Legal Uncertainty Looms as IRS Appeals Kwong: A High-Stakes Battle Over COVID-Era Tax Refunds
The Internal Revenue Service (IRS) has officially escalated its legal battle regarding the interpretation of COVID-19-era disaster relief provisions. By filing a notice of appeal in the case of Kwong v. United States (179 Fed. Cl. 382, 2025), the government is seeking to overturn a lower court ruling that potentially unlocked billions of dollars in dormant tax refund claims.
At the heart of the dispute is Section 7508A(d) of the Internal Revenue Code, a provision enacted to provide the IRS with the authority to postpone tax filing and payment deadlines during federally declared disasters. The Court of Federal Claims previously held that this provision acted as an automatic, broad-reaching suspension of deadlines throughout the pandemic. If upheld, this interpretation could significantly extend the statute of limitations for filing refund claims for the tax years 2019 through 2022. However, with the National Taxpayer Advocate warning that the law remains in a state of flux, taxpayers are facing a complex strategic decision: whether to file "protective claims" before the window closes.
The Chronology of the Dispute
The controversy stems from the federal government’s broad response to the COVID-19 pandemic. To understand the current legal friction, one must track the timeline of both the disaster declaration and the subsequent litigation:
- January 20, 2020: The federal government identifies this date as the beginning of the COVID-19 disaster period for the purposes of Section 7508A(d).
- March 2020–July 2023: A series of administrative actions and legislative updates led to various filing extensions. The Court of Federal Claims in Kwong identified July 10, 2023, as the critical end-date for these suspensions.
- 2024: The Tax Court weighs in on related matters in Abdo v. Commissioner (162 T.C. 148), where the IRS maintained its narrow view that Section 7508A(d) is discretionary rather than automatic.
- 2025: The Court of Federal Claims issues its decision in Kwong, ruling in favor of the taxpayer and finding that the statutory language of 7508A(d) mandated a suspension of deadlines, effectively extending the time to file for refunds.
- May 2026: The IRS files a notice of appeal with the U.S. Court of Appeals for the Federal Circuit.
- July 10, 2026: A critical, self-imposed deadline noted by the National Taxpayer Advocate for taxpayers to consider filing protective claims while the legal landscape remains unsettled.
- July 20, 2026: The deadline for the IRS to submit its opening brief to the Federal Circuit, which will clarify the government’s legal strategy in the appeal.
Understanding Section 7508A(d)
Section 7508A(d) was designed to ensure the tax system remained functional during the unprecedented disruption of the pandemic. However, the statute’s phrasing has become the subject of intense debate.
The IRS argues that the statute grants the Treasury Secretary broad discretion to decide which specific deadlines are postponed and for what duration. From the perspective of the tax authorities, they did not intend for a blanket, multi-year extension of the standard three-year statute of limitations for refund claims. They contend that if the court were to read the law as an automatic, universal suspension, it would create administrative chaos and open the floodgates to stale claims that were never intended to be revived.
Conversely, the Kwong decision interprets the statute as a self-executing mechanism triggered by the disaster declaration. Under this reading, the specific period from January 20, 2020, to July 10, 2023, is "disregarded" in the calculation of filing deadlines. For a taxpayer who, under normal circumstances, would have faced a hard deadline to claim a refund, this interpretation provides a generous "pause button" that could extend their rights for several years.
Implications for Taxpayers: Beyond Penalties and Interest
While Kwong initially gained attention for its impact on penalties and interest—which were often assessed incorrectly during the pandemic—the implications are far more reaching. National Taxpayer Advocate Erin Collins has highlighted that this ruling potentially affects the eligibility for various refundable credits and stimulus payments.
The Statute of Limitations Conundrum
For millions of Americans, the standard three-year statute of limitations for filing a return to claim a refund is the "hard stop." Typically, if a taxpayer fails to file within three years of the original due date, the government keeps the money. The Kwong reasoning suggests that the COVID-19 disaster period may have extended this three-year window.
Consider the hypothetical taxpayer mentioned by the National Taxpayer Advocate: an individual who had taxes withheld from their 2020 wages but failed to file a 2020 return. Normally, the window for that refund would have closed. Under the Kwong interpretation, that taxpayer might still be within their rights to file for that refund today.
Credits and Benefits
Beyond simple overpayment of withholding, the ruling could impact:
- Earned Income Tax Credit (EITC): Families who missed out on the credit because they didn’t file in time might be able to claim it retroactively.
- Child Tax Credit: Similar to the EITC, the expanded credits from the pandemic years remain a point of interest for taxpayers who were perhaps unaware of their eligibility or were unable to file due to pandemic-related disruptions.
- Stimulus Payments: Although the window for many stimulus-related claims has closed, the Kwong logic provides a potential legal foothold for those who believe their claim was improperly denied due to a filing deadline error.
The IRS Stance and the Risks of Litigation
The IRS has been clear about its disagreement with the lower court. In its Action on Decision regarding the Abdo case, the IRS signaled that it would fight this interpretation in higher courts. The government’s argument is rooted in the principle of sovereign immunity and the notion that the government cannot be sued for refunds except under the precise conditions defined by Congress—conditions the IRS claims are discretionary.
Taxpayers should be aware that filing a claim based on the Kwong decision is not a guaranteed payday. The National Taxpayer Advocate has been careful to manage expectations:
- Non-Guaranteed Approval: Filing a claim does not mean the IRS will grant it. The IRS is likely to hold these claims in suspense or deny them outright pending the outcome of the Federal Circuit appeal.
- Additional Scrutiny: Any claim filed under these "novel" legal theories will almost certainly be subjected to rigorous internal review.
- The "Protective Claim" Strategy: For many, the best approach is to file a "protective claim." This is a mechanism used to preserve a taxpayer’s right to a refund while an issue is still being litigated. By filing before July 10, 2026, taxpayers essentially stake their claim in case the appellate courts ultimately agree with the Kwong ruling.
Expert Guidance: Proceed with Caution
"Taxpayers should carefully evaluate their individual circumstances before filing claims based on the court’s reasoning," Erin Collins advised in a recent blog post. Because individual tax situations vary—depending on when returns were filed, whether payments were made, and whether the taxpayer has already received notices from the IRS—a "one-size-fits-all" approach is dangerous.
The law is currently in a state of development. While Kwong provides a temporary victory for taxpayers, the Federal Circuit’s eventual ruling will serve as the binding precedent. If the appellate court overturns Kwong, claims filed purely on the basis of that decision will likely be denied, and the legal fees spent in pursuing them will be lost.
Conclusion
The appeal of Kwong marks a pivotal moment in post-pandemic tax administration. It pits the IRS’s administrative authority against a judicial interpretation that prioritizes taxpayer relief in the wake of a national disaster. As July 20, 2026, approaches—the date the IRS must lay out its formal argument to the appellate court—taxpayers and their advisors must remain vigilant.
The window to protect potential refund rights is narrow, and the path to a final resolution is likely to be lengthy. For those who believe they may be impacted, consulting with a tax professional to determine if a protective claim is appropriate is the most prudent course of action. In the volatile landscape of federal tax litigation, waiting for a final answer from the courts may mean missing the chance to claim the money you are owed.
