Is a refund due? A recent court case extended the time to claim one, but time may be running out.
getty
A federal court case decided late last year prompts taxpayers to consider applying for a refund in 2026. The ruling in Kwong v. United States that certain tax deadlines should have been suspended for the entire time the pandemic was considered a federal disaster — plus 60 days — means the time to apply for a refund or reduction may still be open.
The potential extension opened the door for taxpayers, including individuals and businesses, to recover IRS penalties and interest assessed during the COVID-19 disaster period. For most taxpayers, the deadline for filing refund or reduction claims is now July 10, 2026.
Do you think you might be owed some money? Here’s what you need to know.
Facts of Kwong v. United States
The case was brought by Terry Kwong, an individual taxpayer in California. His case began long before the pandemic. Kwong was advised of a loss carryforward related to a transaction that began in 2005. Years later, the IRS reduced the amount of the loss, and the subsequent adjustment resulted in the loss being exhausted in the 2005 and 2006 tax years.
Since Kwong anticipated that the loss would be sufficient to cover future years’ taxes, he failed to timely resolve his tax liabilities for 2007, 2010, and 2011 (he also failed to timely file his 2010 and 2011 federal income tax returns). As a result, he was assessed failure to file and failure to pay penalties for tax years 2007, 2010 and 2011.
Kwong hired a new accountant and filed and paid his 2015 taxes on time. The IRS, however, carried over his entire payment to another tax year (to satisfy the outstanding balance) and assessed significant delinquency penalties.
For the tax year 2016, the same was done. Kwong’s 2016 individual federal income tax return was timely filed and he paid the tax due. The IRS again carried the entire payment to another tax year and assessed significant delinquency penalties.
When he found out what happened, he met with the IRS and arranged to pay his tax liabilities in full for the years 2007, 2010, 2011, 2015 and 2016. Then in 2020, Kwong filed for a refund of the penalties and interest for those years on the grounds that he acted with reasonable cause and in good faith. The IRS rejected his claims in September and October 2020.
Kwong filed a refund lawsuit in 2023. The case was filed in the United States Court of Federal Claims (COFC), a specialized federal court authorized by the Constitution. Unlike federal district courts, which handle a wide range of civil and criminal cases, the COFC focuses exclusively on monetary claims against the government. And, in particular, the court has national jurisdiction over federal tax refund actions.
Judge Edward J. Meyers, who was appointed to the court in 2020 by President Donald Trump, was assigned to the matter.
Arguments and Procedure
Under section 6532 of the Internal Revenue Code, a taxpayer has two years from the date the IRS sends a Notice of Prohibition to file a lawsuit in federal court. Kwong didn’t file suit until February 2023, more than two years after the IRS rejected his claims. As a result, the government filed a motion for summary judgment, arguing that the claims were untimely because Kwong waited too long.
Summary judgment is a decision made by a court for one party and against another. In a civil case, it is triggered by a pretrial motion that asks the court to rule on the merits of the case. Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment is appropriate when there is no dispute as to any material fact and the party seeking the motion is entitled to judgment as a matter of law.
Myers disagreed with the government. Instead, it ruled in favor of the taxpayer, finding that the action was timely.
Tax Department Code 7508A
Key to the government’s case was section 7508A, which provides relief to taxpayers affected by federal disasters by postponing certain federal tax deadlines, including deadlines for filing tax returns and claiming refunds.
The government pointed to its own COVID-19 relief notices, including the 2020-23 Notice, which only extended the deadlines by a few months in 2020. And the government further argued that Section 7508A was discretionary, meaning the Treasury Secretary had the ability to make those decisions.
Meyers found this to be a misreading of the statute. Rather, it held that Congress used the word “shall,” which is mandatory and not discretionary. That means, he ruled, that those tax deadlines — including those tied to refunds — apply to the entirety of a federal disaster plus 60 days.
In the US, the pandemic was officially a federal disaster from January 20, 2020 to May 11, 2023, for federal tax purposes. That would mean the law automatically tolls the statute of limitations for that period plus 60 days, extending the window to July 10, 2023.
For Kwong, this meant that the time to file his Section 6532 action had run out and the clock did not start ticking again until July 2023. In other words, his filing was not late.
Result for Kwong
It wasn’t a complete victory for Kwong. The finding was not a decision on the merits of his case – he was simply allowed to file it and move on.
When the case was settled in 2026, he ended up walking away with $84,000 plus interest for his 2007 tax year. He got nothing back for 2010, 2011, 2015 or 2016. And he wasn’t awarded costs or attorneys’ fees. (My guess is that he probably spent as much as he recovered on attorney fees alone.)
What about Abdo?
Although Kwong is getting all the attention, it was not the first case to examine how Section 7508A was applied during the pandemic. In the case of Abdo v Commissioner 162 TC No. 7 (April 2, 2024), the US Tax Court reached a similar decision. In its decision for the taxpayers, the Court found that, pursuant to section 7508A, an automatic grace period applied, making the taxpayers’ petition timely.
Notably, both Abdo and Kwong relied on Loper Bright to decline to defer to IRS guidance and instead looked exclusively to the statute. Loper Bright Enterprises v. Raimondo (2024) is a Supreme Court decision that overturned the longstanding Chevron deference doctrine, which required courts to defer to a federal agency’s reasonable interpretation of ambiguous statutes. Before Loper Bright, a court likely would have deferred to the IRS’s argument that managing the pandemic required administrative flexibility. After Loper Bright, the administrative needs of the IRS no longer go beyond the literal text of the tax code.
Congress enters
Realizing that there was some ambiguity, Congress updated section 7508A on November 15, 2021, changing the formula so that extensions for new disasters are much shorter (essentially limiting most deferral periods to 60 days). However, in Kwong, Meyers expressly ruled that this limitation of the law in 2021 does not apply retroactively to the pandemic, since it occurred before the law changed.
What does it mean for taxpayers?
While Kwong didn’t leave the outright winner, tax businesses and taxpayers see an opportunity. Since Meyers ruled that section 7508A automatically extended the deadlines for filing and paying federal taxes for the entire federally declared disaster period — plus 60 days — that extends the window for many taxpayers to file for refunds.
The argument is that any failure-to-file or failure-to-pay penalties or underpayment interest on taxes accrued between January 20, 2020 and July 10, 2023, should never have accrued because the statutory due date was moved. If you were charged any of these penalties or interest during this period, it means you may be eligible for a refund or reduction.
For most taxpayers, this means the deadline for filing refund or reduction claims is July 10, 2026.
What to consider
The Kwong decision is not exactly final. The government can (and probably will) appeal to the Federal Circuit. If a higher court reverses it, any claim for a refund based on the decision will be dismissed.
But if you don’t apply for a refund by the deadline and the decision stands, you’re barred from making a claim, which means that even if you’re right, it’s too late to get your money back.
That’s why many companies encourage taxpayers to file a protective claim for refund using Form 843. A protective claim is used to preserve the taxpayer’s right to a future refund when that right depends on events that may not be resolved after the standard statute of limitations has expired. In the Kwong context, protective claims make sense because the IRS is expected to appeal. Filing a protection claim freezes the statute of limitations, meaning you remain potentially eligible for a refund if the Kwong decision is upheld.
But remember, the chance to bring the suit doesn’t mean you’ll win everything you ask for. Kwong is a good example of how it can work.
Your best bet? Check your tax transcripts for penalty codes 160 (failure to file) and 166 (failure to pay) that may appear during the claims window. If these amounts are large, talk to a reputable tax firm who can review the merits of your claims and help you decide if you have a case.
