United States—may create a significant opportunity for taxpayers to recover IRS penalties and interest assessed during the COVID‑19 period.

Because this ruling is broadly applicable, it could impact many taxpayers, including those who filed Employee Retention Credit (ERC) claims, amended returns, or experienced filing or payment delays during the pandemic years.

Action may be required before July 10, 2026.

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What the Court Decided

The U.S. Court of Federal Claims determined that federal tax filing and payment deadlines were automatically postponed for the COVID‑19 disaster period:

January 20, 2020 – July 10, 2023

Under this interpretation, affected tax obligations were not due until July 11, 2023. As a result:

• Penalties should not have accrued, and
• Underpayment interest may have been improperly charged

during this timeframe.

Several national tax authorities (including Thomson Reuters and the Taxpayer Advocate Service) have indicated that this decision could have wide‑ranging implications for taxpayers nationwide.

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Who May Be Affected BY THE TAX COURT’S DECISION ON PENALTIES & iNTEREST?

This opportunity extends well beyond ERC filers. You may be eligible if you had any tax filing, payment, or compliance activity between 2020 and 2023.

1. Businesses That Filed ERC Amended Returns

Companies that filed Form 941‑X to claim the ERC often triggered:

• Amended income tax filings
• Additional tax liabilities
• Interest assessments
• Late filing or payment penalties

These charges may now be eligible for refund or abatement.

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2. Individuals with Amended Returns (Including Pass‑Through Owners)

Owners of partnerships and S corporations who amended 2020–2021 returns due to ERC adjustments may have incurred interest.

• Interest charged between 1/20/2020 and 7/10/2023 may now be invalid
• This applies even if ERC refund interest was received, as these are separate calculations

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3. Taxpayers Who Filed Returns Late

If you filed late for tax years:

• 2019, 2020, 2021, or 2022

You may have incurred:

• Failure‑to‑file penalties
• Failure‑to‑pay penalties

These may now be recoverable.

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4. Taxpayers in Installment Agreements or Collections

Many taxpayers entered payment plans or collections during the pandemic.

• Interest and penalties accrued during the disaster period may now be subject to refund or removal

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5. Business with payroll tax penalties

Employers that incurred:

• Late deposit penalties
• Failure‑to‑deposit penalties
• Payroll tax interest

during this period may qualify for relief or refunds.

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6. Previously “Late” Refund Claims or Amended Filings

The ruling may effectively extend the statute of limitations for:

• Income tax refund claims
• Payroll tax refund claims
• ERC claims
• Other pandemic‑era filings

Certain claims previously considered time‑barred may now be valid through July 10, 2026.

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7. interest caused by irs processing delays 

IRS backlogs during COVID‑19 caused delays that led to interest charges for many taxpayers.

• This interest may now be refundable under the court’s interpretation

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IS THERE A Deadline to Act ON CLAIMING A REFUND OF PENALTIES AND INTEREST?

To preserve your rights, refund or abatement claims should generally be filed by:

July 10, 2026 

Submitting a protective claim is recommended, especially while a potential government appeal is pending.

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wHAT ARE A TAXPAYER’S Next Steps TO CLAIM A REFUND?

We recommend taking the following actions:

1. Review IRS account transcripts (2019–2023)
2. Identify penalties and interest assessed during the disaster period
3. Evaluate amended returns, including ERC‑related filings
4. Consider filing Form 843 (Claim for Refund and Request for Abatement)
5. Submit protective claims before July 10, 2026

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We’re Here to Help

Our firm is actively reviewing client accounts to identify refund opportunities related to the Kwong decision.

If you filed ERC claims, amended returns, or had IRS activity during the pandemic years, we encourage you to contact us. We can help determine whether you may be entitled to:

• Refunds of interest and penalties, or
• Abatement of improperly assessed charges