A Taxpayer-Favorable COVID Deadline Case With Potential Refund and Penalty Implications
A recent Court of Federal Claims decision, Kwong v. United States, could matter for taxpayers who assumed certain refund claims, refund suits, or penalty challenges became untimely during the COVID period. The court held that the pre-2021 version of Internal Revenue Code section 7508A(d) automatically postponed certain federal tax deadlines for qualified taxpayers during the COVID disaster period, and that for the taxpayer in the case, the postponement ran through July 10, 2023 [2].
Although the decision is favorable to taxpayers, it is not the last word. It is a trial-court decision, not binding nationwide, and it conflicts with the IRS’s narrower reading of the statute reflected in its regulations [2]. Still, the case is important because it offers a substantial statutory argument for taxpayers whose deadlines fell during the COVID disaster period.
What happened in Kwong
The taxpayer sought refunds of penalties for several tax years. For 2007, 2010, and 2011, the IRS had mailed notices disallowing his refund claims in September and October 2020. Under IRC section 6532(a), a taxpayer generally must file a refund suit within two years after the IRS mails a notice of disallowance [2].
The taxpayer did not file suit until February 2023, which ordinarily would have been too late. But the court held the suit was timely because the 2019 version of IRC section 7508A(d) automatically postponed the running of that deadline during the COVID disaster period [2].
At the time relevant to the case, section 7508A contained two different disaster-relief mechanisms:
- IRC section 7508A(a) allowed the Secretary to specify a period of up to one year to be disregarded for affected taxpayers in determining whether certain acts were timely performed and in determining the amount of interest, penalties, additions to tax, and credits or refunds [1].
- Former IRC section 7508A(d) provided a mandatory postponement period for qualified taxpayers in a disaster area [2].
The court read the 2019 version of section 7508A(d) according to its text. Under that version, the disregarded period began on the earliest incident date specified in the disaster declaration and ended 60 days after the latest incident date specified in the declaration [2]. Because the COVID disaster declaration for California began January 20, 2020 and later was closed effective May 11, 2023, the court concluded that the mandatory postponement ran through July 10, 2023 [2].
That meant the taxpayer’s February 2023 refund suit was timely [2].
Why the decision is notable
The most significant part of Kwong is the court’s rejection of the government’s narrower interpretation of former section 7508A(d). The government argued, among other things, that the later 2021 amendment should control or that the earlier statute should not be read to create such a long postponement period [2].
The court disagreed. It held that the 2021 amendment did not apply because Congress made that amendment effective only for federally declared disasters declared after enactment, and COVID-19 had been declared in early 2020 [2]. The court also concluded that the IRS regulation limiting the mandatory postponement period to no more than one year misread the statute, because the one-year cap in section 7508A(a) did not limit the separate mandatory rule in former section 7508A(d) [2].
Current law is different. IRC section 7508A now provides a mandatory 120-day extension for qualified taxpayers, ending 120 days after the later of the earliest incident date or the declaration date [1]. That current rule matters for present and future disasters, but Kwong is important because it interprets the older statutory language that applied to COVID-era declarations [2].
Potential implications for taxpayers
Kwong may affect taxpayers in several ways.
First, it may support arguments that certain refund suits thought to be barred under IRC section 6532(a) were actually timely if the two-year suit period overlapped the COVID disaster postponement period [2].
Second, it may support refund-claim timing arguments more broadly. IRC section 7508A(a) expressly applies to determining the amount of any credit or refund, and the statute is designed to disregard certain periods for affected taxpayers [1]. If a taxpayer’s filing deadline or refund-related deadline fell during the COVID disaster period, Kwong provides authority for arguing that the deadline remained open longer than the IRS may have assumed [2].
Third, the case may have implications for penalties tied directly to missed deadlines. Because section 7508A(a) applies to the amount of any interest, penalty, additional amount, or addition to tax for periods after the disaster date, a taxpayer may argue that a penalty based on a missed filing or payment deadline should be reduced or abated if the underlying deadline was postponed [1]. That argument is strongest where the penalty depends on whether a return or payment was late.
Important limits
Kwong is favorable, but it is not a blanket taxpayer win.
The court ruled against the taxpayer on other issues. It held that the IRS properly applied the taxpayer’s 2016 overpayment to his outstanding 2007 liability under IRC section 6402(a), which permits the Secretary to credit an overpayment against any internal revenue tax liability of the person who made the overpayment [2]. The court also held that any separate refund challenge to that transfer was untimely under IRC section 6511(a), because under IRC section 7422(d) the credit is treated as a payment of the earlier year’s liability when the credit is allowed [2].
The court also rejected the taxpayer’s challenge to a 2016 estimated tax penalty under IRC section 6654. That part of the opinion is a useful reminder that not all penalties are treated the same way. The court explained that section 6654 estimated tax penalties do not have a general reasonable-cause exception. Instead, relief is limited to the specific statutory exceptions in section 6654(e), such as owing less than $1,000, having no prior-year tax liability, certain unusual circumstances, or retirement or disability [2]. By contrast, penalties under IRC section 6651 may be waived if the taxpayer shows reasonable cause and lack of willful neglect [2].
So the practical effect of Kwong depends on the type of deadline and the type of penalty involved.
What taxpayers should take from the case
For taxpayers and advisors, the main takeaway is that some COVID-period deadlines may deserve a second look. If a taxpayer concluded that a refund claim, refund suit, or deadline-based penalty issue was untimely because the normal statute had expired during the COVID period, Kwong may provide support for revisiting that conclusion [2].
At the same time, the case should be used carefully. It is a Court of Federal Claims decision, not controlling authority in every forum, and the IRS has taken a narrower view of the statute in its regulations [2]. In addition, the decision is tied to the pre-2021 version of section 7508A(d), not the current statutory text [2] [1].
Conclusion
Kwong v. United States is an important taxpayer-favorable decision because it interprets the pre-2021 version of IRC section 7508A(d) to provide a much longer automatic COVID-related postponement period than the IRS had recognized, extending certain deadlines through July 10, 2023 [2]. Its greatest significance is for taxpayers with refund suits, refund claims, or deadline-based penalty issues that may have been treated as untimely during the COVID disaster period. But the decision does not eliminate ordinary refund and penalty rules, and its broader impact will depend on whether other courts adopt the same reading of the statute [2] [1].
Cited sources
