IRS Challenges Ruling in Kwong: A High-Stakes Legal Battle Over COVID-Era Tax Refunds
The Internal Revenue Service (IRS) has officially initiated an appeal of the landmark decision in Kwong v. United States, 179 Fed. Cl. 382 (2025), a case that has sparked a significant debate regarding the scope of federal tax relief granted during the COVID-19 pandemic. The Court of Federal Claims previously ruled that Section 7508A(d) of the Internal Revenue Code—a provision enacted under the CARES Act—automatically extended filing and payment deadlines for taxpayers during the COVID-19 disaster period.
This legal challenge places the federal government at odds with a judicial interpretation that could potentially grant millions of taxpayers a retroactive window to claim refunds for the 2019 through 2022 tax years. While the IRS remains steadfast in its narrow interpretation of the law, the National Taxpayer Advocate has signaled that taxpayers must act with caution and urgency to protect their potential claims.
The Core Legal Conflict: What is Section 7508A(d)?
At the heart of the dispute lies the interpretation of Section 7508A(d), which was introduced to provide the Treasury Department with the authority to offer tax relief during federally declared disasters. The Kwong decision posits that this section was not merely a discretionary tool for the IRS but a statutory mandate that effectively suspended federal tax filing and payment deadlines between January 20, 2020, and July 10, 2023.
The Court of Federal Claims concluded that these years were "disregarded" in calculating the statutory time limits for tax filings. If this interpretation holds, the standard three-year statute of limitations for filing refund claims—typically calculated from the original filing deadline—would be pushed forward, effectively granting a longer window for taxpayers to claim money they were previously thought to have forfeited.
Conversely, the IRS has consistently maintained that Section 7508A(d) provides the Treasury Secretary with discretionary authority. Under the government’s view, the provision does not function as an automatic, broad-brush suspension of all deadlines. The IRS argues that Congress intended for the Treasury to selectively apply relief rather than creating an all-encompassing, automatic extension for every taxpayer in the country.
Chronology of the Dispute
The trajectory of this legal battle underscores the complexity of interpreting pandemic-era legislation:
- January 20, 2020: The start of the COVID-19 disaster period, a date that serves as the anchor for the Kwong ruling’s argument regarding the tolling of deadlines.
- 2024: The U.S. Tax Court rules in Abdo v. Commissioner, 162 T.C. 148 (2024), adopting a restrictive view of the government’s relief provisions and rejecting the notion of an automatic, blanket extension for all tax-related activities.
- 2025: The Court of Federal Claims issues the Kwong decision, directly contradicting the logic applied in previous cases by holding that the disaster declaration triggered an automatic extension of deadlines through July 10, 2023.
- May 2026: The IRS files a formal notice of appeal to the U.S. Court of Appeals for the Federal Circuit.
- July 10, 2026: A critical, self-imposed deadline for taxpayers to consider filing protective claims, as recommended by the National Taxpayer Advocate.
- July 20, 2026: The deadline for the IRS to submit its opening brief to the Federal Circuit, which will provide the first detailed glimpse into the government’s comprehensive appellate strategy.
Implications for Taxpayers: Refunds and Credits
National Taxpayer Advocate Erin Collins has been vocal about the potential ripple effects of the Kwong decision. In a recent blog post, she noted that the impact of the ruling extends far beyond simple penalties and interest. If the decision is upheld on appeal, the ramifications for the American tax base could be substantial.
The "Forgotten" Refund
For millions of Americans, the standard three-year rule meant that if a 2020 return was not filed by the spring of 2024, the right to a refund for that year was permanently extinguished. Under the Kwong reasoning, that expiration date is not fixed. A taxpayer who had significant taxes withheld from their wages in 2020—but who failed to file a return—might find that their claim is not, in fact, time-barred.
Credits and Stimulus Payments
The potential expansion of filing deadlines may also open the door to eligibility for various refundable tax credits, including those related to stimulus payments or child tax credits that were tied to specific filing windows. However, the legal waters here are particularly murky. Courts have not yet determined whether a "disregarded" deadline under 7508A(d) applies to the eligibility criteria for credits or merely the procedural deadline for filing a return.
The Government’s Stance: A Narrow Interpretation
The IRS’s litigation strategy in Kwong is expected to mirror its arguments in Abdo. The government contends that reading the statute as an "automatic" extension would create an administrative nightmare, as it would effectively rewrite the Internal Revenue Code without explicit congressional direction.
Government attorneys argue that the Treasury Secretary’s authority to "postpone" deadlines is a tool for targeted relief, not a systemic overhaul of the statute of limitations. The IRS warns that if the Kwong interpretation is allowed to stand, it would undermine the certainty of the tax system, leaving tax liability in a state of flux for years after the relevant tax periods have closed.
Strategic Advice: Should You File a Protective Claim?
In light of the ongoing uncertainty, the National Taxpayer Advocate has suggested that taxpayers who believe they may have valid claims under the Kwong interpretation should consider filing a "protective claim."
What is a Protective Claim?
A protective claim is a filing submitted to the IRS intended to preserve a taxpayer’s right to a refund while an underlying legal issue—such as the Kwong appeal—is being resolved. It serves as a placeholder. If the courts eventually rule in favor of the taxpayers, the protective claim ensures that the taxpayer has already "filed" within the newly established timeframe.
The Risks and Limitations
Taxpayers must understand several critical factors before proceeding:
- No Guarantee of Success: Filing a claim does not equate to receiving a refund. The IRS may hold these claims in suspense or deny them outright pending the outcome of the Federal Circuit’s ruling.
- Individual Circumstances: Taxpayers should not assume a "one-size-fits-all" approach. Deadlines vary depending on when a return was originally filed, when tax payments were made, and whether the taxpayer has already engaged in prior disputes with the IRS.
- Legal Development: The law remains in a state of flux. Future rulings may narrow the scope of Kwong or reject it entirely, meaning that even a timely filed protective claim could be invalidated by a subsequent appellate court decision.
Conclusion: A Watching Brief for Taxpayers
The appeal in Kwong is not merely a procedural technicality; it is a fundamental battle over the government’s power to manage the tax system during national crises. While the Court of Federal Claims has provided a beacon of hope for taxpayers seeking to recover unclaimed refunds, the IRS is clearly prepared to defend its authority and the integrity of the three-year statute of limitations.
For taxpayers, the period leading up to July 10, 2026, is a window of opportunity, but one that requires professional tax advice. Given the technical nature of the law and the potential for a hostile ruling from the Court of Appeals, taxpayers are strongly encouraged to consult with a tax professional, CPA, or tax attorney. They must weigh the potential for a significant refund against the administrative burden and legal risks of filing a claim that may ultimately be rejected.
As the IRS prepares its brief for the July 20 deadline, the eyes of the tax community remain fixed on the Federal Circuit. Until a definitive ruling is reached, the tax landscape will remain unsettled, requiring taxpayers to balance caution with the desire to maximize their financial interests in an era of unprecedented legal interpretation.
