The Tax Navigator – IRS Penalty and Interest Refunds: What the Kwong Case Means for COVID-Era Taxpayers

In this episode of The Tax Navigator, Sean Muller and Dawn Rhea discuss the Kwong case and how it may affect IRS penalties and interest assessed during the COVID-19 disaster period. They break down what the ruling says, which taxpayers may be impacted and how the potential refund opportunity works, along with the July 10, 2026, deadline to file protective claims. They also highlight key considerations for taxpayers as the case remains under appeal and why it’s important to evaluate whether action is needed.

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Detailed Description of The Tax Navigator – IRS Penalty and Interest Refunds: What the Kwong Case Means for COVID-Era Taxpayers

00:00:00
Sean: I’ve got Dawn Rhea joining me today who leads our controversy practice, energy credits and any number of other things. Lots of articles in The Wall Street Journal — an article about a case that just settled the last couple months and just got appealed, the Kwong ruling.

00:00:14
Sean: What does it mean, and what are all these billions of dollars that taxpayers could be entitled to?

00:00:18
Dawn: Okay. Thanks, Sean, and thanks for keeping up with The Wall Street Journal.

00:00:22
Sean: It’s the little things in life.

00:00:24
Dawn: When tax hits the Journal, it’s either going to be something really great or something really bad, right? So, the Kwong case is a federal court of claims case where some taxpayers got really inventive in thinking about what do federally declared disasters mean when we’re talking about taxes.

00:00:40
Dawn: What was interesting about the Kwong decision, and why it’s such a big deal and why it’s smattered all over your The Wall Street Journal read, is that the holding in Kwong is basically that, under some obscure Treasury regulations around disasters, you get to exclude this extended period of time where the service, under Kwong, which Sean mentioned, has been appealed.

00:01:02
Sean: Yep.

00:01:03
Dawn: — Can’t assess penalties and interest. And that extended period of time is January 2020 all the way out until, technically, July 10, 2023.

00:01:12
Sean: Okay. So we have a dark period between Jan. 20, 2020, all the way through July 10, 2023, where the position is the IRS can’t charge any sort of penalties for late filing, interest, penalties, any of those different things for that period of time.

00:01:30
Dawn: And I think the other thing that taxpayers should look at is to look beyond your income tax forms, right?

00:01:33
Sean: Okay.

00:01:34
Dawn: Were you assessed penalties and interest on payroll? Were you assessed penalties and interest on those Affordable Care Act forms known as Forms 1095 and 1094?

00:01:42
Dawn: So really think about this overall holistically — were you, as a taxpayer, assessed penalties and interest during what is known as those 1,268 magical days of Kwong? And think about, are there enough dollars on the table? Should I do anything about it?

00:01:57
Sean: Well, it’s a shout out to Brian Thomas in my past life on PPP loans and the ERC. Can I get my interest back from the SBA for my PPP loans under this provision?

00:02:10
Dawn: I’m going to go with no.

00:02:11
Sean: That’s a dumb question, but we’re talking about government interest appeals. The SBA is a government entity. I’m just checking. I mean, if we can get that interest back —

00:02:19
Dawn: So, it definitely does apply — it’s a great question. Thank you so much. It actually really is a great question. I could totally see it coming up.

00:02:24
Dawn: But it really does apply to a very specific set of taxpayers and tax additions to tax, and that’s under Internal Revenue Code Section 7508A, subsection (d). So, great question. Unfortunately, it is tax in addition to tax, and that is very defined in the code.

But I do appreciate the creativity on your PPP loan.

00:02:48
Sean: Well, I’m trying here. So well, we can’t get the tax. We can get the interest and penalties back during this period.

00:02:53
Dawn: Correct.

00:02:54
Sean: But the problem is we’ve got a ticking time bomb coming 45 days from now.

00:02:58
Dawn: Correct.

00:02:59
Sean: If we’re going to do this without any guarantees, right?

00:03:00
Dawn: Who knows if you’ll ever see the money?

00:03:03
Sean: But what’s the significance of July 10, 2026?

00:03:05
Dawn: The great, great question. So, if we take the Kwong decision and the Kwong says, “Hello. You, IRS, really shouldn’t be assessing any penalties or interest all the way until July 10, 2023.”

00:03:18
Dawn: What the magic is based on that argument, then you have a three-year statute of limitations, as Sean noted — a ticking time bomb — three years from July 10, 2023, which brings you to July 10, 2026, to file these protective claims and perhaps get in the queue to get this money back.

00:03:36
Sean: And this is for 2020, 2021 and 2022 returns?

00:03:41
Dawn: For part of 2022.

00:03:42
Sean: Part of 2022, yeah. But 2021 returns and part of 2022?

00:03:44
Dawn: Correct. And 2020.

00:03:46
Sean: And so we thought the statute had closed on some of these returns as well, and we were done with it. But now this has been opened back up as well because of Kwong and this potential protective claim.

00:03:55
Dawn: Correct. And the reason Sean’s using the language “protective claim,” and it would be a protective claim for a refund if you paid it or an abatement if you didn’t pay, is because, as Sean noted, this case is being appealed.

So, it is an unsettled area of law that everyone should stay tuned for.

00:04:13
Sean: But we have to file if you have any chance of getting the money back. So, action items for taxpayers are to talk to their accountants, probably avoid those calls from random strangers about this stuff, but talk to their tax preparers and find out if they had some penalties and interest during that time frame and see if it’s worthwhile — if you want to file a claim.

00:04:31
Dawn: And then I also think avoid the “two minutes to see if you have any refund under Kwong.” And the reason is, number one, it takes a little bit longer than two minutes. And number two, those are probably the same as Sean alluded to — the ERC and other shops that just sprung to life and miraculously were out of business right afterwards.

So, they’re not going to be generally available to help in the process.

00:04:57
Sean: All right. In our next episode, we’re going to talk about actually what you have to do to file for this protective claim.

But we want to just educate you on what Kwong is and what it means to follow that The Wall Street Journal article. So thanks.

00:05:08
Dawn: Thank you so much.

This episode of The Tax Navigator was recorded prior to publication. Some references or updates discussed may reflect information current as of the recording date.

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