The Kwong Case: Could the IRS Owe Penalty and Interest Refunds?

Editorial Note: This issue is still being fought. The IRS has not accepted the broad reading of the Kwong case, and the government has appealed.

Quick Answer

The Kwong case may give some taxpayers a chance to ask the IRS for a refund or removal of certain penalties and interest charged during the COVID disaster period. This is not automatic, and it is not guaranteed. Most taxpayers who may qualify need to file a protective refund claim, usually Form 843, by July 10, 2026, to protect their rights while the courts decide the issue.

What happened in the Kwong case?

Kwong v. United States is a federal court case about tax deadlines during the COVID-19 disaster period.

Terry Kwong had paid IRS penalties for older tax years. He later asked for those penalties to be refunded. The IRS denied some of his claims and said he waited too long to sue. Mr. Kwong argued that the COVID disaster relief rules gave him more time.

The Court of Federal Claims agreed with him on part of the case. The court said the COVID disaster period could postpone certain tax deadlines from January 20, 2020, through July 10, 2023. That made his lawsuit timely for some years. The court did not rule that every taxpayer automatically gets money back. It also did not rule in Mr. Kwong’s favor on every part of his case.

That is why this is important but uncertain. The case is still being fought, and the IRS does not agree with the broad refund argument.

Why could this matter to taxpayers?

Many IRS penalties and interest charges depend on a due date. For example, the IRS may charge a penalty because a return was filed late, tax was paid late, or estimated tax payments were not made on time.

The big question is this: If tax deadlines during the COVID disaster period were postponed until July 10, 2023, were some taxpayers really late?

If the courts say the IRS was wrong, some taxpayers may be able to recover penalties and interest they already paid. Others may be able to ask the IRS to remove penalties and interest they still owe.

What penalties and interest could be included?

The most likely items to review are federal IRS charges tied to a filing or payment deadline during the COVID disaster period. These may include:

• Failure-to-file penalties for filing a return late.
• Failure-to-pay penalties for paying tax late.
• Estimated tax penalties for individuals or businesses.
• Interest that may have started too early if the due date was postponed.
• Some overpayment interest issues if the IRS treated a return or claim as late.
• Certain information return penalties, depending on the facts.

This does not mean every penalty qualifies. The facts matter. The tax year matters. The type of penalty matters. The payment date also matters.

Could civil penalties, like 1099 penalties, be refunded?

Possibly, but this is an area where taxpayers should be careful.

Some civil penalties are tied to deadlines. For example, IRS information return penalties can apply when a business does not file information returns, such as Forms 1099, correctly and on time, or does not furnish payee statements correctly and on time.

Because those penalties are tied to due dates, a business that paid a penalty for late or incorrect 1099 filings during the affected period may want to review the notice, transcript, and penalty code. A protective claim may make sense in some cases.

However, Kwong is mainly about deadlines. If the penalty was not really tied to a postponed deadline, or if it involved intentional disregard, fraud, state taxes, FBAR penalties, or another issue outside the Internal Revenue Code, it may not fit. Also, the IRS may fight these claims unless a higher court or new IRS guidance says otherwise.

Who should take a closer look?

A taxpayer may want to review this if they:

• Filed a federal tax return late between January 20, 2020, and July 10, 2023.
• Paid federal tax late during that period.
• Paid an IRS failure-to-file, failure-to-pay, or estimated tax penalty.
• Paid IRS interest tied to a return or payment due during that period.
• Had IRS penalties for late information returns, such as certain 1099 or international reporting penalties.
• Still owes penalties or interest from that period.

This is federal tax only. State tax penalties and interest do not automatically qualify just because the federal case exists.

Important dates and deadlines

When could taxpayers actually see the money?

Taxpayers should not expect quick checks.

A protective claim is mainly a placeholder. It protects the taxpayer’s right to a refund while the legal issue is still being decided. The IRS often waits to act on protective claims until the legal issue is resolved. The Taxpayer Advocate has warned that this issue may take years to fully resolve.

A practical timeline could look like this:

• Now through July 10, 2026: Review IRS notices and transcripts. File Form 843 or another proper claim if needed.
• After filing: Keep proof of mailing and a full copy of the claim. The IRS may not act quickly.
• While the appeal is pending: Claims may be held or denied. The IRS currently disagrees with the broad refund position.
• If the IRS loses: The taxpayer may need to perfect the claim by giving exact amounts, transcripts, notices, and calculations.
• After final IRS processing: Refunds could include the penalty or interest paid, plus any overpayment interest the law allows. The timing could still be months after the legal issue is resolved.

In plain English: filing by the deadline may protect the right to money later, but it does not mean the taxpayer will receive money soon.

What should taxpayers do now?

1. Look for IRS notices from 2020 through 2023 that mention penalties or interest.
2. Review IRS account transcripts for penalty, interest, payment, and refund entries.
3. Identify the tax year, penalty type, penalty code, amount paid, and payment date.
4. Decide whether the claim should be a refund claim, a protective refund claim, or an abatement request.
5. Use the correct form and filing address. Many Kwong-related penalty and interest claims will use Form 843.
6. Mail the claim in a way that gives proof of mailing, such as certified mail with return receipt.
7. Keep a full copy of everything sent to the IRS.

Frequently Asked Questions

What is the Kwong case?

Kwong v. United States is a federal case about whether certain tax deadlines were postponed during the COVID disaster period. If the taxpayer-friendly view holds up, some IRS penalties and interest may have been charged too early or incorrectly.

Is a refund automatic?

No. Most taxpayers must file a refund claim or protective claim. The IRS is not expected to automatically send refunds at this time.

What is the deadline to file a Kwong-related claim?

For many affected taxpayers, the key deadline is July 10, 2026. Some taxpayers may have a later deadline if they paid the penalty or interest later, because the two-year-from-payment rule may apply.

What form do taxpayers use?

If the claim is for penalties or interest and not a change to the underlying tax return, many taxpayers will use IRS Form 843, Claim for Refund and Request for Abatement.

Could 1099 penalties qualify?

Possibly. If the penalty was tied to a deadline for filing or furnishing information returns during the affected period, it should be reviewed. But not all civil penalties will qualify.

When will taxpayers get the money if the IRS loses?

There is no firm date. Protective claims may be held while the courts decide the issue, and that could take years. If the IRS ultimately loses, taxpayers may still need to provide final amounts and supporting documents before payment.

Bottom line

The Kwong case could be a major issue for taxpayers who paid IRS penalties and interest during the COVID disaster period. But it is not settled, and the IRS is fighting it. The safest step for potentially affected taxpayers is to review their records now and file a timely claim if there is a good-faith basis to do so.

If you received IRS penalties or interest during 2020, 2021, 2022, or the first half of 2023, please contact our office. We can help review the issue and determine whether it may be worth protecting your rights before the deadline.