Focus Pixel Art | Moment | Getty Images
For most filers, the tax deadline has come and gone. But thanks to a federal court decision, millions of Americans could still be eligible for tax refunds for pandemic-era penalties and interest.
The issue stems from recent rulings, including Kwong v. United States, which found that the IRS shouldn’t have assessed certain penalties and interest from Jan. 20, 2020, through July 10, 2023, That includes the Covid-19 federal disaster period through May 11, 2023, plus an extra 60 days. The court decision was based on an interpretation of a tax code provision that governs postponed filing and payment deadlines during a disaster.
If taxpayers filed returns and paid taxes on time, they generally have three years after the filing deadline to claim unpaid refunds, which brings the due date to July 10, 2026.
The court decision isn’t final, and the government could still appeal it.
But should the decision stand, it may offer a “major refund opportunity” for some filers, National Taxpayer Advocate Erin Collins wrote in an April 30 blog post. Collins heads the Taxpayer Advocate Service, an independent organization within the IRS.
Relief won’t happen automatically, and impacted taxpayers generally must take action by July 10 to receive a possible refund or abatement, which is a penalty waiver, Collins wrote.
Taxpayers can rack up IRS penalties plus interest for missing tax filing and payment deadlines. The failure-to-file penalty is 5% of your unpaid taxes monthly, up to 25%, while the failure-to-pay penalty is 0.5% of your balance monthly, with the same cap.
The Kwong v. United States decision could impact taxpayers who incurred penalties for late filing or failure to pay taxes, including estimated tax payments and interest.
“This issue is widespread and not limited to a small or specialized group of taxpayers.”
Erin Collins
National taxpayer advocate
“This issue is widespread and not limited to a small or specialized group of taxpayers,” Collins wrote in a second blog post on May 5. “Impacted taxpayers represent a broad cross-section of the public, including individuals, small businesses, large corporations, estates and trusts.”
During fiscal year 2023, the IRS assessed more than 14.2 million individual estimated tax penalties and roughly 18.6 million penalties for failure to pay, according to the agency’s latest data. However, some filers received penalty abatement.
How to claim your tax refund
With the July 10 deadline about two months away, some tax professionals are racing to inform clients about possible refunds or penalty abatement.
“These cases have opened the door to what could become one of the largest waves of tax refund claims in recent years,” tax consultant Victoria Boon of Boon Tax Educators told CNBC.
“But the outcome remains uncertain, and taxpayers must act quickly to preserve their rights while the legal landscape continues to develop,” said Boon, who spent more than 20 years working for the IRS.
You can use tax transcriptions in an IRS online account to see if the agency charged you eligible penalties or interest from Jan. 20, 2020, through July 11, 2023, according to Collins. She included instructions and an example in her May 5 blog post.
Most taxpayers can use Form 843 to request a refund or abatement, but it can’t be filed electronically and must be mailed, Collins wrote. She recommends sending the form via certified mail for proof that it was submitted before the deadline.
If you have already paid penalties and interest, you will ask the IRS for a refund; unpaid balances will require an abatement request, she wrote in a third blog post on May 7.
A “protective claim” can help preserve rights to a refund when a law isn’t finalized, Collins wrote. But first, “taxpayers should consult a trusted tax professional, review IRS guidance and retain documentation supporting your position.”
